Attached files
| file | filename |
|---|---|
| EX-31.2 - EXHIBIT 31.2 - CAPITAL BANK CORP | ex31_2.htm |
| EX-31.1 - EXHIBIT 31.1 - CAPITAL BANK CORP | ex31_1.htm |
| EX-32.1 - EXHIBIT 32.1 - CAPITAL BANK CORP | ex32_1.htm |
| EX-99.1 - EXHIBIT 99.1 - CAPITAL BANK CORP | ex99_1.htm |
| EX-99.2 - EXHIBIT 99.2 - CAPITAL BANK CORP | ex99_2.htm |
| EX-32.2 - EXHIBIT 32.2 - CAPITAL BANK CORP | ex32_2.htm |
| EX-10.14 - EXHIBIT 10.14 - CAPITAL BANK CORP | ex10_14.htm |
UNITED
STATES
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, 2009
CAPITAL
BANK CORPORATION
(Exact
name of registrant as specified in its charter)
|
North
Carolina
|
000-30062
|
56-2101930
|
||
|
(State
or other jurisdiction
of incorporation or organization) |
(Commission
File
Number)
|
(I.R.S.
Employer
Identification
No.)
|
333
Fayetteville Street, Suite 700
Raleigh,
North Carolina 27601
(Address
of principal executive offices)
(919)
645-6400
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, no par value
(Title
of class)
NASDAQ
Global Select Market
(Name
of each exchange on which registered)
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2
of the
Exchange Act:
|
Large accelerated filer o
|
Accelerated
filer o
|
Non-accelerated filer o
|
(Do
not check here if a smaller reporting company)
|
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
The
aggregate market value of the registrant’s common stock, no par value per share,
as of June 30, 2009, held by those persons deemed by the registrant to be
non-affiliates was approximately $40,039,004 (8,429,264 shares held by
non-affiliates at $4.75 per share). For purposes of the foregoing calculation
only, all directors, executive officers, and 5% shareholders of the registrant
have been deemed affiliates.
As of
March 8, 2010 there were 11,412,584 shares outstanding of the registrant’s
common stock, no par value.
|
DOCUMENTS
INCORPORATED BY REFERENCE
|
|||
|
Document
Incorporated
|
Where
|
||
|
1.
|
Portions
of the registrant’s Proxy Statement for the Annual Meeting of Shareholders
to be held on May 27, 2010
|
Part
III
|
|
- 2
-
Annual
Report on Form 10-K for the Year Ended December 31, 2009
INDEX
|
PART
I
|
Page
No.
|
||
|
Business
|
4
|
||
|
Risk
Factors
|
13
|
||
|
Unresolved
Staff Comments
|
24
|
||
|
Properties
|
24
|
||
|
Legal
Proceedings
|
24
|
||
|
(Removed
and Reserved)
|
24
|
||
|
PART
II
|
|||
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
25
|
||
|
Selected
Financial Data
|
26
|
||
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
27
|
||
|
Quantitative
and Qualitative Disclosures about Market Risk
|
53
|
||
|
Financial
Statements and Supplementary Data
|
55
|
||
|
(a) Consolidated Balance
Sheets for the Years Ended December 31, 2009 and 2008
|
55
|
||
|
(b) Consolidated Statements
of Operations for the Years Ended December 31, 2009, 2008 and
2007
|
56
|
||
|
(c) Consolidated Statements
of Changes in Shareholders’ Equity and Comprehensive Income for the
Years Ended December 31, 2009, 2008 and 2007
|
57
|
||
|
(d) Consolidated Statements
of Cash Flows for the Years Ended December 31, 2009, 2008 and
2007
|
58
|
||
|
(e) Notes to Consolidated
Financial Statements
|
60
|
||
|
(f) Report of Independent
Registered Public Accounting Firm
|
89
|
||
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
90
|
||
|
Controls
and Procedures
|
90
|
||
|
Controls
and Procedures
|
92
|
||
|
Other
Information
|
92
|
||
|
PART
III
|
|||
|
Directors,
Executive Officers and Corporate Governance
|
92
|
||
|
Executive
Compensation
|
92
|
||
|
Security
Ownership of Certain Beneficial Owners and Management, and Related
Stockholder Matters
|
92
|
||
|
Certain
Relationships and Related Transactions, and Director
Independence
|
93
|
||
|
Principal
Accounting Fees and Services
|
93
|
||
|
PART
IV
|
|||
|
Exhibits
and Financial Statement Schedules
|
93
|
||
|
Signatures
|
|||
PART I
Information
set forth in this Annual Report on Form 10-K contains various “forward looking
statements” within the meaning of Section 27A of the Securities Act of 1933, as
amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), which statements represent the Company’s
judgment concerning the future and are subject to business, economic and other
risks and uncertainties, both known and unknown, that could cause the Company’s
actual operating results and financial position to differ materially from the
forward looking statements. Such forward looking statements can be identified by
the use of forward looking terminology such as “may,” “will,” “expect,”
“anticipate,” “estimate,” “believe,” or “continue,” or the negative thereof or
other variations thereof or comparable terminology.
Capital
Bank Corporation (the “Company”) cautions that any such forward looking
statements are further qualified by important factors that could cause the
Company’s actual operating results to differ materially from those in the
forward looking statements, including without limitation, the management of the
Company’s growth, the risks associated with possible or completed acquisitions,
the risks associated with the Bank’s loan portfolio, competition within the
industry, dependence on key personnel, government regulation and the other risk
factors described in Part I- Item 1A. Risk Factors.
Any
forward looking statements contained in this Annual Report on Form 10-K are as
of the date hereof, and the Company undertakes no duty to update them if views
change later. These forward looking statements should not be relied upon as
representing the Company’s views as of any date subsequent to the date
hereof.
General
Capital
Bank Corporation (the “Company”) is a financial holding company incorporated
under the laws of North Carolina on August 10, 1998. The Company’s primary
function is to serve as the holding company for its wholly-owned subsidiaries,
Capital Bank, CB Trustee, LLC, and Capital Bank Investment Services, Inc. In
addition, the Company has interests in three trusts, Capital Bank Statutory
Trust I, II and III (hereinafter collectively referred to as the “Trusts”).
These Trusts are not consolidated with the financial statements of the Company.
Capital Bank (the “Bank”) was incorporated under the laws of the State of North
Carolina on May 30, 1997, and commenced operations as a state-chartered banking
corporation on June 20, 1997. The Bank is not a member of the Federal Reserve
System (“Federal Reserve”). CB Trustee, LLC was established to facilitate the
administration of deeds of trust relating to real property that is used as
collateral to secure loans made by the Bank. CB Trustee, LLC has no assets,
liabilities, operational income or expenses. Capital Bank Investment Services,
Inc. currently has no operations and is inactive, but remains a subsidiary of
the Company. See also Part II – Item 8, Financial Statements and Supplementary
Data, Notes to Consolidated Financial Statements – Note 1, for a discussion of
the Company’s operating segment.
The Bank
has one wholly-owned subsidiary. CB Capital Purchase, Inc. was formed as a
wholly-owned subsidiary of the Bank solely to inject capital into the Bank that
was received by the Company from the U.S. Treasury Department under the Capital
Purchase Program.
As of
December 31, 2009, the Company had assets of approximately $1.7 billion, with
gross loans and deposits outstanding of approximately $1.4 billion each. The
Company’s corporate office is located at 333 Fayetteville Street, Suite 700,
Raleigh, North Carolina 27601, and its telephone number is (919) 645-6400. In
addition to the corporate office, the Company has 32 branch offices in North
Carolina: five branch offices in Raleigh, four in Asheville, four in
Fayetteville, three in Burlington, three in Sanford, two in Cary, and one each
in Clayton, Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Siler
City, Pittsboro, Wake Forest and Zebulon.
Capital
Bank is a community bank engaged in the general commercial banking business in
Alamance, Buncombe, Catawba, Chatham, Cumberland, Granville, Johnston, Lee and
Wake counties in North Carolina. The Bank’s Triangle market includes operations
in Wake, Johnston and Granville counties. Wake County and the surrounding
Triangle market have a well-diversified economic base with a mixture of
businesses, universities, and large medical institutions, and include the city
of Raleigh, which is the state capital. The Bank’s Sandhills market includes
operations in Cumberland, Lee and Chatham counties. The Sandhills market, which
includes the city of Fayetteville, has a large military community and is home to
Fort Bragg, the largest global Army installation with 10% of the Army’s active
forces. Fayetteville and the surrounding Sandhills market have in recent years
experienced significant growth due to the 2005 Base Realignment and Closure
process, or BRAC. Lee and Chatham counties are also significant centers for
various industries, including agriculture, manufacturing, lumber and tobacco.
The Bank’s Triad market includes operations in Alamance County, which has a
diversified economic base, comprised primarily of manufacturing, agriculture,
retail and wholesale trade, government, services and utilities. The Bank’s
Western market includes operations in Buncombe and Catawba counties. Catawba
County, which includes the town of Hickory, is a regional center for
manufacturing and wholesale trade. The economic base of the city of Asheville,
in Buncombe County, is comprised primarily of services, health care, tourism and
manufacturing.
The Bank
offers a full range of banking services, including the following: checking
accounts; savings accounts; NOW accounts; money market accounts; certificates of
deposit; individual retirement accounts; loans for real estate, construction,
businesses, agriculture, personal use, home improvement and automobiles; equity
lines of credit; mortgage loans; credit loans; consumer loans; credit cards;
safe deposit boxes; bank money orders; internet banking; electronic funds
transfer services including wire transfers and remote deposit capture;
traveler’s checks; and free notary services to all Bank customers. In addition,
the Bank provides automated teller machine access to its customers for cash
withdrawals through nationwide ATM networks. Through a partnership between the
Bank’s financial services division and Capital Investment Companies, an
unaffiliated Raleigh, North Carolina-based broker-dealer, the Bank also makes
available a complete line of uninsured investment products and services. The
securities involved in these services are not deposits or other obligations of
the Bank and are not insured by the Federal Deposit Insurance Corporation (the
“FDIC”).
The
Trusts were formed for the sole purpose of issuing trust preferred securities.
The proceeds from such issuances were loaned to the Company in exchange for
subordinated debentures, which are the sole assets of the Trusts. The Company’s
obligation under the subordinated debentures constitutes a full and
unconditional guarantee by the Company of the Trust’s obligations under the
trust preferred securities. The Trusts have no operations other than those that
are incidental to the issuance of the trust preferred securities (see Part II –
Item 8. Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements – Note 9).
Lending
Activities
The Bank
originates a variety of loans, including loans secured by real estate, loans for
construction, loans for commercial purposes, loans to individuals for personal
and household purposes and loans to municipalities. A significant portion of the
loan portfolio is related to real estate. The economic trends in the areas
served by the Company are influenced by the significant industries within the
regions. Consistent with the Company’s emphasis on being a community-oriented
financial institution, virtually all its business activity is with customers
located in and around counties in which the Company has banking offices. The
ultimate collectability of the Bank’s loan portfolio is susceptible to changes
in the market conditions of these geographic regions.
The
Company uses a centralized risk management process to ensure uniform credit
underwriting that adheres to the Bank’s loan policies as approved annually by
the Board of Directors. Lending policies are reviewed on a regular basis to
confirm that the Company is prudent in setting its underwriting criteria. Credit
risk is managed through a number of methods including a loan approval process
that establishes consistent procedures for the processing and approval of loan
requests, risk grading of all commercial loans and certain consumer loans, and
coding of all loans by purpose, class and collateral type. The Company also
seeks to focus on underwriting loans that enhance a balanced, diversified
portfolio. Management analyzes the Bank’s commercial real estate concentrations
by market region on a quarterly basis in an attempt to prevent over-exposure to
any one type of commercial real estate loan and incorporates third party real
estate analysis in this report to monitor market conditions.
The
Company believes that early detection of potential credit problems through
regular contact with the Company’s clients, coupled with consistent reviews of
the borrowers’ financial condition, are important factors in overall credit risk
management. Management has designed an active system for the purpose of
identifying problem loans and managing the quality of the portfolio. This system
includes a problem loan detection program, which is designed to prioritize
potential problem loans at an early stage to enable timely solutions by senior
management. Under this program, loans that are projected to be 30 or more days
past due at month-end are reviewed on a weekly basis. Additionally, the Company
employs a loan review department that audits a minimum of 25% of commercial loan
commitments annually, concentrating on adversely risk rated credits, a small
sample of each consumer loan officer’s loan portfolio and all unsecured
commercial loans greater than $500,000. All findings are reported to senior
management and the Audit Committee of the Board of Directors. Another part of
the Company’s approach to proactively managing credit quality is to aggressively
work with customers for which a problem loan has been identified to potentially
resolve issues before defaults result.
The
amounts and types of loans outstanding for the past five years ended
December 31 are shown on the following table:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
|||||||||||||||||||||
|
Commercial
real estate, including owner occupied
|
$
|
892,523
|
64
|
%
|
$
|
803,634
|
64
|
%
|
$
|
708,768
|
65
|
%
|
$
|
638,492
|
64
|
%
|
$
|
483,658
|
72
|
%
|
|||||||||||
|
Consumer
real estate
|
262,503
|
19
|
235,688
|
19
|
196,706
|
18
|
195,853
|
19
|
94,562
|
14
|
|||||||||||||||||||||
|
Commercial
and industrial
|
183,733
|
13
|
186,474
|
15
|
169,389
|
15
|
155,673
|
15
|
78,074
|
12
|
|||||||||||||||||||||
|
Consumer
|
9,692
|
1
|
11,215
|
1
|
13,540
|
1
|
12,246
|
1
|
9,808
|
1
|
|||||||||||||||||||||
|
Other
loans
|
41,851
|
3
|
17,357
|
1
|
6,704
|
1
|
5,788
|
1
|
2,880
|
1
|
|||||||||||||||||||||
|
$
|
1,390,302
|
100
|
%
|
$
|
1,254,368
|
100
|
%
|
$
|
1,095,107
|
100
|
%
|
$
|
1,008,052
|
100
|
%
|
$
|
668,982
|
100
|
%
|
||||||||||||
Funding Activities
The
majority of the Bank’s deposit customers are individuals and small- to
medium-size businesses located in Alamance, Buncombe, Catawba, Chatham,
Cumberland, Granville, Johnston, Lee and Wake counties in North Carolina.
Management of the Company does not believe that the deposits or the business of
the Bank are seasonal in nature. Deposits vary with local and national economic
conditions, but management does not believe the variances have a material effect
on planning and policy making. The Bank attempts to control deposit flow through
the pricing of deposits and promotional activities. Management believes that the
Bank’s rates are competitive with those offered by other institutions in the
same geographic area.
The types
and mix of depository accounts for the past five years ended December 31 are
shown on the following table:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
Amount
|
%
of
Total
|
|||||||||||||||||||||
|
Demand,
noninterest
|
$
|
141,069
|
10
|
%
|
$
|
125,281
|
10
|
%
|
$
|
114,780
|
10
|
%
|
$
|
120,945
|
11
|
%
|
$
|
77,847
|
11
|
%
|
|||||||||||
|
Savings
and interest checking
|
204,042
|
15
|
173,711
|
13
|
151,698
|
14
|
144,741
|
14
|
91,427
|
13
|
|||||||||||||||||||||
|
Money
market accounts
|
184,146
|
13
|
212,780
|
16
|
229,560
|
21
|
221,502
|
21
|
145,578
|
21
|
|||||||||||||||||||||
|
Time
deposits less than $100,000
|
507,348
|
37
|
509,231
|
39
|
370,416
|
34
|
347,698
|
33
|
253,745
|
36
|
|||||||||||||||||||||
|
Time
deposits $100,000 and greater
|
341,360
|
25
|
294,311
|
22
|
232,244
|
21
|
220,323
|
21
|
129,883
|
19
|
|||||||||||||||||||||
|
$
|
1,377,965
|
100
|
%
|
$
|
1,315,314
|
100
|
%
|
$
|
1,098,698
|
100
|
%
|
$
|
1,055,209
|
100
|
%
|
$
|
698,480
|
100
|
%
|
||||||||||||
The
Company’s ability to borrow funds from nondeposit sources provides additional
flexibility in meeting its liquidity needs. Short-term borrowings include
federal funds purchased, securities sold under repurchase agreements, short-term
Federal Home Loan Bank (“FHLB”) borrowings, Federal Reserve Bank (“FRB”)
discount window borrowings and brokered deposits. The Company also utilizes
longer-term borrowings when management determines that the pricing and maturity
options available through these sources create cost-effective options for
funding asset growth and satisfying capital needs. The Company’s long-term
borrowings include long-term FHLB advances, structured repurchase agreements and
subordinated debt.
Local
Economic Conditions
Local
economic indicators in the markets that the Bank serves may affect the Bank’s
results of operations and, as a result, the Company’s results of operations. The
following table presents certain important economic indicators for the regions
in which the Bank has branches as well as all of North Carolina:
|
Unemployment
Rate
1
|
Median
Household
Income
2
|
Bankruptcy
Filings
3
(2009
Increase)
|
|||||||||
|
Region:
|
|||||||||||
|
Triangle
|
8.7
|
%
|
$
|
68,870
|
47
|
%
|
|||||
|
Sandhills
|
9.3
|
47,711
|
56
|
||||||||
|
Triad
|
12.1
|
50,579
|
47
|
||||||||
|
Western
|
8.8
|
47,740
|
47
|
||||||||
|
North
Carolina
|
11.2
|
%
|
$
|
51,418
|
50
|
%
|
|||||
| 1 |
Preliminary
unemployment rate for December 2009 according to U.S. Department of Labor,
Bureau of Labor Statistics.
|
|
2
|
SNL
Financial as of June 30, 2009.
|
|
3
|
Represents percentage increase in number of business bankruptcy filings for nine months ended September 30, 2009 compared to the same period in 2008 according to the Administrative Office of the U.S. Courts, which serves the U.S. Judiciary. |
Competition
Commercial
banking in North Carolina is extremely competitive. The Company competes in its
market area with some of the largest banking organizations in the state and the
country, other community financial institutions, such as federally and
state-chartered savings and loan institutions and credit unions, as well as
consumer finance companies, mortgage companies and other lenders engaged in the
business of extending credit. Many of the Company’s competitors have broader
geographic markets, easier access to capital and lower cost funding, and higher
lending limits than the Company; and are also able to provide more services and
make greater use of media advertising.
Despite
the competition in its market area, the Company believes that it has certain
competitive advantages that distinguish it from its competition. The Company
believes that its primary competitive advantages are its strong local identity
and affiliation with the communities it serves, and its emphasis on providing
specialized services to small- and medium-sized business enterprises,
professionals and upper-income individuals. The Bank offers customers modern,
high-tech banking without compromising community values such as prompt, personal
service and friendliness. The Bank offers many personalized services and
attracts customers by being responsive and sensitive to their individualized
needs. The Company relies on goodwill and referrals from shareholders and
satisfied customers, as well as traditional media to attract new customers. To
enhance a positive image in the communities in which it has branches, the Bank
supports and participates in local events and its officers and directors serve
on boards of local civic and charitable organizations.
Employees
As of
March 8, 2010, the Company employed 391 persons, of which 377 were full-time and
14 were part-time. None of the Company’s employees are represented by a
collective bargaining unit or agreement. The Company considers relations with
its employees to be good.
Supervision
and Regulation
Holding
companies, banks and many of their non-bank affiliates are extensively regulated
under both federal and state law. The following is a brief summary of certain
statutes, rules and regulations affecting the Company and the Bank. This summary
is qualified in its entirety by reference to the particular statutory and
regulatory provisions referred to below and is not intended to be an exhaustive
description of the statutes or regulations applicable to the Company’s or the
Bank’s business. Supervision, regulation and examination of the Company and the
Bank by bank regulatory agencies is intended primarily for the protection of the
Bank’s depositors rather than holders of the Company’s common
stock.
The
Company is also regulated by the Securities and Exchange Commission (“SEC”) as a
result of its common stock being publicly traded. The regulatory compliance
burden of being a publicly traded company has increased significantly over the
last several years.
Holding
Company Regulation
General. The Company is a
holding company registered with the Federal Reserve under the Bank Holding
Company Act of 1956 (the “BHCA”). As such, the Company and the Bank are subject
to the supervision, examination and reporting requirements contained in the BHCA
and the regulation of the Federal Reserve. The BHCA requires that a bank holding
company obtain the prior approval of the Federal Reserve before: (i) acquiring
direct or indirect ownership or control of more than five percent of the voting
shares of any bank; (ii) taking any action that causes a bank to become a
subsidiary of a bank holding company; (iii) acquiring all or substantially all
of the assets of any bank; or (iv) merging or consolidating with any other bank
holding company.
The BHCA
generally prohibits a bank holding company and its subsidiaries, with certain
exceptions, from engaging in or acquiring or retaining direct or indirect
control of any company engaged in (i) activities other than banking or managing
or controlling banks or other permissible subsidiaries, or (ii) those activities
not determined by the Federal Reserve to be closely related to banking, or
managing or controlling banks. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity can reasonably be expected to produce benefits to the public, such
as greater convenience, increased competition or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest or unsound banking
practices. For example, extending credit and servicing loans, leasing real or
personal property, providing securities brokerage services, providing certain
data processing services, acting as agent or broker in selling credit life
insurance and certain other types of insurance underwriting activities have all
been determined by regulations of the Federal Reserve to be permissible non-bank
activities.
The
Federal Reserve has the power to order a holding company or its subsidiaries to
terminate any activity or to terminate its ownership or control of any
subsidiary when it believes that continuation of such activity or such ownership
or control constitutes a serious risk to the financial safety, soundness or
stability of any bank subsidiary of that bank holding company.
Financial Holding Companies.
The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB”) allows
bank holding companies meeting management, capital and the Community
Reinvestment Act of 1977 (the “CRA”) standards to be treated as a financial
holding company and engage in activities that are financial in nature or
incidental to a financial activity. The Company has elected to operate as a
financial holding company and therefore is eligible to engage in the broader
range of activities that are permitted by the GLB, including insurance
underwriting, securities underwriting and dealing, and making merchant banking
investments in commercial and financial companies.
Additional Restrictions and Oversight. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the Federal Reserve on any extensions of credit to the bank holding company or any of its subsidiaries, investments in the stock or securities of the bank holding company and the acceptance of such stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. An example of a prohibited tie-in would be any arrangement that would condition the provision or cost of services on a customer obtaining additional services from the bank holding company or any of its other subsidiaries.
The
Federal Reserve may issue cease and desist orders against bank holding companies
and non-bank subsidiaries to stop actions believed to present a serious threat
to a subsidiary bank. The Federal Reserve regulates certain debt obligations,
changes in control of bank holding companies and capital
requirements.
Under the
provisions of North Carolina law, the Bank is registered with and subject to
supervision by the North Carolina Office of the Commissioner of Banks (the
“Commissioner”).
Capital Requirements. The
Federal Reserve has established risk-based capital guidelines for bank holding
companies. The minimum standard for the ratio of capital to risk-weighted assets
(including certain off-balance-sheet obligations, such as standby letters of
credit) is eight percent, of which at least four percent must consist of common
equity, retained earnings, and a limited amount of perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries, less
certain goodwill items and other adjustments (“Tier 1 capital”). The remainder
(“Tier 2 capital”) may consist of mandatorily redeemable convertible debt
securities, a limited amount of other preferred stock, subordinated debt- and
loan loss reserves.
In
addition, the Federal Reserve has established minimum leverage ratio guidelines
for bank holding companies. These guidelines provide for a minimum leverage
ratio of Tier 1 capital to adjusted average quarterly assets less certain
amounts (“Leverage Ratio”) equal to three percent for bank holding companies
that meet certain specified criteria, including having the highest regulatory
rating. All other bank holding companies will generally be required to maintain
a Leverage Ratio of at least four percent.
The
guidelines provide that bank holding companies experiencing significant growth,
whether through internal expansion or acquisitions, will be expected to maintain
strong capital ratios well above the minimum supervisory levels without
significant reliance on intangible assets. The same heightened requirements
apply to bank holding companies with supervisory, financial, operational or
managerial weaknesses, as well as to other banking institutions if warranted by
particular circumstances or the institution’s risk profile. Furthermore, the
guidelines indicate that the Board of Governors of the Federal Reserve System
(the “Federal Reserve Board”) will continue to consider a “tangible Tier 1
Leverage Ratio” (deducting all intangibles) in evaluating proposals for
expansion or new activity. The Federal Reserve has not advised the Company of
any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable
to it.
As of
December 31, 2009, the Company had Tier 1 risk-adjusted, total regulatory
capital and leverage capital of approximately 10.16%, 11.41% and 8.94%,
respectively, all in excess of the minimum requirements. Those same ratios as of
December 31, 2008 were 12.17%, 13.24% and 10.58%, respectively.
Anti-Money Laundering and the USA
PATRIOT Act. The United and Strengthening of America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the
“USA PATRIOT Act”) contains anti-money laundering provisions that impose
affirmative obligations on a broad range of financial institutions, including
banks, brokers, and dealers. Among other requirements, the USA Patriot Act
requires all financial institutions to establish anti-money laundering programs
that include, at a minimum, internal policies, procedures, and controls;
specific designation of an anti-money laundering compliance officer; ongoing
employee training programs; and an independent audit function to test the
anti-money laundering program. The USA PATRIOT Act requires financial
institutions that establish, maintain, administer, or manage private banking
accounts for non-United States persons or their representatives to establish
appropriate, specific, and where necessary, enhanced due diligence policies,
procedures, and controls designed to detect and report money laundering. The
Company has established policies and procedures that the Company believes will
comply with the requirements of the USA PATRIOT Act.
Emergency Economic Stabilization Act
of 2008. In response to recent unprecedented market turmoil, the
Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted on October 3,
2008. EESA authorizes the U.S. Treasury Department to purchase or guarantee up
to $700 billion in troubled assets from financial institutions under the
Troubled Asset Relief Program (“TARP”). Pursuant to authority granted under
EESA, the Treasury created the TARP Capital Purchase Program (“CPP”) under which
the Treasury Department was authorized to invest up to $250 billion in senior
preferred stock of U.S. banks and savings associations or their holding
companies.
Institutions
participating in the TARP or CPP are required to issue warrants for common or
preferred stock or senior debt to the Treasury. If an institution participates
in the CPP or if the Treasury acquires a meaningful equity or debt position in
the institution as a result of TARP participation, the institution is required
to meet certain standards for executive compensation and corporate governance,
including a prohibition against incentives to take unnecessary and excessive
risks, recovery of bonuses paid to senior executives based on materially
inaccurate earnings or other statements and a prohibition against agreements for
the payment of golden parachutes.
The Company’s CPP Participation.
In December 2008, the Company entered into a Securities Purchase
Agreement—Standard Terms with the Treasury pursuant to which, among other
things, the Company sold to the Treasury for an aggregate purchase price of
$41.3 million, 41,279 shares of Series A Fixed Rate Cumulative Perpetual
Preferred Stock of the Company (“Series A Preferred Stock”) and warrants to
purchase up to 749,619 shares of common stock (the “Warrants”) of the Company.
As a condition under the CPP, the Company’s share repurchases are currently
limited to purchases in connection with the administration of any employee
benefit plan, consistent with past practices, including purchases to offset
share dilution in connection with any such plans. This restriction is effective
until December 2011 or until the Treasury no longer owns any of the Series A
Preferred Stock.
The
Series A Preferred Stock ranks senior to the Company’s common shares and pays a
compounding cumulative dividend, in cash, at a rate of 5% per annum for the
first five years, and 9% per annum thereafter on the liquidation preference of
$1,000 per share. The Company is prohibited from paying any dividend with
respect to shares of common stock or repurchasing or redeeming any shares of the
Company’s common shares unless all accrued and unpaid dividends are paid on the
Series A Preferred Stock for all past dividend periods (including the latest
completed dividend period). The Series A Preferred Stock is non-voting, other
than class voting rights on matters that could adversely affect the Series A
Preferred Stock. The Series A Preferred Stock is callable at par after three
years. Prior to the end of three years, the Series A Preferred Stock may be
redeemed with the proceeds from one or more qualified equity offerings of any
Tier 1 perpetual preferred or common stock of at least $10.3 million (each a
“Qualified Equity Offering”). In connection with the adoption of the American
Recovery and Reinvestment Act of 2009 (“ARRA”), subject to the approval of the
Treasury and the Federal Reserve, the Company may redeem the Series A Preferred
Stock at any time regardless of whether or not it has replaced such funds from
any other source. The Treasury may also transfer the Series A Preferred Stock to
a third party at any time.
American Recovery and Reinvestment
Act of 2009. ARRA was enacted on February 17, 2009 and includes a wide
variety of programs intended to stimulate the economy and provide for extensive
infrastructure, energy, health, and education needs. In addition, ARRA imposes
certain new executive compensation and corporate governance obligations on all
current and future TARP recipients, including the Company, until the institution
has redeemed the preferred stock, which TARP recipients are now permitted to do
under ARRA without regard to the three year holding period and without the need
to raise new capital, subject to approval of its primary federal
regulator.
Additionally,
ARRA amends Section 111 of EESA to require the Treasury to adopt additional
standards with respect to executive compensation and corporate governance for
TARP recipients, which are set forth in the TARP Standards for Compensation and
Corporate Governance: Interim Final Rule (“Interim Final Rule”), adopted by the
Treasury on June 15, 2009. Among the executive compensation and corporate
governance provisions included in ARRA and the Interim Final Rule are the
following:
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an
incentive compensation “clawback” provision to cover “senior executive
officers” (defined in this instance and below to mean the “named executive
officers” for whom compensation disclosure is provided in the company’s
proxy statement) and the next 20 most highly compensated
employees;
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a
prohibition on certain golden parachute payments to cover any payment
related to a departure for any reason (with limited exceptions) made to
any senior executive officer (as defined above) and the next five most
highly compensated employees;
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a
limitation on incentive compensation paid or accrued to the five most
highly compensated employees of the financial institution, subject to
limited exceptions for pre-existing arrangements set forth in written
employment contracts executed on or prior to February 11, 2009, and
certain awards of restricted stock which may not exceed one-third of
annual compensation, are subject to a two year holding period and cannot
be transferred until the Treasury’s preferred stock is redeemed in
full;
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a
requirement that a company’s chief executive officer and chief financial
officer provide in annual securities filings, a written certification of
compliance with the executive compensation and corporate governance
provisions of the Interim Final Rule;
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an
obligation for the compensation committee of the board of directors to
evaluate with a company’s chief risk officer certain compensation plans to
ensure that such plans do not encourage unnecessary or excessive risks or
the manipulation of reported earnings;
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a
requirement that companies adopt a company-wide policy regarding excessive
or luxury expenditures;
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a
requirement that companies permit a separate, non-binding shareholder vote
to approve the compensation of executives; and
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a
provision that allows the Treasury to review compensation paid prior to
enactment of ARRA to senior executive officers and the next 20 most
highly-compensated employees to determine whether any payments were
inconsistent with the executive compensation restrictions of EESA, TARP or
otherwise contrary to the public
interest.
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Bank
Regulation
General. The Bank is subject
to numerous state and federal statues and regulations that affect its business,
activities, and operations, and is supervised and examined by the Commissioner
and the FDIC. The FDIC and the Commissioner regularly examine the operations of
banks over which they exercise jurisdiction. They have the authority to approve
or disapprove the establishment of branches, mergers, consolidations and other
similar corporate actions. They also have authority to prevent the continuance
or development of unsafe or unsound banking practices and other violations of
law. The FDIC and the Commissioner regulate and monitor all areas of the
operations of banks and their subsidiaries, including loans, mortgages, the
issuance of securities, capital adequacy, loss reserves and compliance with the
CRA as well as other laws and regulations. Interest and certain other charges
collected and contracted for by banks are also subject to state usury laws and
certain federal laws concerning interest rates.
Deposit Insurance. The
deposit accounts of the Bank are insured by the Deposit Insurance Fund (the
“DIF”) of the FDIC. Pursuant to EESA and ARRA, the maximum deposit insurance
amount per depositor was increased from $100,000 to $250,000 until
December 31, 2013. The FDIC issues regulations and conducts periodic
examinations, requires the filing of reports and generally supervises the
operations of its insured banks. This supervision and regulation is intended
primarily for the protection of depositors. Any insured bank that is not
operated in accordance with or does not conform to FDIC regulations, policies
and directives may be sanctioned for noncompliance. Civil and criminal
proceedings may be instituted against any insured bank or any director, officer
or employee of such bank for the violation of applicable laws and regulations,
breaches of fiduciary duties or engaging in any unsafe or unsound practice. The
FDIC has the authority to terminate insurance of accounts pursuant to procedures
established for that purpose.
The Bank
is subject to insurance assessments imposed by the FDIC. The FDIC imposes a
risk-based deposit premium assessment system, which was amended pursuant to the
Federal Deposit Insurance Reform Act of 2005. Under this system, as amended, the
assessment rates for an insured depository institution vary according to the
level of risk incurred in its activities. To arrive at an assessment rate for a
banking institution, the FDIC places it in one of four risk categories
determined by reference to its capital levels and supervisory ratings. In
addition, in the case of those institutions in the lowest risk category, the
FDIC further determines its assessment rate based on certain specified financial
ratios or, if applicable, its long-term debt ratings.
Recently,
the FDIC has been actively seeking to replenish the DIF. The FDIC increased
risk-based assessment rates uniformly by seven basis points, on an annual basis,
beginning in the first quarter of 2009. On May 22, 2009, the FDIC adopted a
final rule imposing a five basis point special assessment on each insured
depository institution’s qualifying assets less Tier 1 capital as of June 30,
2009. The FDIC collected this special assessment on September 30, 2009. On
November 12, 2009, the FDIC adopted a final rule that required insured financial
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for the following three years. Such prepaid
assessments were collected on December 30, 2009 at a rate based on the insured
institution’s modified third quarter 2009 assessment rate. The Company’s prepaid
assessment was $7.3 million.
Temporary Liquidity Guarantee
Program. On October 14, 2008, the FDIC announced its Temporary Liquidity
Guarantee Program (“TLGP”) to strengthen confidence and encourage liquidity in
the banking system. Under the transaction account guarantee program of the TLGP,
the FDIC will fully guarantee, through June 30, 2010 (extended from December 31,
2009 subject to an opt-out provision by subsequent amendment), all
non-interest-bearing transaction accounts, including NOW accounts with interest
rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also
guarantees all senior unsecured debt of insured depository institutions or their
qualified holding companies issued between December 19, 2008 and October 31,
2009 subject to certain conditions.
All
eligible institutions were permitted to participate in both of the components of
the TLGP without cost for the first 30 days of the program. Following the
initial 30 day grace period, institutions were assessed at the rate of ten basis
points (15 basis points during the six-month extension period) for transaction
account balances in excess of $250,000 for the transaction account guarantee
program and at the rate of either 50, 75, or 100 basis points of the amount of
debt issued, depending on the maturity date of the guaranteed debt, for the debt
guarantee program. Institutions were required to opt-out of the TLGP if they did
not wish to participate. The Bank did not choose to opt out of either the
transaction account guarantee program or debt guarantee program components of
the TLGP or the six-month extension of the account guarantee
program.
Dividends and Capital Requirements. Under North Carolina corporation laws, the Company may not pay a dividend or distribution, if after giving its effect, the Company would not be able to pay its debts as they become due in the usual course of business or the Company’s total assets would be less than its liabilities. In general, the Company’s ability to pay cash dividends is dependent upon the amount of dividends paid to the Company by the Bank. The ability of the Bank to pay dividends to the Company is subject to statutory and regulatory restrictions on the payment of cash dividends, including the requirement under the North Carolina banking laws that cash dividends be paid only out of undivided profits and only if the Bank has surplus of a specified level. During 2009, the Office of the Commissioner of Banks authorized a one-time transfer of funds from the Bank’s permanent surplus account to undivided profits for the purpose of paying dividends to the Company.
Like the
Company, the Bank is required by federal regulations to maintain certain minimum
capital levels. The levels required of the Bank are the same as required for the
Company. As of December 31, 2009, the Bank had Tier 1 risk-adjusted, total
regulatory capital and leverage capital of approximately 10.14%, 11.40% and
8.92%, respectively, all in excess of the minimum requirements. Those same
ratios as of December 31, 2008 were 12.09%, 13.15% and 10.47%,
respectively.
Federal Deposit Insurance
Corporation Improvement Act of 1991. The Federal Deposit Insurance
Corporation Improvement Act of 1991 (“FDICIA”) provides for, among other things,
(i) publicly available annual financial condition and management reports for
certain financial institutions, including audits by independent accountants,
(ii) the establishment of uniform accounting standards by federal banking
agencies, (iii) the establishment of a “prompt corrective action” system of
regulatory supervision and intervention, based on capitalization levels, with
greater scrutiny and restrictions placed on depository institutions with lower
levels of capital, (iv) additional grounds for the appointment of a conservator
or receiver, and (v) restrictions or prohibitions on accepting brokered
deposits, except for institutions which significantly exceed minimum capital
requirements. FDICIA also provides for increased funding of the FDIC insurance
funds and the implementation of risk-based premiums.
A central
feature of FDICIA is the requirement that the federal banking agencies take
“prompt corrective action” with respect to depository institutions that do not
meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: “well capitalized,” “adequately
capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity. FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution.
Community Reinvestment Act.
Banks are also subject to the CRA, which requires the appropriate federal
bank regulatory agency, in connection with its examination of a bank, to assess
such bank’s record in meeting the credit needs of the community served by that
bank, including low- and moderate-income neighborhoods. Each institution is
assigned one of the following four ratings of its record in meeting community
credit needs: “outstanding,” “satisfactory,” “needs to improve” or “substantial
noncompliance.” The regulatory agency’s assessment of the bank’s record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office, or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the
application.
The GLB’s
“CRA Sunshine Requirements” call for financial institutions to publicly disclose
certain written agreements made in fulfillment of the CRA. Banks that are
parties to such agreements must report to federal regulators the amount and use
of any funds expended under such agreements on an annual basis, along with such
other information as regulators may require.
Monetary
Policy and Economic Controls
The
Company and the Bank are directly affected by governmental policies and
regulatory measures affecting the banking industry in general. Of primary
importance is the Federal Reserve Board, whose actions directly affect the money
supply which, in turn, affects banks’ lending abilities by increasing or
decreasing the cost and availability of funds to banks. The Federal Reserve
Board regulates the availability of bank credit in order to combat recession and
curb inflationary pressures in the economy by open market operations in United
States government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against bank deposits, and
limitations on interest rates that banks may pay on time and savings
deposits.
Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks has eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates has generally increased banks’ cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, face a significant challenge to maintain acceptable net interest margins.
Executive
Officers
The
executive officers of the Company are:
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Name
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Age
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Position
with Company
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B.
Grant Yarber
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45
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President
and Chief Executive Officer
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Michael
R. Moore
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52
|
Executive
Vice President and Chief Financial Officer
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David
C. Morgan
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49
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Executive
Vice President and Chief Banking Officer
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|
Mark
J. Redmond
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42
|
Executive
Vice President and Chief Credit Officer
|
|
Ralph
J. Edwards
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54
|
Sr.
Vice President and Technology & Operations Executive
Officer
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B. Grant
Yarber serves as President and Chief Executive Officer for Capital Bank
Corporation and Capital Bank, overseeing the day-to-day operations of the Bank.
Mr. Yarber joined Capital Bank Corporation in 2003 as the Chief Credit Officer
and was promoted to President and Chief Operating Officer in January 2004 before
his appointment to Chief Executive Officer in May 2004. Mr. Yarber served
previously as Chief Lending Officer and Chief Credit Officer of MountainBank in
Hendersonville, N.C. from 2002 to 2003. With more than 19 years of banking
experience, Mr. Yarber has particular strength in lending and credit management.
His background includes leadership positions with Bank of America, including
Southeast Credit Manager and Regional Executive for Business Banking and
Professional/Executive Banking for Missouri and Illinois. He also serves as a
director and President of Capital Bank Foundation, Inc.
Michael
R. Moore serves as Executive Vice President and Chief Financial Officer for
Capital Bank Corporation and Capital Bank. Mr. Moore joined the Bank as
Executive Vice President and Chief Financial Officer in 2008. In this position,
Mr. Moore is responsible for the financial activities of the Company, including
investment portfolio management, analyst relations and strategic planning. Mr.
Moore has over 29 years of banking experience and most recently served as Senior
Vice President of Funds Management for Sky Financial Group Incorporated from
2000 to 2008. Mr. Moore was responsible for balance sheet management at Sky
Financial Group which included the investment portfolio, borrowed funds, margin
management of all loan and deposit products, and ensuring adequate liquidity was
available.
David C.
Morgan serves as Executive Vice President and Chief Banking Officer for Capital
Bank Corporation and Capital Bank. Mr. Morgan joined the Bank in 2003 serving as
Triangle Regional President and became Executive Vice President and Chief
Banking Officer in 2007. Mr. Morgan has over 27 years of business lending
expertise in executive level positions with a large Southeastern bank where he
served the Granville, Wake, Durham and Franklin County areas. In his role as
Chief Banking Officer, Mr. Morgan is responsible for commercial and retail
banking statewide.
Mark J.
Redmond serves as Executive Vice President and Chief Credit Officer for Capital
Bank Corporation and Capital Bank. Mr. Redmond joined the Bank in 2005,
previously having served as Senior Credit Officer at BB&T Corporation
(“BB&T”) for three years, where he was responsible for credit administration
for the western half of Kentucky, and as a Relationship Officer with BB&T’s
Capital Markets Group for two years. Mr. Redmond has over 17 years of banking
experience, concentrating in the commercial lending and credit areas. In his
function as Chief Credit Officer, Mr. Redmond is responsible for credit quality,
loan review, special assets and the credit department.
Ralph J.
Edwards serves as Senior Vice President and Technology and Operations Executive
Officer for Capital Bank Corporation and Capital Bank. Mr. Edwards joined the
Bank in December 2008 serving as Chief Operations Officer. Mr. Edwards has over
30 years of experience in bank operations and information technology. Prior to
joining the Bank, Mr. Edwards served as Chief Information Officer at First
Citizens Bancshares, Inc. from 2006 to 2008, and as Executive Vice President and
IT Operations Services Manager at BB&T from 2003 to 2006. In addition to
responsibility for the Bank’s technology and operations areas, Mr. Edwards has
management oversight for the Bank’s compliance area and mortgage
department.
Website Access to Capital Bank Corporation’s Filings with the Securities and Exchange Commission
All of
the Company’s electronic filings with the SEC, including the Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and
amendments to these reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
have been made available at no cost on the Company’s web site, www.capitalbank-us.com,
as soon as reasonably practicable after the Company has filed such material
with, or furnished it to, the SEC. The Company’s SEC filings are also available
through the SEC’s web site at www.sec.gov. In
addition, any reports the Company files with the SEC are available at the SEC’s
Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information
may be obtained about the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Item 1A. Risk Factors
In
addition to the other information provided in this Annual Report on Form 10-K,
you should consider the following material risk factors carefully before
deciding to invest in the Company’s securities. Additional risks and
uncertainties not presently known to the Company, which the Company currently
deems not material or which are similar to those faced by other companies in the
Company’s industry or business in general, such as competitive conditions, may
also impact the Company’s business operations. If any of the events described
below occur, the Company’s business, financial condition, or results of
operations could be materially adversely affected. In that event, the trading
price of the Company’s common stock may decline, in which case the value of your
investment may decline as well. References herein to “we,” “us” and “our” refer
to Capital Bank Corporation, a company incorporated in North Carolina, and its
consolidated subsidiaries, unless the context otherwise requires.
Risks
Related to Our Business
U.S.
and international credit markets and economic conditions could adversely affect
our liquidity, financial condition and profitability.
Global
market and economic conditions continue to be disruptive and volatile and the
disruption has particularly had a negative impact on the financial sector. The
possible duration and severity of this adverse economic cycle is unknown.
Although we remain well capitalized and have not suffered any liquidity issues
as a result of these recent events, the cost and availability of funds may be
adversely affected by illiquid credit markets. Continued turbulence in U.S. and
international markets and economies may also adversely affect our liquidity,
financial condition and profitability.
Legislative
and regulatory actions taken now or in the future to address the current
liquidity and credit crisis in the financial industry may significantly affect
our liquidity or financial condition.
The
Federal Reserve, U.S. Congress, the Treasury, the FDIC and others have taken
numerous actions to address the current liquidity and credit situation in the
financial markets. These measures include actions to encourage loan
restructuring and modification for homeowners; the establishment of significant
liquidity and credit facilities for financial institutions and investment banks;
and coordinated efforts to address liquidity and other weaknesses in the banking
sector. The EESA, which established the TARP, was enacted on October 3, 2008. As
part of the TARP, the Treasury created the CPP, under which the Treasury will
invest up to $250 billion in senior preferred stock of U.S. banks and savings
associations or their holding companies for the purpose of stabilizing and
providing liquidity to the U.S. financial markets. On February 17, 2009, the
ARRA was enacted as a sweeping economic recovery package intended to stimulate
the economy and provide for extensive infrastructure, energy, health and
education needs. We participated in the CPP and sold $41.3 million of our Series
A Preferred Stock, and a warrant to purchase 749,619 shares of our common stock
to the Treasury. Future participation in this or similar programs may subject us
to additional restrictions and regulation. There can be no assurance as to the
actual impact that EESA or its programs, including the CPP, and ARRA or its
programs, will have on the national economy or financial markets. The failure of
these significant legislative measures to help stabilize the financial markets
and a continuation or worsening of current financial market conditions could
materially and adversely affect our financial condition, results of operations,
liquidity or stock price.
Further,
the U.S. Congress and state legislatures and federal and state regulatory
authorities continually review banking laws, regulations and policies for
possible changes. Changes to statutes, regulations or regulatory policies,
including interpretation and implementation of statutes, regulation or policies,
including EESA, ARRA, and TARP and recently proposed executive compensation
guidance by the Federal Reserve and FDIC, could affect us in substantial and
unpredictable ways, including limiting the types of financial services and
products we may offer or increasing the ability of non-banks to offer competing
financial services and products. While we cannot predict the regulatory changes
that may be borne out of the current economic crisis, and we cannot predict
whether we will become subject to increased regulatory scrutiny by any of these
regulatory agencies, any regulatory changes or scrutiny could increase or
decrease the cost of doing business, limit or expand our permissible activities,
or affect the competitive balance among banks, credit unions, savings and loan
associations and other institutions. We cannot predict whether new legislation
will be enacted and, if enacted, the effect that it, or any regulations, would
have on our business, financial condition or results of
operations.
Changes
in local economic conditions could lead to higher loan charge-offs and reduce
our net income and growth.
Our
business is subject to periodic fluctuations based on local economic conditions
in central and western North Carolina. These fluctuations are not predictable,
cannot be controlled and may have a material adverse impact on our operations
and financial condition even if other favorable events occur. Our operations are
locally oriented and community-based. Accordingly, we expect to continue to be
dependent upon local business conditions as well as conditions in the local
residential and commercial real estate markets we serve. For example, an
increase in unemployment, a decrease in real estate values or increases in
interest rates, as well as other factors, could weaken the economies of the
communities we serve.
Weakness
in our market areas could depress our earnings and consequently our financial
condition because:
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customers
may not want or need our products or services;
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borrowers
may not be able to repay their loans;
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the
value of the collateral securing loans to borrowers may decline;
and
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the
quality of our loan portfolio may
decline.
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Any of
the latter three scenarios could require us to charge off a higher percentage of
loans and/or increase provisions for credit losses, which would reduce our net
income.
Because
the majority of our borrowers are individuals and businesses located and doing
business in Wake, Granville, Lee, Cumberland, Johnston, Chatham, Alamance,
Buncombe and Catawba Counties, North Carolina, our success will depend
significantly upon the economic conditions in those and the surrounding
counties. Unfavorable economic conditions or a continued increase in
unemployment rates in those and the surrounding counties may result in, among
other things, a deterioration in credit quality or a reduced demand for credit
and may harm the financial stability of our customers. Due to our limited market
areas, these negative conditions may have a more noticeable effect on us than
would be experienced by a larger institution that is able to spread these risks
of unfavorable local economic conditions across a large number of diversified
economies.
We
are exposed to risks in connection with the loans we make.
A
significant source of risk for us arises from the possibility that losses will
be sustained because borrowers, guarantors and related parties may fail to
perform in accordance with the terms of their loans. We have underwriting and
credit monitoring procedures and credit policies, including the establishment
and review of the allowance for loan losses, that we believe are appropriate to
minimize this risk by assessing the likelihood of nonperformance, tracking loan
performance and diversifying our loan portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could adversely affect our
results of operations. Loan defaults result in a decrease in interest income and
may require the establishment of or an increase in loan loss reserves.
Furthermore, the decrease in interest income resulting from a loan default or
defaults may be for a prolonged period of time as we seek to recover, primarily
through legal proceedings, the outstanding principal balance, accrued interest
and default interest due on a defaulted loan plus the legal costs incurred in
pursuing our legal remedies. No assurance can be given that recent market
conditions will not result in our need to increase loan loss reserves or charge
off a higher percentage of loans, thereby reducing net income.
A
significant portion of our loan portfolio is secured by real estate, and events
that negatively impact the real estate market could hurt our
business.
A
significant portion of our loan portfolio is secured by real estate. As of
December 31, 2009, approximately 83% of our loans had real estate as a primary
or secondary component of collateral. The real estate collateral in each case
provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended. A
continued weakening of the real estate market in our primary market areas could
continue to result in an increase in the number of borrowers who default on
their loans and a reduction in the value of the collateral securing their loans,
which in turn could have an adverse effect on our profitability and asset
quality. If we are required to liquidate the collateral securing a loan to
satisfy the debt during a period of reduced real estate values, our earnings and
shareholders’ equity could be adversely affected. The declines in home prices in
the markets we serve, along with the reduced availability of mortgage credit,
also may result in increases in delinquencies and losses in our portfolio of
loans related to residential real estate construction and development. Further
declines in home prices coupled with a deepened economic recession and continued
rises in unemployment levels could drive losses beyond that which is provided
for in our allowance for loan losses. In that event, our earnings could be
adversely affected.
Additionally, recent weakness in the secondary market for residential lending could have an adverse impact on our profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, mortgage loan originations and gains on sale of mortgage loans. Continued declines in real estate values and home sales volumes, and financial stress on borrowers as a result of job losses or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods, which could adversely affect our financial condition or results of operations.
Our
real estate and land acquisition and development loans are based upon estimates
of costs and the value of the complete project.
We extend
real estate land loans, construction loans, and acquisition and development
loans to builders and developers, primarily for the construction/development of
properties. We originate these loans on a presold and speculative basis and they
include loans for both residential and commercial purposes. As of December 31,
2009, these loans totaled $452.1 million, or 33% of our total loan portfolio.
Approximately $100.7 million of this amount was for construction of residential
properties and $59.9 million was for construction of commercial properties.
Additionally, approximately $219.3 million was for acquisition and development
loans for both residential and commercial properties. Land loans, which are
loans made with raw land as security, totaled $72.2 million, or 5% of our
portfolio, as of December 31, 2009.
In
general, construction and land lending involves additional risks because of the
inherent difficulty in estimating a property’s value both before and at
completion of the project. Construction costs may exceed original estimates as a
result of increased materials, labor or other costs. In addition, because of
current uncertainties in the residential and commercial real estate markets,
property values have become more difficult to determine than they have been
historically. Construction and land acquisition and development loans often
involve the repayment dependent, in part, on the ability of the borrower to sell
or lease the property. These loans also require ongoing monitoring. In addition,
speculative construction loans to a residential builder are often associated
with homes that are not presold, and thus pose a greater potential risk than
construction loans to individuals on their personal residences. As of December
31, 2009, $85.0 million of our residential construction loans were for
speculative construction loans. Slowing housing sales have been a contributing
factor to an increase in nonperforming loans as well as an increase in
delinquencies. Residential construction loans and commercial construction loans
represented 18% and 0%, respectively, of our nonperforming loans as of December
31, 2009.
Our
non-owner occupied commercial real estate loans may be dependent on factors
outside the control of our borrowers.
We
originate non-owner occupied commercial real estate loans for individuals and
businesses for various purposes, which are secured by commercial properties.
These loans typically involve repayment dependent upon income generated, or
expected to be generated, by the property securing the loan in amounts
sufficient to cover operating expenses and debt service. This may be adversely
affected by changes in the economy or local market conditions. Non-owner
occupied commercial real estate loans expose a lender to greater credit risk
than loans secured by residential real estate because the collateral securing
these loans typically cannot be liquidated as easily as residential real estate.
If we foreclose on a non-owner occupied commercial real estate loan, our holding
period for the collateral typically is longer than a 1-4 family residential
property because there are fewer potential purchasers of the collateral.
Additionally, non-owner occupied commercial real estate loans generally have
relatively large balances to single borrowers or related groups of borrowers.
Accordingly, charge-offs on non-owner occupied commercial real estate loans may
be larger on a per loan basis than those incurred with our residential or
consumer loan portfolios.
As of
December 31, 2009, our non-owner occupied commercial real estate loans totaled
$245.7 million, or 18% of our total loan portfolio.
Repayment
of our commercial business loans is dependent on the cash flows of the borrower,
which may be unpredictable, and the collateral securing these loans may
fluctuate in value.
We offer
different types of commercial loans to a variety of small to medium-sized
businesses. The types of commercial loans offered are owner-occupied term real
estate loans, business lines of credit and term equipment financing. Commercial
business lending involves risks that are different from those associated with
non-owner occupied commercial real estate lending. Our commercial business loans
are primarily underwritten based on the cash flow of the borrower and
secondarily on the underlying collateral, including real estate. The borrowers’
cash flow may be unpredictable, and collateral securing these loans may
fluctuate in value. Some of our commercial business loans are collateralized by
equipment, inventory, accounts receivable or other business assets, and the
liquidation of collateral in the event of default is often an insufficient
source of repayment because accounts receivable may be uncollectible and
inventories may be obsolete or of limited use.
As of December 31, 2009, our commercial business loans totaled $378.1 million, or 27% of our total loan portfolio. Of this number, $194.4 million was secured by owner-occupied real estate and $183.7 million was secured by business assets.
A
portion of our commercial real estate loan portfolio utilizes interest reserves
which may not accurately portray the financial condition of the project and the
borrower’s ability to repay the loan.
Some of
our commercial real estate loans utilize interest reserves to fund the interest
payments and are funded from loan proceeds. Our decision to establish a
loan-funded interest reserve upon origination of a loan is based on the
feasibility of the project, the creditworthiness of the borrower and guarantors
and the protection provided by the real estate and other collateral. When
applied appropriately, an interest reserve can benefit both the lender and the
borrower. For the lender, an interest reserve provides an effective means for
addressing the cash flow characteristics of a properly underwritten acquisition,
development and construction loan. Similarly, for the borrower, interest
reserves provide the funds to service the debt until the property is developed,
and cash flow is generated from the sale or lease of the developed
property.
Although
potentially beneficial to the lender and the borrower, our use of interest
reserves carries certain risks. Of particular concern is the possibility that an
interest reserve may not accurately reflect problems with a borrower’s
willingness or ability to repay the debt consistent with the terms and
conditions of the loan obligation. For example, a project that is not completed
in a timely manner or falters once completed may appear to perform if the
interest reserve keeps the loan current. In some cases, we may extend, renew or
restructure the term of certain loans, providing additional interest reserves to
keep the loan current. As a result, the financial condition of the project may
not be apparent and developing problems may not be addressed in a timely manner.
Consequently, we may end up with a matured loan where the interest reserve has
been fully advanced, and the borrower’s financial condition has deteriorated. In
addition, the project may not be complete, its sale or lease-up may not be
sufficient to ensure timely repayment of the debt or the value of the collateral
may have declined, exposing us to increasing credit losses.
As of
December 31, 2009, we had a total of 50 loans funded by an interest reserve with
a total outstanding balance of $142.3 million, representing approximately 10% of
our total outstanding loans. Total commitments on these loans equaled $178.8
million with total remaining interest reserves of $5.0 million, representing a
weighted average term of approximately nine months of remaining interest
coverage. These loans had a weighted average loan-to-value ratio of 72% based on
the most recent appraisals.
Our
allowance for loan losses may prove to be insufficient to absorb losses in our
loan portfolio.
Lending
money is a substantial part of our business, and each loan carries a certain
risk that it will not be repaid in accordance with its terms or that any
underlying collateral will not be sufficient to assure repayment. This risk is
affected by, among other things:
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cash
flow of the borrower and/or the project being financed;
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the
changes and uncertainties as to the future value of the collateral, in the
case of a collateralized loan;
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the
duration of the loan;
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the
credit history of a particular borrower; and
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changes
in economic and industry
conditions.
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We
maintain an allowance for loan losses, which is a reserve established through a
provision for loan losses charged to expense, which we believe is appropriate to
provide for probable losses in our loan portfolio. The amount of this allowance
is determined by our management through periodic reviews and consideration of
several factors, including, but not limited to:
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our
general reserve, based on our historical default and loss experience and
certain macroeconomic factors based on management’s expectations of future
events; and
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our
specific reserve, based on our evaluation of nonperforming loans and their
underlying collateral.
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The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for probable loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on our financial condition and results of operations.
If
our allowance for loan losses is not adequate, we may be required to make
further increases in our provisions for loan losses and to charge off additional
loans, which could adversely affect our results of operations.
For the
year ended December 31, 2009, we recorded a provision for loan losses of $23.1
million compared to $3.9 million for the year ended December 31, 2008, an
increase of $19.2 million. We also recorded net loan charge-offs of $11.8
million for the year ended December 31, 2009 compared to $3.5 million for the
year ended December 31, 2008. Generally, our nonperforming loans and assets
reflect operating difficulties of individual borrowers resulting from weakness
in the local economy; however, more recently the deterioration in the general
economy has become a significant contributing factor to the increased levels of
delinquencies and nonperforming loans. Slower sales and excess inventory in the
housing market has been the primary cause of the increase in delinquencies and
foreclosures for residential construction loans, which represented 18% of our
nonperforming loans as of December 31, 2009. In addition, slowing housing sales
have been a contributing factor to the increase in nonperforming loans as well
as the increase in delinquencies. As of December 31, 2009, our total
nonperforming loans increased to $39.5 million, or 2.84% of total loans,
compared to $9.1 million, or 0.73% of total loans, as of December 31,
2008.
If
current trends in the housing and real estate markets continue, we expect that
we will continue to experience higher than normal delinquencies and credit
losses. Moreover, until general economic conditions improve, we may continue to
experience increased delinquencies and credit losses. As a result, we may be
required to make additional provisions for loan losses and to charge off
additional loans in the future, which could materially adversely affect our
financial condition and results of operations.
We
are subject to environmental liability risk associated with lending
activities.
A
significant portion of our loan portfolio is secured by real property. During
the ordinary course of business, we may foreclose on and take title to
properties securing certain loans. In doing so, there is a risk that hazardous
or toxic substances could be found on these properties. If hazardous or toxic
substances are found, we may be liable for remediation costs, as well as for
personal injury and property damage. Environmental laws may require us to incur
substantial expenses to address unknown liabilities and may materially reduce
the affected property’s value or limit our ability to use or sell the affected
property. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to
environmental liability. Although we have policies and procedures to perform an
environmental review before initiating any foreclosure action on nonresidential
real property, these reviews may not be sufficient to detect all potential
environmental hazards. The remediation costs and any other financial liabilities
associated with an environmental hazard could have a material adverse effect on
our financial condition and results of operations.
Changes
in interest rates may have an adverse effect on our profitability.
Our
earnings and financial condition are dependent to a large degree upon net
interest income, which is the difference between interest earned from loans and
investments and interest paid on deposits and borrowings. Approximately 62% of
our loans were variable rate loans as of December 31, 2009, which means that our
interest income will generally decrease in lower interest rate environments and
rise in higher interest rate environments. Our net interest income will be
adversely affected if market interest rates change such that the interest we
earn on loans and investments decreases faster than the interest we pay on
deposits and borrowings. We cannot predict with certainty or control changes in
interest rates. Regional and local economic conditions and the policies of
regulatory authorities, including monetary policies of the Board of Governors of
the Federal Reserve, affect interest income and interest expense. We have
ongoing policies and procedures designed to manage the risks associated with
changes in market interest rates. However, changes in interest rates still may
have an adverse effect on our earnings and financial condition.
The fair value of our investments could decline.
The
majority of our investment portfolio as of December 31, 2009 has been designated
as available-for-sale. Unrealized gains and losses in the estimated value of the
available-for-sale portfolio must be “marked to market” and reflected as a
separate item in shareholders’ equity (net of tax) as accumulated other
comprehensive income. As of December 31, 2009, we maintained $235.4 million, or
96%, of our total investment securities as available-for-sale. Shareholders’
equity will continue to reflect the unrealized gains and losses (net of tax) of
these investments. The fair value of our investment portfolio may decline,
causing a corresponding decline in shareholders’ equity.
As of
December 31, 2009, our available-for-sale securities portfolio contained $8.3
million in book value of non-agency mortgage-backed securities with gross
unrealized losses of $567 thousand. We may continue to observe declines in the
fair market value of these securities. We evaluate the securities portfolio for
any other-than-temporary impairment each reporting period, and as of December
31, 2009, one of our non-agency mortgage-backed securities with an unrealized
loss of $381 thousand was determined to be other-than-temporarily impaired.
Management determined that the impairment related to this security was not a
credit impairment; however, there can be no assurance that future evaluations of
this security or other similar securities will not result in
other-than-temporary impairment related to credit which will negatively impact
future earnings.
Further,
the Company owns two corporate bonds in the available-for-sale investment
portfolio, both of which were issued by community banks. After performing a
thorough analysis of these two bonds and the issuers, management determined that
both were other-than-temporarily impaired as of December 31, 2009. An unrealized
loss of $202 thousand on one of the bonds was determined not to be a credit
impairment, but an unrealized loss of $498 thousand on the other bond was
determined to be a credit impairment, which required a charge to earnings. There
may be future declines in the fair value of these corporate bond investments
which would negatively impact shareholders’ equity and may impact future
earnings.
Management
believes that several factors affect the fair values of our investment
portfolio. These include, but are not limited to, changes in interest rates or
expectations of changes, changes to the credit ratings and financial condition
of security issuers, the degree of volatility in the securities markets,
inflation rates or expectations of inflation, and the slope of the interest rate
yield curve. The yield curve refers to the differences between shorter-term and
longer-term interest rates; a positively sloped yield curve means shorter-term
rates are lower than longer-term rates. These and other factors may impact
specific categories of the portfolio differently, and we cannot predict the
effect these factors may have on any specific category.
Government
regulations may prevent or impact our ability to pay dividends, engage in
acquisitions or operate in other ways.
Current
and future legislation and the policies established by federal and state
regulatory authorities will affect our operations. We are subject to supervision
and periodic examination by the FDIC and the NC Commissioner. Banking
regulations, designed primarily for the protection of depositors, may limit our
growth and the return to you, our current and/or potential investors, by
restricting certain of our activities, such as:
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payment
of dividends to our shareholders;
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possible
mergers with, or acquisitions of or by, other
institutions;
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our
desired investments;
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loans
and interest rates on loans;
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interest
rates paid on our deposits;
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the
possible expansion of our branch offices; and/or
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our
ability to provide securities or trust
services.
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We also
are subject to capitalization guidelines set forth in federal legislation and
could be subject to enforcement actions to the extent that we are found by
regulatory examiners to be undercapitalized. We cannot predict what changes, if
any, will be made to existing federal and state legislation and regulations or
the effect that such changes may have on our future business and earnings
prospects. Many of these regulations are intended to protect depositors, the
public and the FDIC, not shareholders. The cost of compliance with regulatory
requirements including those imposed by the SEC may adversely affect our ability
to operate profitably.
Specifically, federal and state governments could pass additional legislation responsive to current credit conditions. We could experience higher credit losses because of legislation or regulatory action that reduces the amounts borrowers are contractually required to pay under existing loan contracts or that limits our ability to foreclose on property or other collateral or makes foreclosure less economically feasible.
The
FDIC imposed a special assessment on all FDIC-insured institutions, which
decreased our earnings in 2009, and future special assessments could adversely
affect our earnings in future periods.
The FDIC
increased risk-based assessment rates uniformly by 7 basis points, on an annual
basis, beginning in the first quarter of 2009. In May 2009, the FDIC announced
that it had voted to levy a special assessment on insured institutions in order
to facilitate the rebuilding of the Deposit Insurance Fund. The assessment was
equal to 5 basis points of the Bank’s total assets minus Tier 1 capital as of
June 30, 2009. The FDIC collected this special assessment on September 30, 2009.
The Company recorded total expense related to this special assessment of $765
thousand during the year ended December 31, 2009. The FDIC has indicated that
future special assessments are possible, although it has not determined the
magnitude or timing of any future assessments. Any such future assessments will
decrease our earnings.
On
September 29, 2009, the FDIC announced its intention to require insured
institutions to prepay their estimated quarterly risk-based assessments for the
fourth quarter of 2009 and for the following three years. Such prepaid
assessments were collected on December 30, 2009 at a rate based on the insured
institution’s modified third quarter 2009 assessment rate. Our prepaid
assessment was $7.3 million, which will be recognized as expense over the
three-year assessment period.
The
terms governing the issuance of the Series A Preferred Stock to the Treasury may
be changed, the effect of which may have an adverse effect on our
operations.
The terms
of the Securities Purchase Agreement, which we entered into with the Treasury,
provides that the Treasury may unilaterally amend any provision of the
Securities Purchase Agreement to the extent required to comply with any changes
in applicable federal law that may occur in the future. We have no control over
any change in the terms of the transaction that may occur in the future. Such
changes may place restrictions on our business or results of operations, which
may adversely affect the market price of our common stock.
There
are potential risks associated with future acquisitions and
expansions.
We intend
to continue to explore expanding our branch system through selective
acquisitions of existing banks or bank branches in the Research Triangle area
and other markets in North Carolina, South Carolina and Virginia, at this time
particularly through FDIC-assisted transactions. We cannot say with any
certainty that we will be able to consummate, or if consummated, successfully
integrate, future acquisitions, or that we will not incur disruptions or
unexpected expenses in integrating such acquisitions. In the ordinary course of
business, we evaluate potential acquisitions that would bolster our ability to
cater to the small business, individual and residential lending markets in our
target markets. In attempting to make such acquisitions, we anticipate competing
with other financial institutions, many of which have greater financial and
operational resources. The process of identifying acquisition opportunities,
negotiating potential acquisitions, obtaining the required regulatory approvals,
and integrating new operations and personnel requires a significant amount of
time and expense and may divert management’s attention from our existing
business. In addition, since the consideration for an acquired bank or branch
may involve cash, notes or the issuance of shares of common stock, existing
shareholders could experience dilution in the value of their shares of our
common stock in connection with such acquisitions. Any given acquisition, if and
when consummated, may adversely affect our results of operations or overall
financial condition. In addition, we may expand our branch network through de
novo branches in existing or new markets. These de novo branches will have
expenses in excess of revenues for varying periods after opening, which could
decrease our reported earnings.
Our
ability to raise additional capital could be limited, could affect our liquidity
and could be dilutive to existing shareholders.
We may be
required or choose to raise additional capital, including for strategic,
regulatory or other reasons. Current conditions in the capital markets are such
that traditional sources of capital may not be available to us on reasonable
terms if we needed to raise additional capital, and the inability to access the
capital markets could impair our liquidity, which is important to our business.
In such case, there is no guarantee that we will be able to successfully raise
additional capital at all or on terms that are favorable or otherwise not
dilutive to existing shareholders.
We are dependent on our key personnel, including our senior management and directors, and our inability to hire and retain key personnel may adversely affect our operations and financial performance.
We are,
and for the foreseeable future will be, dependent on the services of our senior
management and directors. Members of our senior management have extensive and
long-standing ties within our market area and substantial experience with our
operations, which have contributed significantly to our growth. Should the
services of a member of our senior management team become unavailable, our
operations and growth may be disrupted, and there can be no assurance that a
suitable successor could be retained upon the terms and conditions that we would
offer. In December 2008, we entered into the Securities Purchase Agreement in
connection with the CPP pursuant to which we sold the Treasury 41,279 shares of
our Series A Preferred Stock and a warrant to purchase up to 749,619 shares of
our common stock for an aggregate purchase price of $41.3 million. Our
participation in the CPP restricts our ability to provide certain types of
compensation to certain senior executive officers and employees. The inability
to make certain types of compensation available to certain senior executive
officers and employees may reduce our ability to retain key
personnel.
Further,
as we continue to grow our operations both in our current markets and other
markets that we may target, we expect to continue to be dependent on our senior
management and their relationships in such markets. Our inability to attract or
retain additional personnel could materially adversely affect our business or
growth prospects in one or more markets.
We
compete with larger companies for business.
The
banking and financial services business in our market areas continues to be a
competitive field and is becoming more competitive as a result of:
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changes
in regulations;
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changes
in technology and product delivery systems; and
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the
accelerating pace of consolidation among financial services
providers.
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We may
not be able to compete effectively in our markets, and our results of operations
could be adversely affected by the nature or pace of change in competition. We
compete for loans, deposits and customers with various bank and nonbank
financial services providers, many of which have substantially greater
resources, including higher total assets and capitalization, greater access to
capital markets and a broader offering of financial services.
The
failure of other financial institutions could adversely affect us.
Our
ability to engage in routine transactions, including, for example, funding
transactions, could be adversely affected by the actions and potential failures
of other financial institutions. We have exposure to many different industries
and counterparties, and we routinely execute transactions with a variety of
counterparties in the financial services industry. As a result, defaults by, or
even rumors or concerns about, one or more financial institutions with which we
do business, or the financial services industry generally, have led to
market-wide liquidity problems and could lead to losses or defaults by us or by
others. In addition, our credit risk may be exacerbated when the collateral we
hold cannot be sold at prices that are sufficient for us to recover the full
amount of our exposure. Any such losses could materially and adversely affect
our financial condition or results of operations.
Consumers
may decide not to use banks to complete their financial transactions, which
could limit our revenue.
Technology
and other changes are allowing parties to complete financial transactions
through alternative methods that historically have involved banks. For example,
consumers can now maintain funds in brokerage accounts or mutual funds that
would have historically been held as bank deposits. Consumers can also complete
transactions such as paying bills and/or transferring funds directly without the
assistance of banks through the use of various electronic payment systems. The
process of eliminating banks as intermediaries could result in the loss of fee
income, as well as the loss of customer deposits and the related income
generated from those deposits. The loss of these revenue streams and the lower
cost deposits as a source of funds could have a material adverse effect on our
financial condition and results of operations.
Technological advances impact our business.
The
banking industry is undergoing rapid technological changes with frequent
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, on our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations. Many of our competitors have substantially greater resources
than we do to invest in technological improvements. We may not be able to
effectively implement new technology-driven products and services or
successfully market such products and services to our customers.
Our
information systems, or those of our third party contractors, may experience an
interruption or breach in security.
We rely
heavily on our communications and information systems, and those of third party
contractors, to conduct our business. Any failure, interruption or breach in
security of these systems could result in failures or disruptions in our
customer relationship management, general ledger, deposit, loan and other
systems. While we have policies and procedures designed to prevent or limit the
effect of the failure, interruption or security breach of our information
systems, there can be no assurance that we can prevent any such failures,
interruptions or security breaches of our information systems, or those of our
third party contractors, or, if they do occur, that they will be adequately
addressed. The occurrence of any failures, interruptions or security breaches of
such information systems could damage our reputation, result in a loss of
customer business, subject us to additional regulatory scrutiny, or expose us to
civil litigation and possible financial liability, any of which could have a
material adverse effect on our financial condition and results of
operations.
Our
controls and procedures may fail or be circumvented.
Management
regularly reviews and updates our internal controls, disclosure controls and
procedures and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of our controls
and procedures or failure to comply with regulations related to controls and
procedures could have a material adverse effect on our business, results of
operations and financial condition.
Issues
discovered related to the administration and termination of the 1st State
Bancorp, Inc. Employee Stock Ownership Plan may subject us to liability and
adversely impact our financial condition and results of operations.
We
discovered that the 1st State Bancorp, Inc. Employee Stock Ownership Plan
(“ESOP”), which was to be terminated immediately prior to the Bank’s merger with
1st State Bank in 2006, was not correctly terminated. Among other things, we
have discovered that certain required filings with the Internal Revenue Service
(“IRS”) related to the termination of the ESOP were never made, insufficient
withholding taxes may have been submitted to the IRS, and incorrect
distributions may have been made from the ESOP, resulting in potential
overpayment of certain accounts and underpayment of others. We are currently in
the process of determining the source and extent of these potential errors and
have engaged outside counsel and an independent third party record keeper to
assist with correcting the errors and preparing the necessary filings with the
IRS and U.S. Department of Labor. We may be subject to penalties and interest
from the IRS due to the delinquent filings and insufficient payment of taxes and
potential liability to participants in the ESOP. We may also be required to
reimburse certain funds if improperly distributed from the ESOP.
For the
year ended December 31, 2009, the Company recorded total expense of $244
thousand related to this ESOP matter, which represented corrective amounts that
the Company contributed to the ESOP as well as professional fees incurred
through the end of the year. The Company is still in the process of determining
the final corrective amounts to be contributed to the ESOP, and in future
periods, may record expense related to additional contributions and/or penalties
and interest from the IRS or DOL as additional facts become known. If these
amounts are material, such additional payments may have an adverse effect on our
financial condition and results of operation.
Risks Related to Ownership of Our Common Stock
The
trading volume in our common stock has been low, which could make it difficult
for you to sell your shares.
Our
common stock is currently traded on the NASDAQ Global Select Market. Our common
stock is thinly traded and has substantially less liquidity than the average
trading market for many other publicly traded companies. Thinly traded stocks
can be more volatile than stock trading in an active public market. Our stock
price has been volatile in the past and several factors could cause the price to
fluctuate substantially in the future. These factors include but are not limited
to changes in analysts’ recommendations or projections, our announcement of
developments related to our business, operations and stock performance of other
companies deemed to be peers, news reports of trends, concerns, irrational
exuberance on the part of investors and other issues related to the financial
services industry. Recently, the stock market has experienced a high level of
price and volume volatility, and market prices for the stock of many companies,
including those in the financial services sector, have experienced wide price
fluctuations that have not necessarily been related to operating performance.
Our stock price may fluctuate significantly in the future, and these
fluctuations may be unrelated to our performance. General market declines or
market volatility in the future, especially in the financial institutions sector
of the economy, could adversely affect the price of our common stock, and the
current market price may not be indicative of future market prices. Therefore,
our shareholders may not be able to sell their shares at the volume, prices or
times that they desire.
We
may issue additional shares of common stock or convertible securities that will
dilute the percentage ownership interest of existing shareholders and may dilute
the book value per share of our common stock and adversely affect the terms on
which we may obtain additional capital.
Our
authorized capital includes 50,000,000 shares of common stock. As of December
31, 2009, we had 11,348,117 shares of common stock outstanding and had reserved
for issuance 366,583 shares underlying options that are or may become
exercisable at an average price of $11.76 per share. In addition, as of December
31, 2009, we had the ability to issue 575,559 shares of common stock pursuant to
options and restricted stock that may be granted in the future under our
existing equity compensation plans. Subject to applicable NASDAQ Listing Rules,
our Board of Directors generally has the authority, without action by or vote of
the shareholders, to issue all or part of any authorized but unissued shares of
common stock for any corporate purpose, including issuance of equity-based
incentives under or outside of our equity compensation plans. We may seek
additional equity capital in the future as we develop our business and expand
our operations. Any issuance of additional shares of common stock or convertible
securities will dilute the percentage ownership interest of our shareholders and
may dilute the book value per share of our common stock.
The
Bank’s ability to pay dividends is subject to regulatory limitations, which may
affect our ability to pay our obligations and dividends.
We are a
separate legal entity from the Bank and our other subsidiaries, and we do not
have significant operations of our own. We have historically depended on the
Bank’s cash and liquidity as well as dividends to pay our operating expenses.
Various federal and state statutory provisions limit the amount of dividends
that subsidiary banks can pay to their holding companies without regulatory
approval. The Bank is also subject to limitations under state law regarding the
payment of dividends, including the requirement that dividends may be paid only
out of undivided profits and only if the Bank has surplus of a specified level.
In addition to these explicit limitations, it is possible, depending upon the
financial condition of the Bank and other factors, that the federal and state
regulatory agencies could take the position that payment of dividends by the
Bank would constitute an unsafe or unsound banking practice. In the event the
Bank is unable to pay dividends sufficient to satisfy our obligations or is
otherwise unable to pay dividends to us, we may not be able to service our
obligations as they become due or to pay dividends on our common stock or Series
A Preferred Stock. Consequently, the inability to receive dividends from the
Bank could adversely affect our financial condition, results of operations, cash
flows and prospects.
In
addition, holders of our common stock are only entitled to receive such
dividends as our Board of Directors may declare out of funds legally available
for such payments. Although we have historically paid cash dividends on our
common stock, we are not required to do so and our Board of Directors has
recently announced that it has suspended the payment of our quarterly cash
dividend. This could adversely affect the market price of our common stock.
Also, we are a financial holding company and our ability to declare and pay
dividends depends on certain federal regulatory considerations, including the
guidelines of the Federal Reserve regarding capital adequacy and
dividends.
The
Treasury’s investment in us imposes restrictions and obligations limiting our
ability to pay dividends and repurchase common stock.
Under the
Securities Purchase Agreement and the rights of the Series A Preferred Stock set
forth in our Articles of Incorporation, our ability to declare or pay dividends
on any of our shares is restricted. Specifically, we may not declare dividend
payments on common, junior preferred or pari passu preferred shares
if we are in arrears on the dividends on the Series A Preferred Stock.
Furthermore, prior to December 12, 2011, unless we have redeemed all of the
Series A Preferred Stock, or the Treasury has transferred all of the Series A
Preferred Stock to a third party, the consent of the Treasury will be required
for us to, among other things, increase common stock dividends or effect
repurchases of common stock (with certain exceptions, including the repurchase
of our common stock to offset share dilution from equity-based employee
compensation awards).
Holders
of Series A Preferred Stock have certain voting rights that may adversely affect
our common shareholders, and the holders of Series A Preferred Stock may have
different interests from, and vote their shares in a manner deemed adverse to,
our common shareholders.
In the
event that we fail to pay dividends on shares of Series A Preferred Stock for an
aggregate of at least six quarterly dividend periods (whether or not
consecutive), the Treasury will have the right to appoint two directors to our
Board of Directors until all accrued but unpaid dividends have been paid;
otherwise, except as required by law, holders of Series A Preferred Stock have
limited voting rights. So long as shares of Series A Preferred Stock are
outstanding, in addition to any other vote or consent of shareholders required
by law or our Articles of Incorporation, the vote or consent of holders owning
at least 66 2/3% of the shares of Series A Preferred Stock outstanding is
required for:
|
•
|
any
amendment or alteration of our Articles of Incorporation to authorize or
create or increase the authorized amount of, or any issuance of, any
shares of, or any securities convertible into or exchangeable or
exercisable for shares of, any class or series of capital stock ranking
senior to the Series A Preferred Stock with respect to payment of
dividends and/or distribution of assets on our liquidation, dissolution or
winding up;
|
|
|
•
|
any
amendment, alteration or repeal of any provision of our Articles of
Incorporation so as to adversely affect the rights, preferences,
privileges or voting powers of the Series A Preferred Stock;
or
|
|
|
•
|
any
consummation of a binding share exchange or reclassification involving the
Series A Preferred Stock or of a merger or consolidation of us with
another entity, unless (i) the shares of Series A Preferred Stock remain
outstanding following any such transaction or, if we are not the surviving
or resulting entity, such shares are converted into or exchanged for
preference securities of the surviving or resulting entity or its ultimate
parent, and (ii) such remaining outstanding shares of Series A Preferred
Stock or preference securities, as the case may be, have rights,
preferences, privileges and voting powers, and limitations and
restrictions thereof, that are not materially less favorable than the
rights, preferences, privileges and voting powers, and limitations and
restrictions thereof, of the Series A Preferred Stock prior to such
consummation, taken as a whole. Holders of Series A Preferred Stock could
block such a transaction, even where considered desirable by, or in the
best interests of, holders of our common
stock.
|
In
addition, the shares of common stock that are issuable upon the exercise of the
warrant held by the Treasury will enjoy voting rights identical to those of our
other outstanding shares of common stock. Although the Treasury has agreed not
to vote the shares of common stock it would receive upon any exercise of the
warrant, a transferee of any portion of the warrant or any of the shares of
common stock it acquires upon exercise of the warrant is not bound by this
limitation.
There
can be no assurance when the Series A Preferred Stock may be redeemed and the
warrant held by the Treasury may be repurchased.
There can
be no assurance when the Series A Preferred Stock may be redeemed and the
warrant may be repurchased. In addition, the Series A Preferred Stock may only
be redeemed upon the express approval of the Federal Reserve. Until such time as
the Series A Preferred Stock is redeemed and the warrant is repurchased, we will
remain subject to the terms and conditions set forth in the Securities Purchase
Agreement, the warrant and the rights of the Series A Preferred Stock as set
forth in the Articles of Incorporation.
The holders of our subordinated debentures have rights that are senior to those of our shareholders.
We have
issued $30.9 million of subordinated debentures in connection with three trust
preferred securities issuances by our subsidiaries, Capital Bank Statutory Trust
I, II and III. We conditionally guarantee all payments of the principal and
interest on these trust preferred securities. Our subordinated debentures are
senior to our shares of common stock. As a result, we must make payments on the
subordinated debentures (and the related trust preferred securities) before any
dividends can be paid on our common stock and, in the event of bankruptcy,
dissolution or liquidation, the holders of the debentures must be satisfied
before any distributions can be made to the holders of common
stock.
An
investment in our common stock is not an insured deposit.
Our
common stock is not a bank deposit and, therefore, is not insured against loss
by the FDIC, any other deposit insurance fund or by any other public or private
entity. Investment in our common stock is inherently risky for the reasons
described in this “Risk Factors” section and elsewhere in this report and is
subject to the same market forces that affect the price of common stock in any
company. As a result, if you acquire our common stock, you may lose some or all
of your investment.
Item 1B. Unresolved Staff
Comments
None
Item 2. Properties
The
Company currently leases property located at 333 Fayetteville Street, Raleigh,
North Carolina for its principal offices and a branch office. The lease is for
58,772 square feet, of which 55,585 square feet is for the Company’s principal
offices and for the branch office. The
remaining leased square footage is currently being subleased to various other
entities. The Company owns 13 properties throughout North Carolina that
are used as branch offices, which are located in Burlington (3), Clayton,
Fayetteville (2), Graham, Hickory, Mebane, Raleigh, Sanford, Siler City, and
Zebulon. The Company’s operations center is located in one of the Burlington
offices. The Company leases 18 other properties throughout North Carolina that
are used as branch offices and which are located in Asheville (4), Cary (2),
Fayetteville (2), Holly Springs, Morrisville, Oxford, Pittsboro, Raleigh (3),
Sanford (2), and Wake Forest. Management believes the terms of the various
leases, which are reviewed on an annual basis, are consistent with market
standards and were arrived at through arm’s length bargaining.
On
January 19, 2010, the Company signed an amendment to its lease agreement at 333
Fayetteville Street to lease an additional 5,677 square feet of office space to
accommodate the Company’s expanded operations.
Item 3. Legal Proceedings
There are
no pending material legal proceedings to which the Company is a party or of
which any of its property is subject. In addition, the Company is not aware of
any threatened litigation, unasserted claims or assessments that could have a
material adverse effect on the Company’s business, operating results or
financial condition.
Item 4. (Removed and Reserved)
PART
II
Item 5. Market for Registrant’s Common
Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Shares of
Capital Bank Corporation common stock are traded on the Nasdaq Global Select
Market under the symbol “CBKN.” As of March 8, 2010, the Company had
approximately 2,000 holders of record of its common stock. The following tables
set forth, for the indicated periods, the high and low sales prices for the
common stock (based on published sources) and the cash dividend declared per
share of the Company’s common stock.
|
High
|
Low
|
Cash
Dividends
per
Share Declared
|
||||||||
|
2009
|
||||||||||
|
First
quarter
|
$
|
7.00
|
$
|
4.00
|
$
|
0.08
|
||||
|
Second
quarter
|
6.39
|
4.13
|
0.08
|
|||||||
|
Third
quarter
|
6.90
|
4.59
|
0.08
|
|||||||
|
Fourth
quarter
|
5.74
|
3.80
|
0.08
|
|||||||
|
2008
|
||||||||||
|
First
quarter
|
$
|
12.99
|
$
|
8.60
|
$
|
0.08
|
||||
|
Second
quarter
|
11.49
|
8.55
|
0.08
|
|||||||
|
Third
quarter
|
10.73
|
7.00
|
0.08
|
|||||||
|
Fourth
quarter
|
9.40
|
5.64
|
0.08
|
|||||||
Dividend Policy. The
Company’s shareholders are entitled to receive such dividends or distributions
as the Board of Directors authorizes in its discretion. The Company’s ability to
pay dividends is subject to the restrictions of the North Carolina Business
Corporation Act and its organizational documents, including its Articles of
Incorporation. There are also various statutory limitations on the ability of
the Bank to pay dividends to the Company. Subject to the legal availability of
funds to pay dividends, during each of 2009 and 2008, the Company declared and
paid dividends totaling $0.32 per share (see chart above for declared quarterly
dividends). The Company has currently suspended payment of its quarterly cash
dividend. The Board of Directors will continue to evaluate the payment of cash
dividends quarterly and determine whether such cash dividends are in the best
interest of the Company in the business judgment of its Board of Directors and
are consistent with maintaining the Company’s status as a “well capitalized”
institution under applicable banking laws and regulations. The Company’s
earnings and projected future earnings as well as capital levels will be
reviewed by the Board of Directors on a quarterly basis to determine whether a
quarterly dividend will be paid to shareholders, and if so, the appropriate
amount. In addition, the Company’s participation in the CPP limits the ability
of the Company to increase its quarterly dividends above $0.08 per share until
the earlier of (i) December 12, 2011 or (ii) the date on which the Company has
redeemed all of its shares of preferred stock held by the U.S. Treasury or the
date the U.S. Treasury has transferred all of its shares of the Company’s
preferred stock to a third party. Actual declaration of any future dividends and
the establishment of the record dates related thereto remains subject to further
action by the Company’s Board of Directors as well as the limitations discussed
above.
Recent Sales of Unregistered
Securities. The Company did not sell any securities in the fiscal year
ended December 31, 2009 that were not registered under the Securities Act of
1933, as amended (the “Securities Act”).
Repurchases of Equity
Securities. On January 24, 2008, the Company’s Board of Directors
authorized the repurchase (in the open market or
in any private transaction) of up to 1.0 million shares of the Company’s
currently outstanding shares of common stock, and all previous authorizations
for the repurchase of the Company’s currently outstanding shares of common stock
were superseded and revoked. As of December 31,
2009, there were an aggregate of 989,900 shares remaining authorized for future
repurchases. As a condition under the CPP, the Company’s share repurchases are
currently limited to purchases in connection with the administration of any
employee benefit plan, consistent with past practices, including purchases to
offset share dilution in connection with any such plans. This restriction is
effective until December 31, 2011 or until the Treasury no longer owns any of
the Company’s preferred stock. Therefore, the Company did not repurchase any of
its equity securities registered pursuant to Section 12 of the Exchange
Act during the year ended December 31, 2009.
The
following table sets forth the Company’s selected financial data for the most
recent five years ended December 31.
|
As
of and for the Years Ended December 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Selected
Balance Sheet Data
|
||||||||||||||||
|
Cash
and cash equivalents
|
$
|
29,513
|
$
|
54,455
|
$
|
40,172
|
$
|
54,332
|
$
|
77,089
|
||||||
|
Investment
securities
|
245,492
|
278,138
|
259,116
|
239,047
|
161,601
|
|||||||||||
|
Loans
|
1,390,302
|
1,254,368
|
1,095,107
|
1,008,052
|
668,982
|
|||||||||||
|
Allowance
for loan losses
|
26,081
|
14,795
|
13,571
|
13,347
|
9,592
|
|||||||||||
|
Intangible
assets
|
2,711
|
3,857
|
63,345
|
64,543
|
12,853
|
|||||||||||
|
Total
assets
|
1,734,668
|
1,654,232
|
1,517,603
|
1,422,384
|
960,906
|
|||||||||||
|
Deposits
|
1,377,965
|
1,315,314
|
1,098,698
|
1,055,209
|
698,480
|
|||||||||||
|
Borrowings
and repurchase agreements
|
173,543
|
147,010
|
208,642
|
160,162
|
107,687
|
|||||||||||
|
Subordinated
debentures
|
30,930
|
30,930
|
30,930
|
30,930
|
30,930
|
|||||||||||
|
Shareholders’
equity
|
139,785
|
148,514
|
164,300
|
161,681
|
83,492
|
|||||||||||
|
Tangible
common equity
|
95,795
|
103,378
|
100,955
|
97,138
|
70,639
|
|||||||||||
|
Summary
of Operations
|
||||||||||||||||
|
Interest
income
|
$
|
83,141
|
$
|
85,020
|
$
|
94,537
|
$
|
86,952
|
$
|
50,750
|
||||||
|
Interest
expense
|
34,263
|
42,424
|
50,423
|
40,770
|
21,476
|
|||||||||||
|
Net
interest income
|
48,878
|
42,596
|
44,114
|
46,182
|
29,274
|
|||||||||||
|
Provision
(credit) for loan losses
|
23,064
|
3,876
|
3,606
|
531
|
(396
|
)
|
||||||||||
|
Net
interest income after provision for loan losses
|
25,814
|
38,720
|
40,508
|
45,651
|
29,670
|
|||||||||||
|
Noninterest
income
|
9,517
|
11,001
|
9,140
|
9,636
|
6,731
|
|||||||||||
|
Noninterest
expense
|
49,160
|
106,612
|
38,666
|
36,678
|
26,439
|
|||||||||||
|
Net
(loss) income before taxes
|
(13,829
|
)
|
(56,891
|
)
|
10,982
|
18,609
|
9,963
|
|||||||||
|
Income
tax (benefit) expense
|
(7,013
|
)
|
(1,207
|
)
|
3,124
|
6,271
|
3,264
|
|||||||||
|
Net
(loss) income
|
$
|
(6,816
|
)
|
$
|
(55,684
|
)
|
$
|
7,858
|
$
|
12,338
|
$
|
6,699
|
||||
|
Dividends
and accretion on preferred stock
|
2,352
|
124
|
–
|
–
|
–
|
|||||||||||
|
Net
(loss) income attributable to common shareholders
|
$
|
(9,168
|
)
|
$
|
(55,808
|
)
|
$
|
7,858
|
$
|
12,338
|
$
|
6,699
|
||||
|
For
the Years Ended December 31,
|
|||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||
|
Per
Share Data
|
|||||||||||||||||
|
Net
(loss) income – basic
|
$
|
(0.80
|
)
|
$
|
(4.94
|
)
|
$
|
0.69
|
$
|
1.06
|
$
|
0.99
|
|||||
|
Net
(loss) income – diluted
|
(0.80
|
)
|
(4.94
|
)
|
0.68
|
1.06
|
0.97
|
||||||||||
|
Book
value
|
8.68
|
9.54
|
14.71
|
14.19
|
12.18
|
||||||||||||
|
Tangible
book value
|
8.44
|
9.20
|
9.04
|
8.53
|
10.31
|
||||||||||||
|
Common
stock dividends
|
0.32
|
0.32
|
0.32
|
0.24
|
0.24
|
||||||||||||
|
Common
shares outstanding
|
11,348,117
|
11,238,085
|
11,169,777
|
11,393,990
|
6,852,156
|
||||||||||||
|
Diluted
shares outstanding
|
11,470,314
|
11,302,769
|
11,492,728
|
11,683,674
|
6,920,388
|
||||||||||||
|
Basic
shares outstanding
|
11,470,314
|
11,302,769
|
11,424,171
|
11,598,502
|
6,790,846
|
||||||||||||
|
Performance
Ratios
|
|||||||||||||||||
|
Return
on average shareholders’ equity
|
(4.62
|
)%
|
(32.93
|
)%
|
4.78
|
%
|
7.64
|
%
|
8.32
|
%
|
|||||||
|
Return
on average assets
|
(0.40
|
)
|
(3.52
|
)
|
0.54
|
0.91
|
0.74
|
||||||||||
|
Net
interest margin 1
|
3.14
|
3.07
|
3.52
|
3.94
|
3.59
|
||||||||||||
|
Efficiency
ratio 2
|
84
|
77
|
73
|
66
|
73
|
||||||||||||
|
Dividend
payout ratio
|
(40
|
)
|
(6
|
)
|
47
|
23
|
24
|
||||||||||
|
Capital
Ratios
|
|||||||||||||||||
|
Tangible
equity to tangible assets
|
7.91
|
%
|
8.77
|
%
|
6.94
|
%
|
7.16
|
%
|
7.45
|
%
|
|||||||
|
Tangible
common equity to tangible assets
|
5.53
|
6.26
|
6.94
|
7.16
|
7.45
|
||||||||||||
| Average shareholders’ equity to average total assets | 8.72 | 10.68 | 11.32 | 11.93 | 8.87 | ||||||||||||
|
Leverage
ratio
|
8.94
|
10.58
|
9.10
|
9.42
|
10.64
|
||||||||||||
|
Tier
1 risk-based capital
|
10.16
|
12.17
|
10.19
|
10.76
|
11.73
|
||||||||||||
|
Total
risk-based capital
|
11.41
|
13.24
|
11.28
|
11.92
|
13.71
|
||||||||||||
|
Asset
Quality Ratios
|
|||||||||||||||||
|
Nonperforming
loans to gross loans
|
2.84
|
%
|
0.73
|
%
|
0.55
|
%
|
0.49
|
%
|
1.21
|
%
|
|||||||
|
Nonperforming
assets to total assets
|
2.90
|
0.63
|
0.50
|
0.42
|
0.92
|
||||||||||||
|
Allowance to
gross loans
|
1.88
|
1.18
|
1.24
|
1.32
|
1.43
|
||||||||||||
|
Allowance to
nonperforming loans
|
66
|
162
|
227
|
272
|
119
|
||||||||||||
|
Net
charge-offs to average loans
|
0.89
|
0.30
|
0.32
|
0.46
|
0.12
|
||||||||||||
|
1
|
Net
interest margin is presented on a tax equivalent basis.
|
|
2
|
Efficiency
ratio is computed by dividing noninterest expense by the sum of net
interest income and noninterest income, net of the goodwill impairment
charge in 2008.
|
Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
The
following discussion and analysis is intended to aid the reader in understanding
and evaluating the results of operations and financial condition of the Company
and its consolidated subsidiaries. As described above, the Trusts are not
consolidated with the financial statements of the Company. This discussion is
designed to provide more comprehensive information about the major components of
the Company’s results of operations and financial condition, liquidity, and
capital resources than can be obtained from reading the financial statements
alone. This discussion should be read in conjunction with, and is qualified in
its entirety by reference to, the Company’s consolidated financial statements,
including the related notes thereto presented elsewhere in this
report.
Overview
Capital
Bank is a full-service state chartered community bank conducting business
throughout North Carolina. The Bank operates through four North Carolina
regions: Triangle, Sandhills, Triad and Western. The Bank was incorporated on
May 30, 1997 and opened its first branch in June of that same year in Raleigh,
North Carolina. In 1999, the shareholders of the Bank approved the
reorganization of the Bank into a bank holding company. In 2001, the Company
received approval to become a financial holding company. As of December 31,
2009, the Company conducted no business other than holding stock in the Bank and
each of the Trusts.
The Bank’s business consists principally of attracting deposits from the general public and investing these funds in loans secured by commercial real estate, secured and unsecured commercial and consumer loans, single-family residential mortgage loans and home equity lines. As a community bank, the Bank’s profitability depends primarily upon its levels of net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income.
The Bank’s profitability is also affected by its
provision for loan losses, noninterest income and other operating expenses.
Noninterest income primarily consists of service charges and ATM fees, fees
generated from originating mortgage loans, commission income generated from
brokerage activity, and the increase in cash surrender value of bank-owned life
insurance. Operating expenses primarily consist of compensation and benefits,
occupancy related expenses, advertising and public relations, data processing
and telecommunications, professional fees, FDIC deposit insurance and other
noninterest expenses.
The
Bank’s operations are influenced significantly by local economic conditions and
by policies of financial institution regulatory authorities. The Bank’s cost of
funds is influenced by interest rates on competing investments and by rates
offered on similar investments by competing financial institutions in our market
area, as well as general market interest rates. Lending activities are affected
by the demand for financing, which in turn is affected by the prevailing
interest rates.
Certain
Recent Developments
The Bank
is subject to insurance assessments imposed by the FDIC. The FDIC, as a result
of recent economic turmoil that has affected the banking industry, is actively
seeking to replenish its deposit insurance fund. The FDIC increased risk-based
assessment rates uniformly by 7 basis points, on an annual basis, beginning with
the first quarter of 2009. On May 22,
2009, the FDIC adopted a final rule imposing a 5 basis point special assessment
on each insured depository institution’s assets less Tier 1 capital as of June
30, 2009. The FDIC collected this special assessment on September 30, 2009. The
Company recorded total expense related to this special assessment of $765
thousand during the year ended December 31, 2009. On September 29, 2009, the
FDIC announced its intention to require insured institutions to prepay their
estimated quarterly risk-based assessments for the fourth quarter of 2009 and
for the following three years. Such prepaid assessments were collected on
December 30, 2009 at a rate based on the insured institution’s modified third
quarter 2009 assessment rate. The Company’s prepaid assessment was $7.3 million,
which will be recognized as expense over the three year assessment
period.
On
October 22, 2009, the Company announced its intention to commence a public
offering of its common stock. On January 15, 2010, the Company announced the
withdrawal of the public offering. Additionally, the Company entered into a
letter of intent with a private equity fund on December 13, 2009 regarding an
investment in the Company’s common stock. That investment was not consummated,
and the letter of intent expired.
Critical
Accounting Policies and Estimates
The
following discussion and analysis of the Company’s financial condition and
results of operations are based on the Company’s consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”). The preparation of these
financial statements requires the Company to make estimates and judgments
regarding uncertainties that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, the Company evaluates its estimates, including
those related to the allowance for loan losses, other-than-temporary impairment
on investment securities, income taxes, and impairment of long-lived assets. The
Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
However, because future events and their effects cannot be determined with
certainty, actual results may differ from these estimates under different
assumptions or conditions, and the Company may be exposed to gains or losses
that could be material.
The
Company’s significant accounting policies are discussed below and in Item 8,
Financial Statements and Supplementary Data, Notes to Consolidated Financial
Statements – Note 1. Management believes that the following accounting policies
are the most critical to aid in fully understanding and evaluating the Company’s
reported financial results, and they require management’s most difficult,
subjective or complex judgments, resulting from the need to make estimates about
the effect of matters that are inherently uncertain. Management has reviewed
these critical accounting policies and related disclosures with the Audit
Committee of the Board of Directors.
|
•
|
Allowance
for Loan Losses – The allowance for loan losses represents management’s
estimate of probable credit losses that are inherent in the existing loan
portfolio. Management’s calculation of the allowance for loan losses
consists of specific and general reserves. Specific reserves are applied
to individually impaired loans based on specific information concerning
the borrower and collateral value. General reserves are determined by
applying loss percentages to pools of loans that are grouped according to
loan type and internal risk ratings. Loss percentages are based on
historical loss experience in each pool and management’s consideration of
environmental factors such as changes in economic conditions, credit
quality trends, collateral values, concentrations of credit risk, and loan
review as well as regulatory exam findings. If economic conditions were to
decline significantly or the financial condition of the Bank’s customers
were to deteriorate, additional increases to the allowance for loan losses
may be required.
|
|
|
•
|
Other-Than-Temporary
Impairment on Investment Securities – Management evaluates each
held-to-maturity and available-for-sale investment security in an
unrealized loss position for other-than-temporary impairment based on an
analysis of the facts and circumstances of each individual investment,
which includes consideration of changes in general market conditions and
changes in the financial strength of specific bond issuers. For debt
securities determined to be other-than-temporarily impaired, the
impairment is separated into the following: (1) the amount representing
credit loss and (2) the amount related to all other factors. The amount
representing credit loss is calculated based on management’s estimate of
future cash flows and recoverability of the investment and is recorded in
current earnings. Future adverse changes in market conditions or adverse
changes in the financial strength of bond issuers could result in an
other-than-temporary impairment charge that may impact
earnings.
|
|
|
•
|
Income
Taxes – A valuation allowance is recorded for deferred tax assets if
management determines that it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Management considers
anticipated future taxable income and ongoing prudent and feasible tax
planning strategies in determining the need, if any, for a valuation
allowance. If actual taxable income were less than anticipated or if tax
planning strategies are not effective, an additional valuation allowance
may be required.
|
|
|
•
|
Impairment
of Long-Lived Assets – Long-lived assets, including identified intangible
assets other than goodwill, are evaluated for impairment whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. An impairment loss is recognized if the sum of the
undiscounted future cash flows is less than the carrying amount of the
asset. Assets to be disposed of are transferred to other real estate owned
and are reported at the lower of the carrying amount or fair value less
costs to sell. Future events or circumstances indicating that the carrying
value of long-lived assets is not recoverable may require an impairment
charge to earnings.
|
Executive
Summary
The
following is a brief summary of our significant results for the year ended
December 31, 2009.
|
•
|
The
Company’s net loss totaled $6.8 million for the year ended December 31,
2009 compared to a net loss of $55.7 million for the year ended December
31, 2008. Net loss attributable to common shareholders was $9.2 million,
or $0.80 per diluted share, for 2009 compared to net loss attributable to
common shareholders of $55.8 million, or $4.94 per diluted share, for
2008. The 2008 results included a goodwill impairment charge of $65.2
million. Results of operations for 2009 reflect a significant increase in
provision for loan losses, higher FDIC insurance costs, and nonrecurring
expenses related to the Company’s recent proposed public stock offering,
partially offset by improved net interest income and a larger income tax
benefit.
|
|
|
•
|
Net interest income increased by $6.3 million,
rising from $42.6 million in 2008 to $48.9 million in 2009. This
improvement was partially due to an increase in net interest margin from
3.07% in 2008 to 3.14% in 2009, coupled with 11.9% growth in average
earning assets over the same period. Net interest margin benefited from a
significant decline in funding costs, partially offset by a decrease in
loan yields on the Company’s variable rate loans.
|
|
|
•
|
Provision
for loan losses for the year ended December 31, 2009 totaled $23.1
million, an increase of $19.2 million from 2008. The increase in the loan
loss provision was driven by continued deteriorating economic conditions
and weakness in local real estate markets which resulted in significantly
higher levels of nonperforming assets and impaired loans as well as
downgrades to the credit ratings of certain loans in the portfolio.
Further, a significant decline in commercial real estate values
contributed to higher levels of specific reserves or charge-offs on
impaired loans. Net charge-offs increased from $3.5 million, or 0.30% of
average loans, during 2008 to $11.8 million, or 0.89% of average loans,
during 2009.
The
elevated provision for loan losses, net charge-offs and nonperforming
loans reflect the economic climate in the Company’s primary markets and
consistent application of the Company’s policy to recognize losses as they
occur. Given significant volatility and rapid changes in current market
conditions, management cannot predict its provision or nonperforming loan
levels into the future but anticipates that credit losses and problem
loans may remain elevated, or even increase, throughout 2010 as the
Company continues working to resolve problem loans in these challenging
market conditions.
|
|
|
•
|
Noninterest
income decreased $1.5 million, or 14%, declining from $11.0 million in
2008 to $9.5 million in 2009. Included in this decrease was a gain of $374
thousand recorded on the sale of the Company’s Greensboro branch in 2008.
For the year ended December 31, 2009, the Company recorded an
other-than-temporary impairment charge of $498 thousand as well as losses
related to the repurchase of mortgages and write-down of other real estate
totaling $578 thousand. Service charge income, which includes overdraft
and non-sufficient funds charges, fell by $662 thousand primarily from a
decline in consumer spending during the recent economic recession.
Partially offsetting the noninterest income decline was an $878 thousand
increase in BOLI income, which was primarily due to collection of policy
proceeds during 2009.
|
|
|
•
|
Noninterest
expense decreased $57.5 million, or 54%, declining from $106.6 million in
2008 to $49.2 million in 2009, primarily due to a goodwill impairment
charge of $65.2 million in 2008. Partially offsetting the noninterest
expense decline was an increase in FDIC deposit insurance expense of $2.0
million and direct nonrecurring expenses related to the recent proposed
public stock offering totaling $1.9 million. Salaries and employee
benefits also increased $1.2 million primarily due to increased staffing
requirements as new branches were opened during 2008 and 2009 in addition
to the four branches purchased in the Fayetteville market during December
2008. Occupancy expense increased $1.2 million from higher levels of
facilities costs related to the new branch
locations.
|
Results
of Operations
Year
Ended December 31, 2009 Compared with Year Ended December 31, 2008
The
Company’s net loss totaled $6.8 million for the year ended December 31, 2009
compared to a net loss of $55.7 million for the year ended December 31, 2008.
Net loss attributable to common shareholders was $9.2 million, or $0.80 per
diluted share, for 2009 compared to net loss attributable to common shareholders
of $55.8 million, or $4.94 per diluted share, for 2008. Financial results for
2008 included a goodwill impairment charge of $65.2 million. Results of
operations for 2009 reflect an increase of $19.2 million in provision for loan
losses, an increase of $2.0 million in FDIC insurance costs, and nonrecurring
expenses of $1.9 million related to the Company’s recent proposed public stock
offering, partially offset by an improvement of $6.3 million in net interest
income and an increase of $5.8 million in income tax benefits.
Net Interest Income. Net
interest income is the difference between total interest income and total
interest expense and is the Company’s principal source of earnings. The amount
of net interest income is determined by the volume of interest-earning assets,
the level of rates earned on those assets, and the volume and cost of supporting
funds. Net interest income increased from $42.6
million for the year ended December 31, 2008 to $48.9 million for the year ended
December 31, 2009. Net interest spread is the difference between rates
earned on interest-earning assets and the interest paid on deposits and other
borrowed funds. Net interest margin is the total of net interest income divided
by average earning assets. Average interest-earning assets for the year ended
December 31, 2009 were $1.61 billion compared to $1.44 billion for the year
ended December 31, 2008, an increase of 11.9%. On a fully taxable equivalent
(“TE”) basis, net interest spread was 2.82% and 2.72% for the years ended
December 31, 2009 and 2008, respectively. The net
interest margin on a fully TE basis increased by 7 basis points to 3.14% for the
year ended December 31, 2009 from 3.07% for the year ended December 31, 2008.
The yield on average interest-earning assets declined to 5.27% from 6.02% for
the years ended December 31, 2009 and 2008, respectively, while the interest
rate on average interest-bearing liabilities for those periods declined to 2.45%
from 3.30%, respectively.
The increase in net interest margin was primarily due to the significant decline in funding costs partially offset by a rapid decline in the prime lending rate late in 2008, which contributed to a decrease in loan yields. In response to the global economic recession and credit crisis, the FOMC cut the benchmark federal funds rate to a target range of 0.00% to 0.25% by the end of 2008. The prime lending rate, which generally tracks against the federal funds rate, declined to 3.25% by the end of 2008 where it remained throughout all of 2009. A significant portion of the Company’s variable rate loans are prime-based, and in a declining rate environment, loan yields suffered as a result. At the same time, management has taken steps to mitigate the impact of exceptionally low interest rates on the loan portfolio by increasing pricing, which includes higher fixed rates and higher spreads to variable benchmark rates, and by placing rate floors on variable rate commercial and consumer loans at origination or renewal. Management believes that these pricing measures will continue to benefit the Company’s net interest margin into the future.
On the
funding side, liquidity concerns plagued several major financial institutions
late in 2008 which caused retail deposit costs to remain relatively high while
the federal funds rate was being cut by the FOMC. The combination of these
factors placed significant pressure on the Company’s net interest margin which
persisted throughout 2009. The resolution of liquidity concerns during 2009
allowed retail and wholesale funding costs to decline significantly during the
year, and management believes that its prudent deposit pricing controls coupled
with continued re-pricing of the Company’s time deposit portfolio will continue
to benefit net interest margin.
The
following two tables set forth certain information regarding the Company’s yield
on interest-earning assets and cost of interest-bearing liabilities and the
component changes in net interest income. The first table, Average Balances,
Interest Earned or Paid, and Interest Yields/Rates, reflects the Company’s
effective yield on earning assets and cost of funds. Yields and costs are
computed by dividing income or expense for the year by the respective daily
average asset or liability balance. Changes in net interest income from year to
year can be explained in terms of fluctuations in volume and rate. The second
table, Rate and Volume Variance Analysis, presents further information on those
changes. For each category of interest-earning asset and interest-bearing
liability, we have provided information on changes attributable to:
|
•
|
changes
in volume, which are changes in average volume multiplied by the average
rate for the previous period;
|
|
|
•
|
changes
in rates, which are changes in average rate multiplied by the average
volume for the previous period;
|
|
|
•
|
changes
in rate/volume, which are changes in average rate multiplied by the
changes in average volume; and
|
|
|
•
|
total
change, which is the sum of the previous
columns.
|
Average Balances, Interest Earned or Paid, and Interest Yields/Rates
For
the Years Ended December 31, 2009, 2008 and 2007
Tax
Equivalent Basis 1
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Average
Balance
|
Amount
Earned
|
Average
Rate
|
Average
Balance
|
Amount
Earned
|
Average
Rate
|
Average
Balance
|
Amount
Earned
|
Average
Rate
|
||||||||||||||||||||
|
Assets
|
|||||||||||||||||||||||||||||
|
Loans:
2
|
|||||||||||||||||||||||||||||
|
Commercial
|
$
|
1,139,042
|
$
|
61,403
|
5.39
|
%
|
$
|
1,017,157
|
$
|
62,678
|
6.16
|
%
|
$
|
877,876
|
$
|
69,203
|
7.88
|
%
|
|||||||||||
|
Consumer
3
|
177,695
|
9,009
|
5.07
|
157,713
|
9,816
|
6.22
|
163,983
|
12,863
|
7.84
|
||||||||||||||||||||
|
Total
loans
|
1,316,737
|
70,412
|
5.35
|
1,174,870
|
72,494
|
6.17
|
1,041,859
|
82,066
|
7.88
|
||||||||||||||||||||
|
Investment
securities 4
|
269,240
|
14,483
|
5.38
|
254,216
|
14,026
|
5.52
|
246,736
|
13,476
|
5.46
|
||||||||||||||||||||
|
Federal
funds sold and interest-earning cash 5
|
25,312
|
42
|
0.17
|
11,293
|
128
|
1.13
|
23,581
|
1,052
|
4.46
|
||||||||||||||||||||
|
Total
interest earning assets
|
1,611,289
|
$
|
84,937
|
5.27
|
%
|
1,440,379
|
$
|
86,648
|
6.02
|
%
|
1,312,176
|
$
|
96,594
|
7.36
|
%
|
||||||||||||||
|
Cash
and due from banks
|
15,927
|
22,477
|
24,576
|
||||||||||||||||||||||||||
|
Other
assets
|
83,283
|
133,566
|
129,629
|
||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(18,535
|
)
|
(13,846
|
)
|
(13,307
|
)
|
|||||||||||||||||||||||
|
Total
assets
|
$
|
1,691,964
|
$
|
1,582,576
|
$
|
1,453,074
|
|||||||||||||||||||||||
|
Liabilities
and Equity
|
|||||||||||||||||||||||||||||
|
Savings
deposits
|
$
|
29,171
|
$
|
47
|
0.16
|
%
|
$
|
29,756
|
$
|
122
|
0.41
|
%
|
$
|
33,559
|
$
|
194
|
0.58
|
%
|
|||||||||||
|
Interest-bearing
demand deposits
|
363,522
|
4,527
|
1.25
|
336,899
|
6,655
|
1.98
|
359,373
|
12,165
|
3.39
|
||||||||||||||||||||
|
Time
deposits
|
822,003
|
23,463
|
2.85
|
691,140
|
26,265
|
3.80
|
568,604
|
27,341
|
4.81
|
||||||||||||||||||||
|
Total
interest-bearing deposits
|
1,214,696
|
28,037
|
2.31
|
1,057,795
|
33,042
|
3.12
|
961,536
|
39,700
|
4.13
|
||||||||||||||||||||
|
Borrowed
funds
|
143,241
|
5,147
|
3.59
|
168,501
|
7,234
|
4.29
|
134,590
|
6,920
|
5.14
|
||||||||||||||||||||
|
Subordinated
debt
|
30,930
|
1,055
|
3.41
|
30,930
|
1,761
|
5.69
|
30,930
|
2,387
|
7.72
|
||||||||||||||||||||
|
Repurchase
agreements
|
10,919
|
24
|
0.22
|
29,929
|
387
|
1.29
|
34,689
|
1,416
|
4.08
|
||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,399,786
|
$
|
34,263
|
2.45
|
%
|
1,287,155
|
$
|
42,424
|
3.30
|
%
|
1,161,745
|
$
|
50,423
|
4.34
|
%
|
||||||||||||||
|
Noninterest-bearing
deposits
|
132,535
|
114,982
|
111,829
|
||||||||||||||||||||||||||
|
Other
liabilities
|
12,148
|
11,352
|
14,940
|
||||||||||||||||||||||||||
|
Total
liabilities
|
1,544,469
|
1,413,489
|
1,288,514
|
||||||||||||||||||||||||||
|
Shareholders’
equity
|
147,495
|
169,087
|
164,560
|
||||||||||||||||||||||||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,691,964
|
$
|
1,582,576
|
$
|
1,453,074
|
|||||||||||||||||||||||
|
Net
interest spread 6
|
2.82
|
%
|
2.72
|
%
|
3.02
|
%
|
|||||||||||||||||||||||
|
Tax
equivalent adjustment
|
$
|
1,796
|
$
|
1,628
|
$
|
2,057
|
|||||||||||||||||||||||
|
Net
interest income and net interest
margin 7 |
$
|
50,674
|
3.14
|
%
|
$
|
44,224
|
3.07
|
%
|
$
|
46,171
|
3.52
|
%
|
|||||||||||||||||
|
1
|
The
tax equivalent basis is computed using a federal tax rate of
34%.
|
|
2
|
Loans
receivable include nonaccrual loans for which accrual of interest has not
been recorded.
|
|
3
|
Includes
loans held for sale.
|
|
4
|
The
average balance for investment securities excludes the effect of their
mark-to-market adjustment, if any.
|
|
5
|
For
comparison purposes, average balances have been adjusted for all periods
presented to include cash held at the Federal Reserve as interest
earning.
|
|
6
|
Net
interest spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
|
|
7
|
Net
interest margin represents net interest income divided by average
interest-earning assets.
|
Rate and Volume Variance Analysis
Tax
Equivalent Basis 1
|
December
31, 2009 vs. 2008
|
December
31, 2008 vs. 2007
|
|||||||||||||||||||
|
(Dollars
in thousands)
|
Rate
Variance
|
Volume
Variance
|
Total
Variance
|
Rate
Variance
|
Volume
Variance
|
Total
Variance
|
||||||||||||||
|
Interest
income:
|
||||||||||||||||||||
|
Loans
|
$
|
(9,671
|
)
|
$
|
7,589
|
$
|
(2,082
|
)
|
$
|
(17,846
|
)
|
$
|
8,274
|
$
|
(9,572
|
)
|
||||
|
Investment
securities
|
(351
|
)
|
808
|
457
|
137
|
413
|
550
|
|||||||||||||
|
Federal
funds sold
|
(109
|
)
|
23
|
(86
|
)
|
(785
|
)
|
(139
|
)
|
(924
|
)
|
|||||||||
|
Total
interest income
|
(10,131
|
)
|
8,420
|
(1,711
|
)
|
(18,494
|
)
|
8,548
|
(9,946
|
)
|
||||||||||
|
Interest
expense:
|
||||||||||||||||||||
|
Savings
and interest-bearing demand deposits
|
(2,534
|
)
|
331
|
(2,203
|
)
|
(5,122
|
)
|
(460
|
)
|
(5,582
|
)
|
|||||||||
|
Time
deposits
|
(6,537
|
)
|
3,735
|
(2,802
|
)
|
(5,733
|
)
|
4,657
|
(1,076
|
)
|
||||||||||
|
Borrowed
funds
|
(1,179
|
)
|
(908
|
)
|
(2,087
|
)
|
(1,142
|
)
|
1,456
|
314
|
||||||||||
|
Subordinated
debt
|
(706
|
)
|
–
|
(706
|
)
|
(626
|
)
|
–
|
(626
|
)
|
||||||||||
|
Repurchase
agreements and fed funds purchased
|
(321
|
)
|
(42
|
)
|
(363
|
)
|
(967
|
)
|
(62
|
)
|
(1,029
|
)
|
||||||||
|
Total
interest expense
|
(11,277
|
)
|
3,116
|
(8,161
|
)
|
(13,590
|
)
|
5,591
|
(7,999
|
)
|
||||||||||
|
Increase
(decrease) in net interest income
|
$
|
1,146
|
$
|
5,304
|
$
|
6,450
|
$
|
(4,904
|
)
|
$
|
2,957
|
$
|
(1,947
|
)
|
||||||
|
1
|
The
tax equivalent basis is computed using a federal tax rate of
34%.
|
Interest
income on loans decreased from $72.5 million in 2008 to $70.2 million in 2009, a
decline of $2.3 million, or 3.2%. This decrease was primarily due to declining
yields on the Company’s loan portfolio, partially offset by growth in average
loan balances over the same period. Declining yields on the loan portfolio
reduced interest income by $9.7 million in 2009 compared to 2008, and the
increase in average loan balances generated $7.6 million in additional interest
income. Average loan balances, which yielded 5.35% and 6.17% for the years ended
December 31, 2009 and 2008, respectively, increased from $1.17 billion in 2008
to $1.32 billion in 2009. In November 2006, the Company entered into a $100
million (notional) interest rate swap to help mitigate its exposure to interest
rate volatility in the prime-based portion of its commercial loan portfolio. The
swap, which expired in October 2009, increased loan interest income by $3.5
million and $2.6 million for the years ended December 31, 2009 and 2008,
respectively, representing a benefit to net interest margin of 22 and 18 basis
points, respectively.
Interest
income on investment securities increased from $12.4 million in 2008 to $12.9
million in 2009, an increase of $523 thousand, or 4.2%. This increase was due to
growth in the investment portfolio partially offset by lower yields earned on
the portfolio. On a tax equivalent basis, growth in the investment portfolio
contributed $808 thousand of additional interest income, and lower yields
decreased interest income by $351 thousand. Average investment balances, at
cost, increased from $254.2 million for the year ended December 31, 2008 to
$269.2 million for the year ended December 31, 2009 while the tax equivalent
yield on investment securities decreased from 5.52% to 5.38% over the same
period. These lower investment yields primarily reflect principal paydowns as
well as calls and sales of higher yielding mortgage-backed securities and other
investments being re-invested at lower current market rates. Interest income on
federal funds sold and interest-earning cash, which includes cash balances held
at the Federal Reserve Bank, declined $86 thousand from 2008 to 2009, or 67.2%.
This decrease reflects sharply lower short-term investment rates. Average
balances of federal funds and interest-earning cash increased from $11.3 million
for the year ended December 31, 2008 to $25.3 million for the year ended
December 31, 2009, and the average yield in this category decreased from 1.13%
to 0.17% over the same period as a result of the significant decrease in
short-term interest rates late in 2008.
Interest
expense decreased from $42.4 million in 2008 to $34.3 million in 2009, a decline
of $8.2 million, or 19.2%. This decrease is primarily due to declining interest
rates, partially offset by growth in average interest-bearing liability
balances. Declining interest rates reduced interest expense by $11.3 million in
2009 compared to 2008, and the increase in average balances resulted in $3.1
million of higher interest expense. Average total interest-bearing deposits,
including savings, interest-bearing demand deposits and time deposits, increased
from $1.06 billion for the year ended December 31, 2008 to $1.21 billion for the
year ended December 31, 2009. The average rate paid on interest-bearing deposits
decreased from 3.12% in 2008 to 2.31% in 2009, primarily due to declining
interest rates in the wholesale and retail deposit markets. The interest rate on
time deposits, which comprised 61.6% of total deposits as of December 31, 2009
and 61.1% of total deposits as of December 31, 2008, decreased from 3.80% in
2008 to 2.85% in 2009.
Average
borrowings, including subordinated debt and repurchase agreements, decreased
from $229.4 million for the year ended December 31, 2008 to $185.1 million for
the year ended December 31, 2009. The average rate paid on borrowings, including
subordinated debt and repurchase agreements, decreased from 4.09% in 2008 to
3.36% in 2009. This decrease reflects the effects of falling interest rates on
the Company’s variable rate borrowings. In July 2003, the Company entered into
interest rate swap agreements on $25.0 million (notional) of its outstanding
Federal Home Loan Bank (“FHLB”) advances to swap fixed rate borrowings to a
variable rate. The net effect of the swaps, which either expired or were
terminated in 2009, was a decrease to interest expense of $286 thousand in 2009
compared to a decrease of $23 thousand in 2008.
Provision for Loan Losses.
Provision for loan losses is the amount charged against earnings for the purpose
of establishing an adequate allowance for loan losses. Loan losses are, in turn,
charged to the allowance rather than being reported as a direct expense.
Provision for loan losses was $23.1 million for the year ended December 31, 2009
compared to $3.9 million for the year ended December 31, 2008. The increase in
the provision was driven by continued deteriorating economic conditions and
weakness in local real estate markets which
resulted in significantly higher levels of nonperforming assets and impaired
loans as well as downgrades to the credit ratings of certain loans in the
portfolio. Further, a significant decline in commercial real estate values
contributed to higher levels of specific reserves or charge-offs on impaired
loans.
Net charge-offs increased from $3.5 million, or 0.30% of
average loans, during 2008 to $11.8 million, or 0.89% of average loans, during
2009. Nonperforming assets, which include loans on nonaccrual and other
real estate owned, increased to 2.90% of total assets as of December 31, 2009
compared to 0.63% as of December 31, 2008. Further, nonperforming loans
increased to 2.84% as a percent of total loans as of December 31, 2009 compared
to 0.73% of total loans as of December 31, 2008.
The elevated provision for loan losses, net charge-offs and nonperforming loans
reflect the economic climate in the Company’s primary markets and consistent
application of the Company’s policy to recognize losses as they occur. Given
significant volatility and rapid changes in current market conditions,
management cannot predict its provision or nonperforming loan levels into the
future but anticipates that credit losses and problem loans may remain elevated,
or even increase, throughout 2010 as the Company continues working to resolve
problem loans in these challenging market conditions.
Noninterest Income.
Noninterest income decreased from $11.0 million in 2008 to $9.5 million in 2009,
a decrease of 13.5%. Management continues to focus on noninterest income
improvement strategies, which are based on core deposit growth, fee collection
efforts, restructured pricing and innovative product enhancements. The following
table presents the detail of noninterest income and related changes for the
years ended December 31, 2009 and 2008:
|
2009
|
2008
|
$
Change
|
%
Change
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Noninterest
income:
|
|||||||||||||
|
Service
charges and other fees
|
$
|
3,883
|
$
|
4,545
|
$
|
(662
|
)
|
(14.6
|
)%
|
||||
|
Bank
card services
|
1,539
|
1,332
|
207
|
15.5
|
|||||||||
|
Mortgage
origination and other loan fees
|
1,935
|
2,148
|
(213
|
)
|
(9.9
|
)
|
|||||||
|
Brokerage
fees
|
698
|
732
|
(34
|
)
|
(4.6
|
)
|
|||||||
|
Bank-owned
life insurance
|
1,830
|
952
|
878
|
92.2
|
|||||||||
|
Gain
on sale of branch
|
–
|
374
|
(374
|
)
|
(100.0
|
)
|
|||||||
|
Net
gain on investment securities
|
103
|
249
|
(146
|
)
|
(58.6
|
)
|
|||||||
|
Net
impairment losses recognized in earnings
|
(498
|
)
|
–
|
(498
|
)
|
–
|
|||||||
|
Other
|
27
|
669
|
(642
|
)
|
(96.0
|
)
|
|||||||
|
Total
noninterest income
|
$
|
9,517
|
$
|
11,001
|
$
|
(1,484
|
)
|
(13.5
|
)%
|
Contributing
to the decrease in noninterest income was a gain of $374 thousand recorded on
the sale of the Company’s Greensboro branch in 2008. In 2009, the Company
recorded an other-than-temporary credit impairment charge of $498 thousand
related to an investment in trust preferred securities issued by a financial
institution. Following an analysis of the financial condition of the issuer and
a decision by the issuer to suspend interest payments on the securities,
management determined the unrealized loss to be credit related and therefore
wrote the securities down to estimated fair market value with the loss charged
to earnings. The Company also recorded an aggregate write down of $217 thousand
on certain foreclosed properties, reflecting declining real estate market
values, and recognized a loss of $361 thousand on the repurchase of a mortgage
loan previously sold to an investor in the secondary market. Both of these
nonrecurring charges were recorded as reductions to noninterest
income.
Service
charge income, which includes overdraft and non-sufficient funds charges,
decreased primarily from a decline in consumer spending during the recent
economic recession. Bank card services, which includes income received from
debit card transactions, increased primarily due to checking account growth.
Mortgage origination and other loan fees include origination fees from brokered
mortgage loans as well as prepayment penalties and other miscellaneous loan fees
that are not recorded to interest income. Mortgage fees increased by $330
thousand, which was primarily a result of higher levels of brokered mortgage
originations benefited by a continued favorable interest rate environment for
residential mortgage refinancing and home purchase activity. Other loan fees
declined by $543 thousand due to a drop in prepayment penalties charged as fewer
business loans were prepaid given the current economic environment. Brokerage
fees declined with increased concerns about the economic recession and
volatility in the stock markets. Partially offsetting the noninterest income
decline was an increase in BOLI income, which was primarily due to collection of
a policy claim in 2009 upon the death of a former director.
Noninterest Expense. Noninterest expense decreased from $106.6 million in 2008 to $49.2 million in 2009, a decrease of 53.9%. Noninterest expense represents the costs of operating the Company. Management regularly monitors all categories of noninterest expense in an effort to improve productivity and operating performance. The following table presents the detail of noninterest expense and related changes for the years ended December 31, 2009 and 2008:
|
2009
|
2008
|
$
Change
|
%
Change
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Noninterest
expense:
|
|||||||||||||
|
Salaries
and employee benefits
|
$
|
22,112
|
$
|
20,951
|
$
|
1,161
|
5.5
|
%
|
|||||
|
Occupancy
|
5,630
|
4,458
|
1,172
|
26.3
|
|||||||||
|
Furniture
and equipment
|
3,155
|
3,135
|
20
|
0.6
|
|||||||||
|
Data
processing and telecommunications
|
2,317
|
2,135
|
182
|
8.5
|
|||||||||
|
Advertising
and public relations
|
1,610
|
1,515
|
95
|
6.3
|
|||||||||
|
Office
expenses
|
1,383
|
1,317
|
66
|
5.0
|
|||||||||
|
Professional
fees
|
1,488
|
1,479
|
9
|
0.6
|
|||||||||
|
Business
development and travel
|
1,244
|
1,393
|
(149
|
)
|
(10.7
|
)
|
|||||||
|
Amortization
of deposit premiums
|
1,146
|
1,037
|
109
|
10.5
|
|||||||||
|
Miscellaneous
loan handling costs
|
1,356
|
848
|
508
|
59.9
|
|||||||||
|
Directors
fees
|
1,418
|
1,044
|
374
|
35.8
|
|||||||||
|
FDIC
deposit insurance
|
2,721
|
685
|
2,036
|
297.2
|
|||||||||
|
Goodwill
impairment charge
|
–
|
65,191
|
(65,191
|
)
|
(100.0
|
)
|
|||||||
|
Other
|
3,580
|
1,424
|
2,156
|
151.4
|
|||||||||
|
Total
noninterest expense
|
$
|
49,160
|
$
|
106,612
|
$
|
(57,452
|
)
|
(53.9
|
)%
|
The
primary reason for the significant decline in noninterest expense was the $65.2
million goodwill impairment charge in 2008.
Salaries
and employee benefits rose primarily due to increased staffing requirements as
new branches were opened during 2008 and 2009 in addition to the four branches
purchased in the Fayetteville market during December 2008. Regular salaries and
wages increased by $3.0 million as the average number of full-time equivalent
employees increased from 342 in 2008 to 390 in 2009. Partially offsetting
increased costs from additional headcount was a reduction in bonus expense of
$1.0 million and 401(k) plan employer match expense of $385 thousand as the
Company suspended its incentive plan and retirement plan matching contributions
in light of current market conditions. Further, deferred loan costs increased by
$863 thousand which resulted in decreased salaries expense. Loan cost deferrals
are applied to each loan originated and renewed based on an estimated cost to
process and underwrite those originations and renewals. Deferred costs increase
the loan balance and are amortized as a component of interest income through the
maturity of the respective loans.
Occupancy
expense increased primarily from higher levels of facilities costs related to
new branch locations but also from higher rent due to sale-leaseback agreements
transactions on three existing branch facilities in September 2008. While
slightly higher, furniture and equipment expense, advertising and public
relations expense, office expenses, and professional fees remained relatively
consistent from 2008 to 2009. Data processing and communications costs rose as
management continued to update the Company’s technology infrastructure to
support business growth. Business development and travel costs declined as
management continued to closely monitor and control discretionary spending and
as a second partner was recruited to sublease the corporate airplane.
Amortization of deposit premiums increased from additional amortization required
on the core deposit intangible recognized as part of the acquisition of four
Fayetteville branches in December 2008. Miscellaneous loan handling costs
increased partially due to loan growth but primarily due to higher levels of
loan collection costs. Directors’ fees increased largely from an accelerated
payout of deferred compensation benefits upon the death of a former
director.
FDIC
deposit insurance expense increased partially due to a mandatory special
assessment of $765 thousand charged and collected in 2009. The remaining
increase in FDIC deposit insurance expense was due to deposit growth as well as
increases in assessment rates charged by the FDIC to cover higher monitoring
costs and losses from insured financial institutions taken into receivership.
The Company incurred $1.9 million of direct nonrecurring expenses related to its
recent proposed public stock offering that was withdrawn on January 15, 2010.
These expenses are recorded in other noninterest expense and represent
investment banking, due diligence, legal and accounting costs as well as other
miscellaneous filing and printing costs related to the proposed
offering.
Income Taxes. The Company’s income tax benefit increased from $1.2 million for the year ended December 31, 2008 to $7.0 million for the year ended December 31, 2009. This increase was due primarily to a larger pre-tax loss in 2009 compared to 2008, excluding the goodwill impairment charge in 2008. Also partially contributing to the increased tax benefit was a nonrecurring benefit of $504 thousand recorded from income tax refunds from federal and state tax authorities upon the amendment of multiple tax returns from previous years. These amended returns were filed during the third quarter of 2009 following a thorough review by the Company’s tax professionals of previously filed federal and state tax returns. The Company’s effective tax rate was 50.7% and 2.1% for the years ended December 31, 2009 and 2008, respectively. The increased effective tax rate was related to higher levels of tax exempt income relative to the pre-tax loss in each year. The goodwill impairment charge also reduced the Company’s effective tax rate in 2008.
Year
Ended December 31, 2008 Compared with Year Ended December 31, 2007
The Company’s net loss totaled $55.7 million for
the year ended December 31, 2008 compared to net income of $7.9 million for the
year ended December 31, 2007. Net loss attributable to common shareholders was
$55.8 million, or $4.94 per diluted share, for 2008 compared to net income
available to common shareholders of $7.9 million, or $0.68 per diluted share,
for 2007. The decline in earnings to a net loss in 2008 was primarily due to a
goodwill impairment charge of $65.2 million. Further decreasing earnings was a
$1.5 million decrease in net interest income, a $270 thousand increase in the
provision for loan losses, and an additional $2.8 million increase in
noninterest expense not related to the goodwill impairment charge. Partially
offsetting the earnings decline was a $1.9 million increase in noninterest
income and a $4.3 million decrease in income taxes.
Net Interest Income. Net interest income decreased from $44.1 million for the
year ended December 31, 2007 to $42.6 million for the year ended December 31,
2008. Average interest-earning assets for the year ended December 31,
2008 were $1.44 billion compared to $1.31 billion for the year ended December
31, 2007, an increase of 9.8%. On a fully TE basis, net interest spread was
2.72% and 3.02% for the years ended December 31, 2008 and 2007, respectively.
The net interest margin on a fully TE basis
decreased by 45 basis points to 3.07% for the year ended December 31, 2008 from
3.52% for the year ended December 31, 2007. The yield on average
interest-earning assets declined to 6.02% from 7.36% for the years ended
December 31, 2008 and 2007, respectively, while the interest rate on average
interest-bearing liabilities for those periods declined to 3.30% from 4.34%,
respectively.
The decrease in net interest margin was attributable to
a rapid decline in the prime lending rate coupled with competitive pressures in
the marketplace for retail deposits. The FOMC made seven downward adjustments to
the benchmark federal funds rate during 2008, three of which occurred during the
fourth quarter. These rate cuts decreased the benchmark rate from 4.25% at the
end of 2007 to a target range of zero to 0.25% by the end of 2008. The prime
lending rate, which generally tracks against the federal funds rate, declined
from 7.25% at the end of 2007 to 3.25% by the end of 2008. The Company’s
balance sheet has remained asset sensitive and, in a declining rate environment,
interest-earning assets reprice downward faster than interest-bearing
liabilities. On the funding side, liquidity concerns plagued several major
financial institutions late in 2008 prompting those institutions to maintain
relatively high interest rates on retail deposit products, thus creating
competitive pricing pressures in the marketplace which further slowed the
downward repricing of the Company’s interest-bearing liabilities.
Interest
income on loans decreased from $82.1 million in 2007 to $72.5 million in 2008, a
decline of $9.6 million, or 11.7%. This decrease was primarily due to declining
yields on the Company’s loan portfolio, partially offset by growth in average
loan balances. Declining yields on the loan portfolio reduced interest income by
$17.8 million in 2008 compared to 2007, and the increase in average loan
balances generated $8.3 million in additional interest income. Average loan
balances, which yielded 6.17% and 7.88% for the years ended December 31, 2008
and 2007, respectively, increased from $1.04 billion in 2007 to $1.17 billion in
2008. In November 2006, the Company entered into a $100 million (notional)
interest rate swap to help mitigate its exposure to interest rate volatility in
the prime-based portion of its commercial loan portfolio. This swap, which
expired in October 2009, decreased loan interest income by $348 thousand in 2007
and increased loan interest income by $2.6 million in 2008.
Interest
income on investment securities increased from $11.4 million in 2007 to $12.4
million in 2008, an increase of $1.0 million, or 8.6%. This increase is due to
growth in the investment portfolio as well as higher yields earned on the
portfolio. On a tax equivalent basis, growth in the investment portfolio
contributed $413 thousand of additional interest income, and higher yields
increased interest income by $137 thousand. Average investment balances, at
cost, increased from $246.7 million for the year ended December 31, 2007 to
$254.2 million for the year ended December 31, 2008, and the tax equivalent
yield on investment securities increased from 5.46% to 5.52% over the same
period. These higher investment yields primarily reflect new mortgage-backed
security purchases that provide higher yields. Interest income on federal funds
sold and interest-earning cash, which includes cash balances held at the Federal
Reserve Bank, declined $924 thousand from 2007 to 2008, or 87.8%. This decrease
reflects lower average balances and sharply lower yields on federal funds and
interest-earning cash over the same period. Average balances of federal funds
and interest-earning cash decreased from $23.6 million for the year ended
December 31, 2007 to $11.3 million for the year ended December 31, 2008, and the
average yield in this category decreased from 4.46% to 1.13% over the same time
period as a result of the significant decrease in short-term interest rates
during 2008.
Interest expense decreased from $50.4 million in 2007 to $42.4 million in 2008, a decline of $8.0 million, or 15.9%. This decrease is primarily due to declining interest rates, partially offset by growth in average interest-bearing liability balances over the same period. Declining interest rates reduced interest expense by $13.6 million in 2008 compared to 2007, and the increase in average balances resulted in $5.6 million of higher interest expense. Average total interest-bearing deposits, including savings, interest-bearing demand deposits and time deposits, increased from $961.5 million for the year ended December 31, 2007 to $1.06 billion for the year ended December 31, 2008. The average rate paid on interest-bearing deposits decreased from 4.13% in 2007 to 3.12% in 2008, primarily due to declining interest rates in the wholesale and retail deposit markets. The interest rate on time deposits, which comprised 61.1% of total deposits as of December 31, 2008 and 54.9% of total deposits as of December 31, 2007, decreased from 4.81% in 2007 to 3.80% in 2008.
Average
borrowings, including subordinated debt and repurchase agreements, increased
from $200.2 million for the year ended December 31, 2007 to $229.4 million for
the year ended December 31, 2008. The average rate paid on borrowings, including
subordinated debt and repurchase agreements, decreased from 5.36% in 2007 to
4.09% in 2008. This decrease reflects the effects of falling interest rates on
the Company’s variable-rate borrowings. In July 2003, the Company entered into
interest rate swap agreements on $25.0 million (notional) of its outstanding
FHLB advances to swap fixed rate borrowings to a variable rate. The net effect
of the swaps, which either expired or were terminated in 2009, was a decrease to
interest expense of $23 thousand in 2008 compared to an increase in interest
expense of $507 thousand in 2007.
Provision for Loan Losses.
Provision for loan losses was $3.9 million for the year ended December 31, 2008
compared to $3.6 million for the year ended December 31, 2007. The increase in the provision was partially due to loan
growth and softening credit quality but was also partially due to enhancements
in the methodology for calculating the allowance for loan losses, which reduced
the allowance and related provision in 2007. The enhancements to the allowance
methodology were implemented during 2007 based on updated guidance issued
through an interagency policy statement by the FDIC, Federal Reserve and other
regulatory agencies. Softening credit quality was reflected by moderately higher
levels of net charge-offs in 2008 as well as certain other credit quality
ratios.
Net charge-offs increased from $3.4 million, or 0.32% of
average loans, during 2007 to $3.5 million, or 0.30% of average loans, during
2008. Nonperforming assets, which include loans on nonaccrual and other
real estate owned, increased to 0.63% as a percent of total assets as of
December 31, 2008 compared to 0.50% as of December 31, 2007. Further,
nonperforming loans increased to 0.73% as a percent of total loans as of
December 31, 2008 compared to 0.55% of total loans as of December 31,
2007.
Noninterest Income.
Noninterest income increased from $9.1 million in 2007 to $11.0 million in 2008,
an increase of 20.4%. The following table presents the detail of noninterest
income and related changes for the years ended December 31, 2008 and
2007:
|
2008
|
2007
|
$
Change
|
%
Change
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Noninterest
income:
|
|||||||||||||
|
Service
charges and other fees
|
$
|
4,545
|
$
|
3,907
|
$
|
638
|
16.3
|
%
|
|||||
|
Bank
card services
|
1,332
|
1,064
|
268
|
25.2
|
|||||||||
|
Mortgage
origination and other loan fees
|
2,148
|
2,536
|
(388
|
)
|
(15.3
|
)
|
|||||||
|
Brokerage
fees
|
732
|
601
|
131
|
21.8
|
|||||||||
|
Bank-owned
life insurance
|
952
|
841
|
111
|
13.2
|
|||||||||
|
Gain
on sale of branch
|
374
|
–
|
374
|
–
|
|||||||||
|
Net
gain on investment securities
|
249
|
(49
|
)
|
298
|
608.2
|
||||||||
|
Other
|
669
|
240
|
429
|
178.8
|
|||||||||
|
Total
noninterest income
|
$
|
11,001
|
$
|
9,140
|
$
|
1,861
|
20.4
|
%
|
Service
charge income, which includes overdraft and non-sufficient funds charges,
increased from higher transaction volumes. The Company experiences increased
transaction volumes in demand deposit accounts as the deposit portfolio grows,
which has increased fee income, but management has also emphasized collection of
service charges, which has decreased the number of fees waived. The Smart Checking product has
also benefited the Company by generating additional fee income. Mortgage
origination and other loan fees decreased largely due to unfavorable conditions
in the residential mortgage market during 2008 caused by a weakened economy and
housing market. Brokerage fees increased as the Company hired more seasoned
investment advisors in 2008 who experienced greater referral success than in the
past. Bank card services increased primarily due to higher levels of interchange
income, reflecting checking account growth. Bank-owned life insurance income
increased primarily due to collection of a policy claim in 2008 upon the death
of a former director.
Noninterest income also included a net gain on sales of investment securities as management continued to align the investment portfolio to provide the proper balance of liquidity, yield and investment mixture. The Company also realized a gain of $374 thousand upon completion of the sale of its branch located in Greensboro, North Carolina, to another community bank in August 2008. Other noninterest income increased primarily due to lower levels of losses on sales of foreclosed properties, which reduce noninterest income.
Noninterest Expense.
Noninterest expense increased from $38.7 million in 2007 to $106.6 million in
2008, an increase of 175.7%. The following table presents the detail of
noninterest expense and related changes for the years ended December 31, 2008
and 2007:
|
2008
|
2007
|
$
Change
|
%
Change
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
Noninterest
expense:
|
|||||||||||||
|
Salaries
and employee benefits
|
$
|
20,951
|
$
|
19,416
|
$
|
1,535
|
7.9
|
%
|
|||||
|
Occupancy
|
4,458
|
4,897
|
(439
|
)
|
(9.0
|
)
|
|||||||
|
Furniture
and equipment
|
3,135
|
2,859
|
276
|
9.7
|
|||||||||
|
Data
processing and telecommunications
|
2,135
|
1,637
|
498
|
30.4
|
|||||||||
|
Advertising
and public relations
|
1,515
|
1,442
|
73
|
5.1
|
|||||||||
|
Office
expenses
|
1,317
|
1,389
|
(72
|
)
|
(5.2
|
)
|
|||||||
|
Professional
fees
|
1,479
|
1,289
|
190
|
14.7
|
|||||||||
|
Business
development and travel
|
1,393
|
1,217
|
176
|
14.5
|
|||||||||
|
Amortization
of deposit premiums
|
1,037
|
1,198
|
(161
|
)
|
(13.4
|
)
|
|||||||
|
Miscellaneous
loan handling costs
|
848
|
743
|
105
|
14.1
|
|||||||||
|
Directors
fees
|
1,044
|
683
|
361
|
52.9
|
|||||||||
|
FDIC
deposit insurance
|
685
|
270
|
415
|
153.7
|
|||||||||
|
Goodwill
impairment charge
|
65,191
|
–
|
65,191
|
–
|
|||||||||
|
Other
|
1,424
|
1,626
|
(202
|
)
|
(12.4
|
)
|
|||||||
|
Total
noninterest expense
|
$
|
106,612
|
$
|
38,666
|
$
|
67,946
|
175.7
|
%
|
The
Company’s annual goodwill impairment evaluation in 2008 resulted in a goodwill
impairment charge of $65.2 million. This impairment charge, representing the
full amount of goodwill on the balance sheet, was primarily due to a significant
decline in the market value of the Company’s common stock during 2008 to below
tangible book value for an extended period of time.
Salary
and employee benefits rose primarily due to increased staffing requirements as
new branches were opened in late 2007 and during 2008 in addition to the four
branches purchased in the Fayetteville market during December 2008. Regular
salaries and wages increased by $1.6 million partially due to normal annual
compensation adjustments and partially due to an increase in the average number
of full-time equivalent employees from 326 in 2007 to 342 in 2008. In addition,
health insurance premiums rose $180 thousand partially from higher employee
headcount but also partially from increased market rates for healthcare
services. Stock-based compensation expense increased $111 thousand during this
period as restricted stock grants awarded to certain key executives in December
2007 partially vested during 2008. Bonuses increased by $116 thousand from
higher employee headcount. Commissions decreased by $355 thousand as the volume
of mortgage applications and fee income declined during 2008. Employee
relocation expense declined by $300 thousand due primarily to key officers hired
in 2007 requiring relocation from other states. In addition, the Company
incurred a one-time expense of $70 thousand related to a rescission offer the
Company made to certain former and current employees who purchased Company
common stock held in the Capital Bank 401(k) Retirement Plan.
Occupancy
expense declined primarily due to increased rent expense and depreciation of
leasehold improvements during 2007 from changes in the remaining economic life
of certain leased facilities, reflecting management’s plans to close or
restructure the facilities. Furniture and
equipment expenses increased partially due to equipment and building
upgrades as well as higher maintenance costs. Data processing and communications
expense increased primarily due to system upgrades and enhancements to support
growth in the Company’s primary business lines. Advertising expense increased
primarily due to additional marketing as the Company entered new markets with
the purchase of four Fayetteville branch offices in December 2008 as well as the
opening of the Clayton branch in December 2008. Office expense declined
primarily due to lower courier costs. Professional fees increased due to higher
recruitment, consulting and legal fees. Business development and travel
increased partially due to higher travel costs necessary to complete due
diligence procedures and to fully integrate the Fayetteville branches purchased
in December 2008. Amortization of deposit premiums acquired as the result of
previous acquisitions decreased as these intangible assets from certain
acquisitions became fully amortized. Miscellaneous loan handling costs increased
primarily due to higher appraisal costs on commercial and consumer real
estate.
Directors’ fees increased as mark-to-market adjustments from the decline in the Company’s stock price decreased expense more in 2007 than in 2008. Prior to November 2008, the Deferred Compensation Plan for Outside Directors was classified as a liability-based plan, and as such, the liability for this plan was recorded at fair market value each reporting period with changes in fair value recorded in earnings. This Plan was amended by the board of directors in November 2008 and was reclassified as an equity-based plan. Upon amendment of the Plan, compensation expense is no longer adjusted based on fair market value but will rather be recognized as expense and a corresponding increase to common stock as the compensation is earned. FDIC deposit insurance costs rose as the regulatory agency increased premiums to cover higher monitoring costs and claims.
Income Taxes. Income taxes
represented a benefit of $1.2 million for the year ended December 31, 2008
compared to tax expense of $3.1 million for the year ended December 31, 2007.
The benefit was created primarily by a $3.2 million reduction in taxes in
connection with the goodwill impairment charge. Because of this impairment
charge, the Company reversed net deferred tax liabilities that arose from
book/tax goodwill differences generated in previous business combinations. The
remaining decrease in tax expense after the goodwill impairment charge was
primarily due to lower pre-tax income generated in 2008 compared to 2007. The
Company’s effective tax rate decreased from 28.4% in 2007 to 2.1% in 2008, which
primarily reflects the goodwill impairment charge as well as an increase in tax
exempt interest income relative to pre-tax income.
Analysis
of Financial Condition
Overview
The
Company’s financial condition is measured in terms of its asset and liability
composition, including asset quality. The growth and composition of the
Company’s balance sheet from 2008 to 2009 reflect organic growth generated
during the year by the Company’s primary business lines.
Total
assets as of December 31, 2009 were $1.73 billion, an increase of $80.4 million,
or 4.9%, from $1.65 billion as of December 31, 2008. The increase in total
assets in 2009 was primarily due to a $124.6 million increase in the Company’s
loan portfolio, net of allowance for loan losses. Earning assets were $1.64
billion as of December 31, 2009 compared to $1.56 billion as of December 31,
2008, which represented 94.6% and 94.3%, respectively, of total assets. As of
December 31, 2009, investment securities were $245.5 million compared to $278.1
million as of December 31, 2008. Interest-earning cash, federal funds sold, and
short term investments totaled $4.5 million as of December 31, 2009 compared to
$26.6 million as of December 31, 2008. Allowance for loan losses was $26.1
million as of December 31, 2009 compared to $14.8 million as of December 31,
2008, representing approximately 1.88% and 1.18%, respectively, of total
loans.
Total
deposits as of December 31, 2009 were $1.38 billion, an increase of $62.7
million, or 4.8%, from $1.32 billion as of December 31, 2008. The increase was
primarily due to a $46.1 million increase in checking and savings deposit
accounts and a $45.2 million increase in time deposits, partially offset by a
$28.6 million decrease in money market deposits. Time deposits represented 61.6%
of total deposits at December 31, 2009 compared to 61.1% at December 31, 2008.
Borrowings increased from $132.0 million as of December 31, 2008 to $167.0
million as of December 31, 2009.
Total
shareholders’ equity decreased from $148.5 million as of December 31, 2008 to
$139.8 million as of December 31, 2009. The Company’s accumulated deficit
increased by $12.8 million for the year ended December 31, 2009, which was
comprised of a $6.8 million net loss, common dividends of $3.6 million, and
dividends and accretion on preferred stock of $2.4 million. Accumulated other
comprehensive income, which includes the unrealized gain or loss on
available-for-sale investment securities and the unrealized gain or loss related
to the cash flow hedge, net of tax, was $4.0 million as of December 31, 2009,
which was an increase of $3.1 million from the net unrealized gain of $0.9
million as of December 31, 2008.
Investment
Securities
Investment
securities represent the second largest component of earning assets and are used
to generate interest income through the employment of excess funds, to provide
liquidity, to fund loan demand or deposit liquidation, and to pledge as
collateral for FHLB advances, public funds and repurchase agreements. The
Company’s securities portfolio consists primarily of debt securities issued by
U.S. government agencies, mortgage-backed securities issued by Fannie Mae and
Freddie Mac, non-agency mortgage-backed securities, municipal bonds, and
corporate bonds.
As securities are purchased, they are designated as available for sale or held to maturity based upon management’s intent, which incorporates liquidity needs, interest rate expectations, asset/liability management strategies and capital requirements. Investment securities available for sale are carried at their fair value and were in a net unrealized gain position of $6.5 million as of December 31, 2009, an improvement from a net unrealized loss position of $1.7 million as of December 31, 2008. Changes to the fair value of available-for-sale investment securities are recorded to other comprehensive income. After considering taxes, the mark-to-market adjustment on available-for-sale investments increased other comprehensive income, which is a component of shareholders’ equity, by $5.1 million in 2009. Future fluctuations in shareholders’ equity will occur due to changes in the fair value of available-for-sale investment securities. Investment securities held to maturity are carried at amortized cost and were in a net unrealized loss position of $54 thousand and $509 thousand as of December 31, 2009 and 2008, respectively.
As of
December 31, 2009 and 2008, the recorded value of investments securities totaled
$245.5 million and $278.1 million, respectively, with $235.4 million and $266.7
million, respectively, classified as available for sale and recorded at fair
value and $3.7 million and $5.2 million, respectively, classified as held to
maturity and recorded at amortized cost. In addition, the Company owned other
investments which totaled $6.4 million and $6.3 million as of December 31, 2009
and 2008, respectively. Other investments primarily includes the Company’s
investment in FHLB stock which does not have a readily determinable fair value
and is recorded at cost and reviewed periodically for impairment. Factors
affecting the growth of the investment portfolio include loan growth, funding
levels, interest rates available for reinvestment of maturing securities, and
changes to the interest rate yield curve.
The
following table reflects the carrying value of the Company’s investment
portfolio as of December 31, 2009, 2008 and 2007:
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Available
for sale:
|
||||||||||
|
U.S.
agency obligations
|
$
|
1,029
|
$
|
5,448
|
$
|
35,048
|
||||
|
Municipal
bonds
|
72,894
|
70,430
|
81,261
|
|||||||
|
Mortgage-backed
securities issued by GSEs
|
151,658
|
181,906
|
116,661
|
|||||||
|
Non-agency
mortgage-backed securities
|
7,797
|
5,809
|
7,367
|
|||||||
|
Other
securities
|
2,048
|
3,063
|
1,152
|
|||||||
|
235,426
|
266,656
|
241,489
|
||||||||
|
Held
to maturity:
|
||||||||||
|
U.S.
agency obligations
|
–
|
–
|
3,999
|
|||||||
|
Municipal
bonds
|
300
|
300
|
300
|
|||||||
|
Mortgage-backed
securities issued by GSEs
|
1,576
|
2,103
|
2,450
|
|||||||
|
Non-agency
mortgage-backed securities
|
1,800
|
2,791
|
3,273
|
|||||||
|
3,676
|
5,194
|
10,022
|
||||||||
|
Other
investments
|
6,390
|
6,288
|
7,605
|
|||||||
|
$
|
245,492
|
$
|
278,138
|
$
|
259,116
|
|||||
As of
December 31, 2009, the Company’s investment portfolio had gross unrealized
losses in available-for-sale municipal bonds, non-agency mortgage-backed
securities, and other securities totaling $668 thousand, $567 thousand, and $204
thousand, respectively. Gross unrealized losses on held-to-maturity non-agency
mortgage-backed securities totaled $145 thousand as of December 31,
2009.
Unrealized
losses on the Company’s investments in non-agency mortgage-backed securities, or
private label mortgage securities, are related to eight different securities.
These losses are due to a combination of interest rate fluctuations and widened
credit spreads. These mortgage securities are not issued and guaranteed by an
agency of the federal government but are instead issued by corporate entities,
primarily financial institutions, and therefore carry an element of credit risk.
Management closely monitors the performance of these securities and the
underlying mortgages, which includes a detailed review of credit ratings,
prepayment speeds, delinquency rates, default rates, current loan-to-values,
regional allocation of collateral, remaining terms, interest rates, loan types,
etc. The Company has engaged a third party expert to provide a “stress test” of
each private label security through a simulation model using assumptions to
simulate certain credit events and recessionary conditions and their impact on
the performance of each mortgage security. Unrealized losses on the Company’s
investments in municipal bonds are related to 36 different securities. These
losses are partially related to interest rate changes but are primarily related
to concerns in the marketplace regarding credit quality of issuers and the
viability of certain bond insurers. Management monitors the underlying credit of
these bonds by reviewing the financial strength of the issuers and the sources
of taxes and other revenues available to service the debt. Unrealized losses on
other securities relate to an investment in subordinated debt of one corporate
financial institution. Management monitors the financial strength of this
institution by reviewing its quarterly financial reports and considers its
capital, liquidity and earnings in this review.
Based on its assessment as of December 31, 2009, management determined that three of its investment securities were other-than-temporarily impaired. The first of these investments was a private label mortgage security with a book value and unrealized loss of $810,000 and $381,000, respectively, as of December 31, 2009. This impairment determination was based on the extent and duration of the unrealized loss as well as a recent credit rating downgrade from one rating agency to below investment grade. Based on its analysis of expected cash flows under the aforementioned stress test, management expects to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. The second of these investments was the subordinated debt of a corporate financial institution referred to above with a book value and unrealized loss of $1.0 million and $203,000, respectively, as of December 31, 2009. This impairment determination was based on the extent of the unrealized loss as well as adverse economic and market conditions for community banks in general. Based on its review of capital, liquidity and earnings of this institution, management expects to receive all contractual principal and interest from this security and therefore did not consider any of the unrealized loss to represent credit impairment. Unrealized losses from these two investments were related to factors other than credit and were recorded to other comprehensive income. The third other-than-temporarily impaired investment was trust preferred securities of a corporate financial institution with an original book value and unrealized loss of $1.0 million and $498,000, respectively. Based on its financial review of this institution and notice by the issuer of the suspension of interest payments on the securities, management determined the unrealized loss to represent credit impairment and therefore charged the full amount of unrealized loss to earnings.
The table
below reflects the carrying value and average yield on debt securities by
contractual maturities as of December 31, 2009. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties. Mortgage-backed
securities, which are not due at a single maturity date, have been included in
their respective maturity groupings based on the contractual maturity date of
the security, which is based on the final maturity date of the longest term
mortgage within the security.
|
Available
for Sale
|
Held
to Maturity
|
|||||||||||||
|
(Dollars
in thousands)
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
||||||||||
|
U.S.
agency securities:
|
||||||||||||||
|
Due
within one year
|
$
|
–
|
–
|
%
|
$
|
–
|
–
|
%
|
||||||
|
Due
after one year through five years
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after five years through ten years
|
1,000
|
6.0
|
–
|
–
|
||||||||||
|
Due
after ten years
|
–
|
–
|
–
|
–
|
||||||||||
|
1,000
|
6.0
|
–
|
–
|
|||||||||||
|
Municipal
bonds 1:
|
||||||||||||||
|
Due
within one year
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after one year through five years
|
1,445
|
5.1
|
300
|
4.5
|
||||||||||
|
Due
after five years through ten years
|
2,862
|
5.9
|
–
|
–
|
||||||||||
|
Due
after ten years
|
68,249
|
6.1
|
–
|
–
|
||||||||||
|
72,556
|
6.1
|
300
|
4.5
|
|||||||||||
|
Mortgage-backed
securities issued by GSEs:
|
||||||||||||||
|
Due
within one year
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after one year through five years
|
120
|
5.1
|
–
|
–
|
||||||||||
|
Due
after five years through ten years
|
3,538
|
4.7
|
1,030
|
4.6
|
||||||||||
|
Due
after ten years
|
141,105
|
5.3
|
546
|
5.4
|
||||||||||
|
144,763
|
5.2
|
1,576
|
4.9
|
|||||||||||
|
Non-agency
mortgage-backed securities:
|
||||||||||||||
|
Due
within one year
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after one year through five years
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after five years through ten years
|
1,940
|
4.9
|
–
|
–
|
||||||||||
|
Due
after ten years
|
6,404
|
5.5
|
1,800
|
3.7
|
||||||||||
|
8,344
|
5.3
|
1,800
|
3.7
|
|||||||||||
|
Other
securities 2:
|
||||||||||||||
|
Due
within one year
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after one year through five years
|
–
|
–
|
–
|
–
|
||||||||||
|
Due
after five years through ten years
|
1,000
|
3.8
|
–
|
–
|
||||||||||
|
Due
after ten years
|
502
|
–
|
–
|
–
|
||||||||||
|
1,502
|
2.5
|
–
|
–
|
|||||||||||
|
$
|
228,165
|
5.5
|
%
|
$
|
3,676
|
4.3
|
%
|
|||||||
|
1
|
Municipal
bonds shown at tax equivalent yield.
|
|
2
|
Other
security due after ten years is an other-than-temporarily impaired
corporate bond for which the Company is no longer accruing
interest.
|
As of
December 31, 2009, the projected weighted average life of the Company’s U.S.
agency bonds, municipal bonds and mortgage-backed securities was 0.6 years, 10.8
years and 5.6 years, respectively, assuming a flat interest rate
environment.
Loans
Total
loans were $1.39 billion and $1.25 billion as of December 31, 2009 and 2008,
respectively. This increase reflects organic loan growth in 2009, primarily
within the Company’s Triangle market. As of December 31, 2009, commercial real
estate (non-owner occupied), consumer real estate, commercial owner occupied,
commercial and industrial, consumer non-real estate and other loans (including
agriculture and municipal loans) amounted to $697.8 million, $262.5 million,
$194.4 million, $183.7 million, $9.7 million, and $41.9 million, respectively.
As of December 31, 2008, such loans amounted to $655.2 million, $235.7 million,
$148.4 million, $186.5 million, $11.2 million, and $17.4 million,
respectively.
The
commercial loan portfolio is comprised mainly of loans to small- and mid-sized
businesses located within the Company’s four primary markets: Triangle,
Sandhills, Triad and Western regions. The economic trends of the areas in North
Carolina served by the Company are influenced by the significant businesses and
industries within these regions. The ultimate collectability of the Company’s
loan portfolio is highly susceptible to changes in the market conditions of
these geographic regions.
The
following table reflects contractual maturities in the commercial loan portfolio
as of December 31, 2009 and 2008:
|
2009
|
2008
|
||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Weighted
Average Yield |
Amount
|
Weighted
Average Yield |
|||||||||
|
Commercial
real estate loans:
|
|||||||||||||
|
Due
within one year
|
$
|
403,784
|
4.7
|
%
|
$
|
370,463
|
4.1
|
%
|
|||||
|
Due
one through five years
|
262,496
|
5.7
|
265,953
|
5.1
|
|||||||||
|
Due
after five years
|
31,514
|
6.6
|
18,742
|
6.8
|
|||||||||
|
697,794
|
5.1
|
655,158
|
4.6
|
||||||||||
|
Commercial
owner occupied loans:
|
|||||||||||||
|
Due
within one year
|
27,757
|
5.8
|
34,517
|
5.5
|
|||||||||
|
Due
one through five years
|
123,072
|
6.0
|
86,624
|
6.3
|
|||||||||
|
Due
after five years
|
43,530
|
6.0
|
27,258
|
6.0
|
|||||||||
|
194,359
|
6.0
|
148,399
|
6.1
|
||||||||||
|
Commercial
and industrial loans:
|
|||||||||||||
|
Due
within one year
|
97,432
|
4.9
|
84,402
|
4.1
|
|||||||||
|
Due
one through five years
|
81,716
|
5.4
|
95,216
|
5.3
|
|||||||||
|
Due
after five years
|
4,585
|
6.2
|
6,856
|
6.9
|
|||||||||
|
183,733
|
5.2
|
186,474
|
4.8
|
||||||||||
|
Total
commercial loans
|
$
|
1,075,886
|
5.3
|
%
|
$
|
990,031
|
4.9
|
%
|
|||||
The following table reflects the mixture of commercial loans by rate type for notes with contractual maturities greater than one year as of December 31, 2009 and 2008:
|
2009
|
2008
|
||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Weighted
Average Yield |
Amount
|
Weighted
Average Yield |
|||||||||
|
Commercial
real estate loans due after one year:
|
|||||||||||||
|
Fixed
rate
|
$
|
162,406
|
6.6
|
%
|
$
|
139,069
|
6.9
|
%
|
|||||
|
Floating
rate
|
124,419
|
4.7
|
140,057
|
3.5
|
|||||||||
|
Adjustable
rate
|
7,185
|
4.6
|
5,569
|
4.7
|
|||||||||
|
294,010
|
5.8
|
284,695
|
5.2
|
||||||||||
|
Commercial
owner occupied loans due after one year:
|
|||||||||||||
|
Fixed
rate
|
128,592
|
6.5
|
86,016
|
7.0
|
|||||||||
|
Floating
rate
|
29,931
|
4.2
|
26,330
|
3.9
|
|||||||||
|
Adjustable
rate
|
8,079
|
4.2
|
1,536
|
6.8
|
|||||||||
|
166,602
|
6.0
|
113,882
|
6.3
|
||||||||||
|
Commercial
and industrial loans due after one year:
|
|||||||||||||
|
Fixed
rate
|
32,577
|
6.9
|
36,540
|
7.2
|
|||||||||
|
Floating
rate
|
47,356
|
4.7
|
61,842
|
4.3
|
|||||||||
|
Adjustable
rate
|
6,368
|
3.2
|
3,690
|
5.1
|
|||||||||
|
86,301
|
5.4
|
102,072
|
5.4
|
||||||||||
|
Total
commercial loans due after one year
|
$
|
546,913
|
5.8
|
%
|
$
|
500,649
|
5.5
|
%
|
|||||
Given the
nature of the Company’s primary markets, a significant portion of the loan
portfolio is secured by commercial real estate. As of December 31, 2009,
approximately 50% of the loan portfolio had non-owner occupied commercial real
estate as a primary component of collateral. The real estate collateral in each
case provides an alternate source of repayment in the event of default by the
borrower. Real estate values in many markets have declined over the past year,
which may continue to negatively impact the ability of certain borrowers to
repay their loans. The Company continues to thoroughly review and monitor its
commercial real estate concentration and sets limits by sector and region based
on this internal review.
The
Company utilizes interest reserves on certain commercial real estate loans to
fund the interest payments, which are funded from loan proceeds. The decision to
establish a loan-funded interest reserve upon origination of a loan is based on
the feasibility of the project, the creditworthiness of the borrower and
guarantors and the protection provided by the real estate and other collateral.
Although potentially beneficial to the lender and the borrower, the use of
interest reserves carries certain risks. Of particular concern is the
possibility that an interest reserve may not accurately reflect problems with a
borrower’s willingness or ability to repay the debt consistent with the terms
and conditions of the loan obligation. To mitigate risks related to the use of
interest reserves, the Company follows an interest reserve policy approved by
its Board of Directors which sets underwriting standards for loans with interest
reserves. These policies include loan-to-value (“LTV”) limits as well as
guarantor strength and equity requirements. Additionally, strict monitoring
requirements are followed. All loans containing interest reserves are detailed
on monthly reports submitted to management and the Board of Directors for
review. Quarterly monitoring consists of an in-depth analysis of all loans with
interest reserves, history of funding, and projected remaining term of those
reserves. Additionally, all acquisition, development and construction loans
require a comprehensive quarterly status report to review budgetary tracking,
collateral value and resulting LTV, overall performance of the project, and
continued viability of the source(s) of repayment.
As of December 31, 2009, the Company had a total of 50 loans funded by an interest reserve with total outstanding balances of $142.3 million, representing approximately 10% of total outstanding loans. Total commitments on these loans equaled $178.8 million with total remaining interest reserves of $5.0 million, representing a weighted average term of approximately nine months of remaining interest coverage. These loans had a weighted average LTV ratio of 72% based on the most recent appraisals. The following table summarizes the Company’s residential and commercial acquisition, development and construction loans with active interest reserves as of December 31, 2009:
|
Outstanding
Balance
|
Committed
Balance
|
Number
of
Loans
|
Remaining
Reserves
|
|||||||||||
|
(Dollars
in thousands)
|
||||||||||||||
|
Residential
|
$
|
69,698
|
$
|
75,068
|
31
|
$
|
1,449
|
|||||||
|
Commercial
|
72,565
|
103,734
|
19
|
3,547
|
||||||||||
|
Total
ADC loans with interest reserves 1
|
$
|
142,263
|
$
|
178,802
|
50
|
$
|
4,996
|
|||||||
|
1
|
Excludes
loans where interest reserves have previously been depleted and the
borrower is paying from other
sources.
|
Nonperforming
Assets and Impaired Loans
Loans are
generally classified as nonaccrual if they are past due as to maturity or
payment of principal or interest for a period of more than 90 days, unless such
loans are well secured and in the process of collection. If a loan or a portion
of a loan is classified as doubtful or as partially charged off, the loan is
generally classified as nonaccrual. Loans that are on a current payment status
or past due less than 90 days may also be classified as nonaccrual if repayment
in full of principal and/or interest is in doubt. Loans may be returned to
accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance of
interest and principal by the borrower in accordance with the contractual
terms.
The following table presents an analysis of
nonperforming assets as of December 31, 2009 and 2008:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Nonperforming
loans:
|
|||||||
|
Commercial
real estate
|
$
|
25,593
|
$
|
5,970
|
|||
|
Consumer
real estate
|
3,330
|
2,013
|
|||||
|
Commercial
owner occupied
|
6,607
|
784
|
|||||
|
Commercial
and industrial
|
3,974
|
348
|
|||||
|
Consumer
|
8
|
–
|
|||||
|
Total
nonperforming loans
|
39,512
|
9,115
|
|||||
|
Other
real estate:
|
|||||||
|
Construction,
land development, and other land
|
2,863
|
802
|
|||||
|
1-4
family residential properties
|
2,060
|
345
|
|||||
|
1-4
family residential properties sold with 100% financing
|
3,314
|
–
|
|||||
|
Commercial
properties
|
1,199
|
200
|
|||||
|
Closed
branch office
|
1,296
|
–
|
|||||
|
Total
other real estate
|
10,732
|
1,347
|
|||||
|
Total
nonperforming assets
|
$
|
50,244
|
$
|
10,462
|
|||
|
Nonperforming
loans to gross loans
|
2.84
|
%
|
0.73
|
%
|
|||
|
Nonperforming
assets to total assets
|
2.90
|
%
|
0.63
|
%
|
|||
Other
real estate, which includes foreclosed assets and other real property held for
sale, increased to $10.7 million as of December 31, 2009 from $1.3 million as of
December 31, 2008. As of December 31, 2009, other real estate included $1.3
million of real estate from a closed branch office held for sale and included
$3.3 million of residential properties sold to individuals prior to December 31,
2009 where the Company financed 100% of the purchase price of the home at
closing. These financed properties will remain in other real estate until
regular payments are made by the borrowers that total at least 5% of the
original purchase price, which is expected to occur in 2010, at which time the
property will be moved out of other real estate and into the performing mortgage
loan portfolio.
The remaining increase in other real estate was primarily due to the repossession of commercial and residential real estate in 2009. The Company is actively marketing all of its foreclosed properties. Such properties are adjusted to fair value upon transfer of the loans or premises to other real estate. Subsequently, these properties are carried at the lower of carrying value or updated fair value. The Company obtains updated appraisals and/or internal evaluations for all other real estate. The Company considers all other real estate to be classified as Level 3 fair value estimates given certain adjustments made to appraised values.
Impaired
loans primarily consist of nonperforming loans and troubled debt restructurings
(“TDRs”) but can include other loans identified by management as being impaired.
Impaired loans totaled $77.3 million and $13.7 million as of December 31, 2009
and 2008, respectively. The significant increase in impaired loans is primarily
due to weakness experienced in the local economy and real estate markets from
the recent recession and credit crisis. The following table summarizes the
Company’s impaired loans and TDRs as of December 31, 2009 and 2008:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Impaired
loans:
|
|||||||
|
Impaired
loans with related allowance for loan losses
|
$
|
58,509
|
$
|
13,723
|
|||
|
Impaired
loans for which the full loss has been charged off
|
18,756
|
–
|
|||||
|
Total
impaired loans
|
77,265
|
13,723
|
|||||
|
Allowance
for loan losses related to impaired loans
|
(6,112
|
)
|
(945
|
)
|
|||
|
Net
carrying value of impaired loans
|
$
|
71,153
|
$
|
12,778
|
|||
|
Performing
TDRs:
|
|||||||
|
Commercial
real estate
|
$
|
27,532
|
$
|
5,624
|
|||
|
Consumer
real estate
|
598
|
219
|
|||||
|
Commercial
owner occupied
|
4,633
|
–
|
|||||
|
Commercial
and industrial
|
1,288
|
–
|
|||||
|
Consumer
|
126
|
–
|
|||||
|
Other
loans
|
–
|
–
|
|||||
|
Total
performing TDRs
|
$
|
34,177
|
$
|
5,843
|
|||
Loans are
classified as TDRs by the Company when certain modifications are made to the
loan terms and concessions are granted to the borrowers due to financial
difficulty experienced by those borrowers. The Company only restructures loans
for borrowers in financial difficulty that have designed a viable business plan
to fully pay off all obligations, including outstanding debt, interest, and
fees, either by generating additional income from the business or through
liquidation of assets. Generally, these loans are restructured to provide the
borrower additional time to execute upon their plans. With respect to
restructured loans, the Company grants concessions by (1) reduction of the
stated interest rate for the remaining original life of the debt or (2)
extension of the maturity date at a stated interest rate lower than the current
market rate for new debt with similar risk. The Company does not generally grant
concessions through forgiveness of principal or accrued interest. Restructured
loans where a concession has been granted through extention of the maturity date
generally include extension of payments in an interest only period, extension of
payments with capitalized interest and extension of payments through a
forbearance agreement. These extended payment terms are also combined with a
reduction of the stated interest rate in certain cases. Success in restructuring
loan terms has been mixed but has proven to be a useful tool in certain
situations to protect collateral values and allow certain borrowers additional
time to execute upon defined business plans. In situations where a TDR is
unsuccessful and the borrower is unable to follow through with terms of the
restructured agreement, the loan is placed on nonaccrual status and continues to
be written down to the underlying collateral value.
The
Company’s policy with respect to accrual of interest on loans restructured in a
TDR follows relevant supervisory guidance. That is, if a borrower has
demonstrated performance under the previous loan terms and shows capacity to
perform under the restructured loan terms, continued accrual of interest at the
restructured interest rate is likely. If a borrower was materially delinquent on
payments prior to the restructuring but shows the capacity to meet the
restructured loan terms, the loan will likely continue as nonaccrual going
forward. Lastly, if the borrower does not perform under the restructured terms,
the loan is placed on nonaccrual status. The Company will continue to closely
monitor these loans and will cease accruing interest on them if management
believes that the borrowers may not continue performing based on the
restructured note terms. If a loan
is restructured a second time, after previously being classified as a TDR, that
loan is automatically placed on nonaccrual status. The Company’s policy
with respect to nonperforming loans requires the borrower to make a minimum of
six consecutive payments in accordance with the loan terms before that loan can
be placed back on accrual status. Further, the borrower must show capacity to
continue performing into the future prior to restoration of accrual status. To
date, the Company has not restored any nonaccrual loan classified as a TDR to
accrual status.
All TDRs
are considered to be impaired and are evaluated as such in the quarterly
allowance calculation. As of December 31, 2009, allowance for loan losses
allocated to performing TDRs totaled $3.5 million. Outstanding nonperforming
TDRs and their related allowance for loan losses totaled $16.1 million and $0.7
million, respectively, as of December 31, 2009.
Allowance
for Loan Losses
Determining
the allowance for loan losses is based on a number of factors, many of which are
subject to judgments made by management. At the origination of each commercial
loan, management assesses the relative risk of the loan and assigns a
corresponding risk grade. To ascertain that the credit quality is maintained
after the loan is booked, a loan review officer performs an annual review of all
unsecured loans over a predetermined loan amount, a sampling of loans within a
lender’s authority, and a sampling of the entire loan pool. Loans are reviewed
for credit quality, sufficiency of credit and collateral documentation, proper
loan approval, covenant, policy and procedure adherence, and continuing accuracy
of the loan grade. The Loan Review Officer reports directly to the Chief Credit
Officer and the Audit Committee of the Company’s Board of
Directors.
The
allowance for loan losses represents management’s best estimate of probable
credit losses that are inherent in the loan portfolio at the balance sheet date
and is determined by management through quarterly evaluations of the loan
portfolio. The allowance calculation consists of specific and general reserves.
Specific reserves are applied to individually impaired loans. A loan is
considered impaired, based on current information and events, if it is probable
that the Company will be unable to collect the scheduled payments of principal
and interest when due according to the contractual terms of the loan agreement.
Specific reserves on impaired loans that are collateral dependent are based on
the fair value of the underlying collateral while specific reserves on loans
that are not collateral dependent are based on either an observable market
price, if available, or the present value of expected future cash flows
discounted at the historical effective interest rate. Management evaluates loans
that are classified as doubtful, substandard or special mention to determine
whether or not they are impaired. This evaluation includes several factors,
including review of the loan payment status and the borrower’s financial
condition and operating results such as cash flows, operating income or loss,
etc. General reserves are determined by applying loss percentages to pools of
loans that are grouped according to loan type and internal risk ratings. Loss
percentages are based on the Company’s historical default and charge-off
experience in each pool and management’s consideration of environmental factors
such as changes in economic conditions, credit quality trends, collateral
values, concentrations of credit risk, and loan review as well as regulatory
exam findings.
Management
has allocated the allowance for loan losses by loan class for the past five
years ended December 31, as shown in the following table:
|
As
of December 31,
|
||||||||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
%
of Total
Allowance |
Amount
|
%
of Total
Allowance |
Amount
|
%
of Total
Allowance |
Amount
|
%
of Total
Allowance |
Amount
|
%
of Total
Allowance |
||||||||||||||||||||
|
Commercial
|
$
|
14,187
|
54
|
%
|
$
|
9,749
|
66
|
%
|
$
|
10,231
|
75
|
%
|
$
|
8,744
|
59
|
%
|
$
|
6,460
|
64
|
%
|
||||||||||
|
Construction
|
10,343
|
40
|
3,548
|
24
|
1,812
|
13
|
3,276
|
25
|
2,039
|
20
|
||||||||||||||||||||
|
Consumer
|
481
|
2
|
620
|
4
|
631
|
5
|
408
|
3
|
311
|
3
|
||||||||||||||||||||
|
Home
equity lines
|
491
|
2
|
570
|
4
|
419
|
3
|
669
|
8
|
557
|
10
|
||||||||||||||||||||
|
Mortgage
|
579
|
2
|
308
|
2
|
478
|
4
|
250
|
5
|
225
|
3
|
||||||||||||||||||||
|
$
|
26,081
|
100
|
%
|
$
|
14,795
|
100
|
%
|
$
|
13,571
|
100
|
%
|
$
|
13,347
|
100
|
%
|
$
|
9,592
|
100
|
%
|
|||||||||||
In 2009,
management changed its loan-related disclosure classifications in its financial
reports to better reflect the underlying collateral risk within the loan
portfolio and to more closely align its financial disclosures with regulatory
classifications. For loan-related disclosures, management has presented data
from all periods to reflect this updated classification. However, for the
allocation of the allowance for loan losses, historical data for certain years
was not available for purposes of applying a consistent allocation methodology.
Thus, the Company has presented the allocation of the allowance for loan losses,
consistent with the allocation methodology used in previous financial reports,
for the past five years in the table above. The following table presents the
allowance for loan losses, allocated according to the updated classifications
and consistent with other loan-related disclosures, as of December 31, 2009 and
2008:
|
2009
|
2008
|
||||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
%
of Total
Allowance |
%
of
Loans
|
Amount
|
%
of Total
Allowance |
%
of
Loans
|
|||||||||||||
|
Allowance
for loan losses:
|
|||||||||||||||||||
|
Commercial
real estate
|
$
|
14,987
|
58
|
%
|
2.15
|
%
|
$
|
6,825
|
46
|
%
|
1.04
|
%
|
|||||||
|
Consumer
real estate
|
2,383
|
9
|
0.91
|
2,360
|
16
|
1.00
|
|||||||||||||
|
Commercial
owner occupied
|
2,650
|
10
|
1.36
|
1,878
|
13
|
1.27
|
|||||||||||||
|
Commercial
and industrial
|
5,536
|
21
|
3.01
|
3,233
|
22
|
1.73
|
|||||||||||||
|
Consumer
|
326
|
1
|
3.36
|
316
|
2
|
2.82
|
|||||||||||||
|
Other
loans
|
199
|
1
|
0.48
|
183
|
1
|
1.05
|
|||||||||||||
|
Total
allowance for loan losses 1
|
$
|
26,081
|
100
|
%
|
1.88
|
%
|
$
|
14,795
|
100
|
%
|
1.18
|
%
|
|||||||
|
1
|
The
allowance for loan losses does not include the amount reserved for
off-balance sheet items which is reflected in other
liabilities.
|
As of
December 31, 2009 and 2008, impaired loans on borrower relationships over $750
thousand totaled $69.4 million and $9.7 million, respectively, with specific
reserves of $5.7 million and $0.2 million, respectively. Specific reserves
represented 8.2% and 2.1% of impaired loan balances as of December 31, 2009 and
2008, respectively. Specific reserves represented 10.6% and 2.1% of impaired
loan balances, net of impaired loans for which the full loss has been
charged-off, as of December 31, 2009 and 2008, respectively. These loans were
evaluated for impairment and valued individually. Given the Company’s
concentration in real estate lending, the vast majority of impaired loans are
collateral dependent and are therefore valued based on underlying collateral
values. In the case of unsecured loans that become impaired, principal balances
are fully charged off. For impaired loans where legal action has been taken to
foreclose, the loan is charged down to estimated fair value, and a specific
reserve is not established.
The
Company employs a dedicated Special Assets Group (“SAG”)
that monitors problem loans and formulates collection and/or resolution plans
for those borrowers. The SAG and the lender who underwrote the problem loan
remain updated on market conditions and inspect collateral on a regular basis.
If there is reason to believe that collateral values have been negatively
affected by market or other forces, an updated appraisal is ordered to assess
the change in value. While not a formal policy, the Company’s management seeks
to ensure that appraisals are not more than twelve months old for impaired
loans.
The
Company considers all impaired loans to be classified as Level 3 fair value
estimates given certain adjustments made to appraised values. For each impaired
loan evaluated individually, the fair value of underlying collateral is
estimated based on the most recent appraised value (or
other appropriate valuation type), adjusted for estimated holding and
selling costs. For certain impaired loans where appraisals are aged or where
market conditions have significantly changed since the appraisal date, a further
reduction is made to appraised value to arrive at the fair value of collateral.
Of
the $69.4 million of impaired loans evaluated and valued on an individual basis
as of December 31, 2009, $55.7 million was valued based on independent
appraisals, $10.8 million was valued based on a combination of broker price
opinions and internal valuations, $1.2 million was valued based on a recent
sales contract and $1.7 million was valued based on a court settlement that will
provide for repayment out of a deposit account. Internal valuations are
primarily used for equipment valuations or for certain real estate valuations
where recent home sales data was used to estimate value for similar fully or
partially built houses. As part of the allowance for loan loss
calculation each quarter, management uses the most recent appraisal available to
estimate fair value. For any impaired loan where a specific reserve has
previously been established, or where a partial charge-off has been recorded, an
updated appraisal that reflects a further decline in value will result in an
additional reserve or partial charge-off during the current period. Currently,
all partially charged-off loans are all on nonaccrual status.
As of
December 31, 2009 and 2008, impaired loans on relationships less than $750
thousand (loans not evaluated individually for impairment), totaled $7.9 million
and $4.0 million, respectively, with associated reserves of $0.4 million and
$0.7 million, respectively. Reserves on these loans were based on loss
percentages applied to pools of loans stratified by common risk rating and loan
type.
General
reserves are determined by applying loss percentages to pools of loans that are
grouped according to loan type and internal risk ratings. Loss percentages are
based on the Company’s historical default and charge-off experience in each pool
and management’s consideration of environmental factors. As of December 31,
2009, the Company used two years of default and charge-off history for purposes
of calculating general reserves. Nonperforming loans and net charge-offs have
significantly increased over recent quarters, particularly in the commercial
real estate portfolio. Such increases have directly impacted loss percentages
and the resulting allowance for loan losses for each loan pool.
The
allowance is established through a provision for loan losses charged to expense.
Loans are charged against the allowance for loan losses when management believes
that the collectability of the principal is unlikely. The following table
presents an analysis of changes in the allowance for loan losses for the
previous five years ended December 31:
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||
|
Allowance
for loan losses, beginning of period
|
$
|
14,795
|
$
|
13,571
|
$
|
13,347
|
$
|
9,592
|
$
|
10,721
|
|||||
|
Adjustment
for loans acquired in acquisition
|
–
|
845
|
–
|
7,650
|
–
|
||||||||||
|
Net
charge-offs:
|
|||||||||||||||
|
Loans
charged off:
|
|||||||||||||||
|
Commercial
real estate
|
8,026
|
1,991
|
1,292
|
1,278
|
262
|
||||||||||
|
Consumer
real estate
|
2,016
|
125
|
2,264
|
268
|
404
|
||||||||||
|
Commercial
and industrial
|
1,903
|
1,658
|
1,265
|
3,541
|
207
|
||||||||||
|
Consumer
|
252
|
794
|
403
|
172
|
276
|
||||||||||
|
Other
loans
|
–
|
–
|
28
|
–
|
–
|
||||||||||
|
Total
charge-offs
|
12,197
|
4,568
|
5,252
|
5,259
|
1,149
|
||||||||||
|
Recoveries
of loans previously charged off:
|
|||||||||||||||
|
Commercial
real estate
|
200
|
650
|
455
|
129
|
77
|
||||||||||
|
Consumer
real estate
|
107
|
28
|
1,295
|
54
|
18
|
||||||||||
|
Commercial
and industrial
|
63
|
316
|
9
|
536
|
240
|
||||||||||
|
Consumer
|
49
|
77
|
111
|
58
|
28
|
||||||||||
|
Other
loans
|
–
|
–
|
–
|
–
|
–
|
||||||||||
|
Total
recoveries
|
419
|
1,071
|
1,870
|
777
|
363
|
||||||||||
|
Total
net charge-offs
|
11,778
|
3,497
|
3,382
|
4,482
|
786
|
||||||||||
|
Provision
(credit) for loan losses
|
23,064
|
3,876
|
3,606
|
587
|
(343
|
)
|
|||||||||
|
Allowance
for loan losses, end of period
|
$
|
26,081
|
$
|
14,795
|
$
|
13,571
|
$
|
13,347
|
$
|
9,592
|
|||||
|
Key
Allowance-Related Ratios:
|
|||||||||||||||
|
Net
charge-offs to average loans during the year
|
0.89
|
%
|
0.30
|
%
|
0.32
|
%
|
0.46
|
%
|
0.12
|
%
|
|||||
|
Allowance
for loan losses to gross loans
|
1.88
|
%
|
1.18
|
%
|
1.24
|
%
|
1.32
|
%
|
1.43
|
%
|
|||||
|
Allowance
for loan losses to gross loans, net of nonperforming loans for which the
full loss has been charged-off
|
1.90
|
%
|
1.18
|
%
|
1.24
|
%
|
1.32
|
%
|
1.43
|
%
|
|||||
|
Allowance
coverage of nonperforming loans
|
66
|
%
|
162
|
%
|
227
|
%
|
272
|
%
|
119
|
%
|
|||||
|
Allowance
coverage of nonperforming loans, net of nonperforming loans for which the
full loss has been charged-off
|
126
|
%
|
162
|
%
|
227
|
%
|
272
|
%
|
119
|
%
|
|||||
The
evaluation of the allowance for loan losses is inherently subjective, and
management uses the best information available to establish this estimate.
However, if factors such as economic conditions differ substantially from
assumptions, or if amounts and timing of future cash flows expected to be
received on impaired loans vary substantially from the estimates, future
adjustments to the allowance for loan losses may be necessary. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance for loan losses
based on their judgments about all relevant information available to them at the
time of their examination. Any adjustments to original estimates are made in the
period in which the factors and other considerations indicate that adjustments
to the allowance for loan losses are necessary.
|
|
As
of December 31, 2009
|
|||||||||
|
Residential
Acquisition, Development and Construction Loan
Analysis by
Type and Region:
|
Residential
Land / Development
|
Residential
Construction
|
Total
|
|||||||
|
(Dollars
in thousands)
|
||||||||||
|
Loans
outstanding
|
$
|
162,733
|
$
|
100,724
|
$
|
263,457
|
||||
|
Loans
outstanding to total loans
|
11.70
|
%
|
7.24
|
%
|
18.95
|
%
|
||||
|
Average
loan balance
|
$
|
372
|
$
|
200
|
$
|
280
|
||||
|
Nonaccrual
loans
|
$
|
16,935
|
$
|
7,102
|
$
|
24,037
|
||||
|
Nonaccrual
loans to loans in category
|
10.41
|
%
|
7.05
|
%
|
9.12
|
%
|
||||
|
Average
nonaccrual loan balance
|
$
|
941
|
$
|
395
|
$
|
668
|
||||
|
Allowance
for loan losses
|
$
|
7,569
|
$
|
1,707
|
$
|
9,276
|
||||
|
Allowance
for loan losses to loans in category
|
4.65
|
%
|
1.69
|
%
|
3.52
|
%
|
||||
|
As
of December 31, 2009
|
|||||||||||||||||||
|
Residential
Acquisition, Development and Construction Loan
Analysis
by
Type and Region:
|
Loans
Outstanding
|
Percent
of Total Loans Outstanding
|
Nonaccrual
Loans
|
Nonaccrual
Loans to Loans Outstanding
|
Allowance
for Loan Losses
|
ALLL
to Loans Outstanding
|
|||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Triangle
|
$
|
185,319
|
70.34
|
%
|
$
|
14,349
|
7.74
|
%
|
$
|
7,325
|
3.95
|
%
|
|||||||
|
Sandhills
|
31,257
|
11.86
|
–
|
–
|
412
|
1.32
|
|||||||||||||
|
Triad
|
5,509
|
2.09
|
106
|
1.92
|
86
|
1.56
|
|||||||||||||
|
Western
|
41,372
|
15.71
|
9,582
|
23.16
|
1,453
|
3.51
|
|||||||||||||
|
Total
|
$
|
263,457
|
100.00
|
%
|
$
|
24,037
|
9.12
|
%
|
$
|
9,276
|
3.52
|
%
|
|||||||
|
|
As
of December 31, 2009
|
|||||||||||||||
|
Other
Commercial Real Estate Loan
Analysis by Type and Region: |
Commercial
Land /
Development |
Commercial
Construction |
Multifamily
|
Other
Non-Residential, Non-Owner Occupied CRE |
Total
|
|||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Loans
outstanding
|
$
|
128,745
|
$
|
59,918
|
$
|
43,379
|
$
|
202,295
|
$
|
434,337
|
||||||
|
Loans
outstanding to total loans
|
9.26
|
%
|
4.31
|
%
|
3.12
|
%
|
14.55
|
%
|
31.24
|
%
|
||||||
|
Average
loan balance
|
$
|
560
|
$
|
990
|
$
|
347
|
$
|
592
|
$
|
571
|
||||||
|
Nonaccrual
loans
|
$
|
529
|
$
|
–
|
$
|
325
|
$
|
702
|
$
|
1,556
|
||||||
|
Nonaccrual
loans to loans in category
|
0.41
|
%
|
–
|
0.75
|
%
|
0.35
|
%
|
0.36
|
%
|
|||||||
|
Average
nonaccrual loan balance
|
$
|
265
|
$
|
–
|
$
|
108
|
$
|
140
|
$
|
156
|
||||||
|
Allowance
for loan losses
|
$
|
1,732
|
$
|
462
|
$
|
474
|
$
|
3,043
|
$
|
5,711
|
||||||
|
Allowance
for loan losses to loans in category
|
1.35
|
%
|
0.77
|
%
|
1.09
|
%
|
1.50
|
%
|
1.31
|
%
|
||||||
|
|
As
of December 31, 2009
|
||||||||||||||||||
|
Other
Commercial Real Estate Loan
Analysis by Type and Region: |
Loans
Outstanding |
Percent
of
Total Loans Outstanding |
Nonaccrual
Loans
|
Nonaccrual
Loans to Loans Outstanding |
Allowance
for
Loan Losses |
ALLL
to Loans
Outstanding |
|||||||||||||
|
(Dollars
in thousands)
|
|||||||||||||||||||
|
Triangle
|
$
|
281,664
|
64.85
|
%
|
$
|
361
|
0.13
|
%
|
$
|
3,653
|
1.30
|
%
|
|||||||
|
Sandhills
|
60,593
|
13.95
|
605
|
1.00
|
937
|
1.55
|
|||||||||||||
|
Triad
|
35,987
|
8.29
|
41
|
0.11
|
576
|
1.60
|
|||||||||||||
|
Western
|
56,093
|
12.91
|
549
|
0.98
|
545
|
0.97
|
|||||||||||||
|
Total
|
$
|
434,337
|
100.00
|
%
|
$
|
1,556
|
0.36
|
%
|
$
|
5,711
|
1.31
|
%
|
|||||||
Deposits
Total
deposits increased from $1.32 billion as of December 31, 2008 to $1.38 billion
as of December 31, 2009. This increase reflects organic growth in 2009,
primarily within the Company’s Triangle market. Of these amounts, $141.1 million
and $125.3 million represented noninterest-bearing demand deposits as of
December 31, 2009 and 2008, respectively, and $1.24 billion and $1.19 billion
represented interest-bearing deposits as of December 31, 2009 and 2008,
respectively. Balances in time deposits of $100,000 and greater increased from
$294.3 million as of December 31, 2008 to $341.4 million as of December 31,
2009. The average interest rate on time deposits of $100,000 or greater
decreased from 3.68% as of December 31, 2008 to 2.74% as of December 31,
2009.
The
following table reflects the scheduled maturities and average rates of time
deposits as of December 31, 2009:
|
Time
Deposits
$100,000
or Greater
|
Time
Deposits
Less
than $100,000
|
||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Weighted
Average Rate |
Amount
|
Weighted
Average Rate |
|||||||||
|
Three
months or less
|
$
|
12,225
|
1.9
|
%
|
$
|
60,423
|
1.0
|
%
|
|||||
|
Over
three months to one year
|
134,161
|
3.6
|
231,592
|
2.6
|
|||||||||
|
Over
one year to three years
|
187,966
|
2.2
|
204,640
|
2.1
|
|||||||||
|
Over
three years
|
7,008
|
3.6
|
10,693
|
3.0
|
|||||||||
|
$
|
341,360
|
2.7
|
%
|
$
|
507,348
|
2.2
|
%
|
||||||
Borrowings
Advances
from the FHLB totaled $49.0 million and $72.0 million as of December 31, 2009
and 2008, respectively, and had a weighted average rate of 4.7% as of December
31, 2009 and 2008. In addition, FHLB overnight borrowings on the Company’s
credit line at that institution totaled $18.0 million and zero as of December
31, 2009 and 2008, respectively. These advances as well as the Company’s credit
line with the FHLB were collateralized by eligible 1–4 family mortgages, home
equity loans, commercial loans, and mortgage-backed securities. Outstanding
structured repurchase agreements totaled $50.0 million and $60.0 million as of
December 31, 2009 and 2008, respectively. These repurchase agreements had a
weighted average rate of 4.1% and 4.3% as of December 31, 2009 and 2008,
respectively, and were collateralized by certain U.S. agency and mortgage-backed
securities. The Company maintains a credit line at the Federal Reserve Bank’s
(“FRB”) discount window that is used for short-term funding needs and as an
additional source of liquidity. Primary credit borrowings totaled $50.0 million
and zero as of December 31, 2009 and 2008, respectively. These borrowings as
well as the Company’s credit line at the discount window were collateralized by
eligible commercial construction as well as commercial and industrial loans. The
Company had total average outstanding borrowings of $143.2 million and $168.5
million with effective borrowing costs of 3.59% and 4.29% in 2009 and 2008,
respectively.
Further,
the Company had $30.9 million of subordinated debentures outstanding as of
December 31, 2009 and 2008. The subordinated debt issues pay interest at varying
spreads to 90-day LIBOR, and the effective interest rate was 3.41% and 5.69% in
2009 and 2008, respectively.
Capital Resources
Total
shareholders’ equity decreased from $148.5 million as of December 31, 2008 to
$139.8 million as of December 31, 2009. The Company’s accumulated deficit
increased by $12.8 million for the year ended December 31, 2009, which was
comprised of a $6.8 million net loss, common dividends of $3.6 million, and
dividends and accretion on preferred stock of $2.4 million. Accumulated other
comprehensive income, which includes the unrealized gain or loss on
available-for-sale investment securities and the unrealized gain or loss related
to the cash flow hedge, net of tax, was $4.0 million as of December 31, 2009,
which was an increase of $3.1 million from the net unrealized gain of $0.9
million as of December 31, 2008.
As of
December 31, 2009, the Company had a leverage ratio of 8.94%, a Tier 1 capital
ratio of 10.16%, and a total risk-based capital ratio of 11.41%. These ratios
exceed the federal regulatory minimum requirements for a “well capitalized” bank
(see Item 8. Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements – Note 19, for additional information on regulatory capital
requirements). The Company’s tangible equity to tangible assets ratio decreased
from 8.77% as of December 31, 2008 to 7.91% as of December 31, 2009, and its
tangible common equity to tangible assets ratio declined from 6.26% as of
December 31, 2008 to 5.53% as of December 31, 2009.
On
December 12, 2008, the Company entered into a Securities Purchase Agreement with
the Treasury pursuant to which, among other things, the Company sold to the
Treasury for an aggregate purchase price of $41.3 million, 41,279 shares of
Series A Fixed Rate Cumulative Perpetual Preferred Stock of the Company (“Series
A Preferred Stock”) and warrants to purchase up to 749,619 shares of common
stock (the “Warrants”) of the Company. The Series A Preferred Stock ranks senior
to the Company’s common shares and pays a compounding cumulative dividend, in
cash, at a rate of 5% per annum for the first five years, and 9% per annum
thereafter on the liquidation preference of $1,000 per share. The Company is
prohibited from paying any dividend with respect to shares of common stock or
repurchasing or redeeming any shares of the Company’s common shares unless all
accrued and unpaid dividends are paid on the Series A Preferred Stock for all
past dividend periods (including the latest completed dividend period). The
Series A Preferred Stock is non-voting, other than class voting rights on
matters that could adversely affect the Series A Preferred Stock. The
Series A Preferred Stock is callable at par after three years. The Treasury
may also transfer the Series A Preferred Stock to a third party at any
time.
The
Company’s Board of Directors has authorized the repurchase of up to 1 million
shares of the Company’s common stock through public or private transactions (see
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchasers of Equity Securities for more information on the Company’s
share repurchases). As a condition under the CPP, the Company’s share
repurchases are currently limited to purchases in connection with the
administration of any employee benefit plan, consistent with past practices,
including purchases to offset share dilution in connection with any such plans.
This restriction is effective until December 2011 or until the Treasury no
longer owns any of the Series A Preferred Stock.
On
January 15, 2010, the Company withdrew its registration statement with respect
to its public offering of common stock due to unfavorable market conditions. On
February 1, 2010, the Company announced that its Board of Directors voted to
suspend payment of the Company’s quarterly cash dividend to its common
shareholders.
Liquidity
Management
Liquidity
management involves the ability to meet the cash flow requirements of depositors
desiring to withdraw funds or borrowers needing assurance that sufficient funds
will be available to meet their credit needs. To ensure the Company is
positioned to meet immediate and future cash demands, management relies on
internal analysis of its liquidity, knowledge of current economic and market
trends and forecasts of future conditions. Regulatory agencies set certain
minimum liquidity standards, including the setting of a reserve requirement by
the FRB. The Company submits weekly reports to the FRB to ensure that it meets
those requirements. As of December 31, 2009, the Company met all of its
regulatory liquidity requirements.
The
Company had $29.5 million in its most liquid assets, cash and cash equivalents
as of December 31, 2009. The Company’s principal sources of funds are deposits,
borrowings and capital. Core deposits (total deposits less certificates of
deposits in the amount of $100,000 or more), one of the most stable sources of
liquidity, together with equity capital funded $1.18 billion, or 67.8%, of total
assets as of December 31, 2009 compared to $1.17 billion, or 70.7% of total
assets as of December 31, 2008.
Changes in the Company’s on-balance sheet liquidity can be demonstrated by an analysis of its cash flows separated by operating activities, investing activities and financing activities. Operating activities generated $10.9 million of liquidity for the year ended December 31, 2009 compared to $12.4 million for the year ended December 31, 2008. The principal elements of operating activities are net income (loss), adjusted for significant noncash expenses such as the provision for loan losses, depreciation, amortization, deferred income taxes and changes in other assets and liabilities. Investing activities used $119.5 million of cash in the year ended December 31, 2009 compared to $97.6 million in the year ended December 31, 2008. The principal elements of investing activities are proceeds and principal repayments from investment securities offset by purchases of investment securities, net loan growth, and proceeds from the sale of premises and equipment offset by purchases of premises and equipment. While the Company does not own any investment securities with final contractual maturities falling within the next 12 months, management expects to receive principal repayments of $38.8 million on its debt securities in 2010. These projected principal repayments include cash flows from regularly scheduled payments on mortgage-backed securities as well as anticipated prepayments on mortgage-backed securities and other debt securities assuming a flat interest rate environment. During 2009, the Company purchased $31.8 million of investment securities, while proceeds from repayments/calls/maturities of investment securities totaled $72.2 million. Financing activities generated $83.7 million of cash for the year ended December 31, 2009 compared to $99.5 million for the year ended December 31, 2008. The principal elements of financing activities are net deposit growth, proceeds from borrowings offset by principal repayments on borrowings, and issuance of stock offset by repurchases of stock and dividends paid. The Company is not currently aware of any trends, events or uncertainties that had or were reasonably likely to have a material affect on its liquidity position.
Additional
sources of liquidity are available to the Company through the FRB and through
membership in the FHLB system. As of December 31, 2009, the Company had a
maximum and available borrowing capacity of $108.5 million and $41.5 million,
respectively, through the FHLB. These funds can be made available with various
maturities and interest rate structures. Borrowings cannot exceed 20% of total
assets or 20 times the amount of FHLB stock owned by the borrowing bank.
Borrowings with the FHLB are collateralized by a blanket lien on certain
qualifying assets. The Company also maintains a credit line at the FRB’s
discount window that is used for short-term funding needs and as an additional
source of available liquidity. As of December 31, 2009, the Company had a
maximum and available borrowing capacity of $67.7million and $17.7 million,
respectively, at the discount window. Available credit at the discount window is
collateralized by eligible commercial construction and commercial and industrial
loans. The Company also maintains off-balance sheet liquidity from other sources
such as federal funds lines, repurchase agreement lines and through brokered
deposit sources.
Off-Balance
Sheet Arrangements
As part
of its normal course of business to meet the financing needs of its customers,
the Bank is at times party to financial instruments with off-balance sheet
credit risks. These instruments include commitments to extend credit and standby
letters of credit. See also Part II – Item 8. Financial Statements and
Supplementary Data, Notes to Consolidated Financial Statements – Note 15, for a
discussion of the Company’s off-balance sheet arrangements.
The
following table reflects maturities of contractual obligations as of December
31, 2009:
|
Payments
Due by Period
|
||||||||||||||||
|
(Dollars
in thousands)
|
Less
Than
1
Year
|
1–3
Years
|
3–5
Years
|
More
Than
5
Years
|
Total
Committed
|
|||||||||||
|
Contractual
obligations:
|
||||||||||||||||
|
Borrowings
|
$
|
76,000
|
$
|
31,000
|
$
|
–
|
$
|
60,000
|
$
|
167,000
|
||||||
|
Subordinated
debentures
|
–
|
–
|
–
|
30,930
|
30,930
|
|||||||||||
|
Operating
leases
|
3,227
|
5,634
|
5,439
|
6,811
|
21,111
|
|||||||||||
|
$
|
79,227
|
$
|
36,634
|
$
|
5,439
|
$
|
97,741
|
$
|
219,041
|
|||||||
The
following table reflects expirations of commercial loan-related commitments as
of December 31, 2009:
|
Amount
of Commitment Expiration by Period
|
||||||||||||||||
|
(Dollars
in thousands)
|
Less
Than
1
Year
|
1–3
Years
|
3–5
Years
|
More
Than
5
Years
|
Total
Committed
|
|||||||||||
|
Commercial
commitments:
|
||||||||||||||||
|
Commercial
letters of credit
|
$
|
9,020
|
$
|
124
|
$
|
–
|
$
|
–
|
$
|
9,144
|
||||||
|
Other
commercial loan commitments
|
70,059
|
21,954
|
15,798
|
4,434
|
112,245
|
|||||||||||
|
$
|
79,079
|
$
|
22,078
|
$
|
15,798
|
$
|
4,434
|
$
|
121,389
|
|||||||
Impact of Inflation
The
Company’s financial statements have been prepared in accordance with U.S. GAAP,
which require the measurement of financial position and operating results in
terms of historic dollars without consideration for changes in the relative
purchasing power of money over time due to inflation. The rate of inflation has
been relatively moderate over the past few years and has not materially impacted
the Company’s results of operations; however, the effect of inflation on
interest rates may in the future materially impact the Company’s operations,
which rely on the spread between the yield on earning assets and rates paid on
deposits and borrowings as the major source of earnings. Operating costs, such
as salaries and wages, occupancy and equipment costs, can also be negatively
impacted by inflation.
Recent
Accounting Developments
Refer to
Item 8. Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements – Note 1, Summary of Significant Accounting Policies, for a
discussion of recent accounting developments.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
The
Company intends to reach its strategic financial objectives through the
effective management of market risk. Like many financial institutions, the
Company’s most significant market risk exposure is interest rate risk. The
Company’s primary goal in managing interest rate risk is to minimize the effect
that changes in interest rates have on earnings and capital. This is
accomplished through the active management of asset and liability portfolios,
which includes the strategic pricing of asset and liability accounts and
ensuring a proper maturity combination of assets and liabilities. The goal of
these activities is the development of maturity and repricing opportunities in
the Company’s portfolios of assets and liabilities that will produce consistent
net interest income during periods of changing interest rates. The Company’s
Management Risk Committee and Board Risk Committee (referred to collectively as
“Risk Committee”) monitor loan, investment and liability portfolios to ensure
comprehensive management of interest rate risk. These portfolios are analyzed to
ensure proper fixed- and variable-rate mixes under several interest rate
scenarios.
The
asset/liability management process is intended to achieve relatively stable net
interest margins and to assure adequate capital and liquidity levels by
coordinating the amounts, maturities, or repricing opportunities of earning
assets, deposits and borrowed funds. The Risk Committee has the responsibility
to determine and achieve the most appropriate volume and combination of earning
assets and interest-bearing liabilities, and ensure an adequate level of
liquidity and capital, within the context of corporate performance objectives.
The Risk Committee also sets policy guidelines and establishes long-term
strategies with respect to interest rate risk exposure, capital and liquidity.
The Risk Committee meets regularly to review the Company’s interest rate risk,
capital levels and liquidity positions in relation to present and prospective
market and business conditions, and adopts balance sheet management strategies
intended to ensure that the potential impact of earnings, capital and liquidity
as a result of fluctuations in interest rates is within acceptable
guidelines.
In the
past, the Company has used derivative financial instruments to manage interest
rate risk, to facilitate asset/liability management strategies and to manage
other risk exposures. The derivatives used by the Company in the past consisted
of interest rate swaps to convert a portion of the Company’s prime-based
commercial loan portfolio to a fixed rate and interest rate swaps to convert
portions of its fixed-rate FHLB advances to variable interest rates. These
interest rate swap strategies reflected the Company’s asset sensitivity and
either expired or were terminated in 2009. As of December 31, 2009, the Company
maintained no active derivative positions.
As a
financial institution, most of the Company’s assets and liabilities are monetary
in nature. This differs greatly from most commercial and industrial companies’
balance sheets, which are comprised primarily of fixed assets or inventories.
Movements in interest rates and actions of the Board of Governors of the Federal
Reserve to regulate the availability and cost of credit have a greater effect on
a financial institution’s profitability than do the effects of higher costs for
goods and services. Through its balance sheet management function, which is
monitored by the Risk Committee, the Company believes it is positioned to
respond to changing needs for liquidity, changes in interest rates and
inflationary trends.
The
Company utilizes an outside asset/liability management advisory firm to help
management evaluate interest rate risk and develop asset/liability management
strategies. One tool used is a computer simulation model which projects the
Company’s performance under different interest rate scenarios. Analyses are
prepared monthly, which evaluate the Company’s performance in a base strategy
that reflects the Company’s current year operating plan. Three interest rate
scenarios (Flat, Rising and Declining) are applied to the base strategy to
determine the effect of changing interest rates on net interest income and
equity. The analysis completed as of December 31, 2009 indicated that the
Company’s interest rate risk exposure and equity at risk exposure over a
twelve-month time horizon were within the guidelines established by the
Company’s Board of Directors.
The table below measures the impact on net interest income and economic value of equity of immediate +/- 100, +/- 200, and +/- 300 basis point changes in interest rates, assuming the interest rate changes occurred on December 31, 2009. Actual results could differ from these estimates.
|
Estimated
% Change
in Net Interest Income (over 12 months following change) |
Estimated
% Change
in Economic Value of Equity (immediately following change) |
|||
|
Basis
point change:
|
||||
|
+
300
|
17.2%
|
(10.7%)
|
||
|
+
200
|
8.2%
|
(9.3%)
|
||
|
+
100
|
0.2%
|
(6.5%)
|
||
|
No
rate change
|
–
|
–
|
||
|
–
100
|
(0.7%)
|
5.0%
|
||
|
–
200
|
(4.9%)
|
13.5%
|
||
|
–
300
|
(9.3%)
|
27.7%
|
The table
below presents the Company’s ratio of cumulative rate sensitive assets to rate
sensitive liabilities (Gap Ratio) as of December 31, 2009. This ratio measures
an entity’s balance sheet sensitivity to repricing assets and liabilities. A
ratio over 1.0 indicates that an entity may be somewhat asset sensitive, and a
ratio under 1.0 indicates that an entity may be somewhat liability
sensitive.
|
Cumulative
Gap Ratio
|
||
|
1
year
|
1.28
|
|
|
2
years
|
1.26
|
|
|
3
years
|
0.95
|
|
|
4
years
|
0.99
|
|
|
5
years
|
1.00
|
|
|
Overall
|
1.13
|
CAPITAL BANK CORPORATION
CONSOLIDATED
BALANCE SHEETS
December
31, 2009 and 2008
|
December
31, 2009
|
December
31, 2008
|
||||||
|
(Dollars
in thousands except per share data)
|
|||||||
|
Assets
|
|||||||
|
Cash
and due from banks:
|
|||||||
|
Interest
earning
|
$
|
4,511
|
$
|
26,621
|
|||
|
Noninterest
earning
|
25,002
|
27,705
|
|||||
|
Federal
funds sold and short term investments
|
–
|
129
|
|||||
|
Total
cash and cash equivalents
|
29,513
|
54,455
|
|||||
|
Investment
securities:
|
|||||||
|
Investment
securities – available for sale, at fair value
|
235,426
|
266,656
|
|||||
|
Investment
securities – held to maturity, at amortized cost
|
3,676
|
5,194
|
|||||
|
Other
investments
|
6,390
|
6,288
|
|||||
|
Total
investment securities
|
245,492
|
278,138
|
|||||
|
Loans
– net of unearned income and deferred fees
|
1,390,302
|
1,254,368
|
|||||
|
Allowance
for loan losses
|
(26,081
|
)
|
(14,795
|
)
|
|||
|
Net
loans
|
1,364,221
|
1,239,573
|
|||||
|
Premises
and equipment, net
|
23,756
|
24,640
|
|||||
|
Bank-owned
life insurance
|
22,746
|
22,368
|
|||||
|
Deposit
premium, net
|
2,711
|
3,857
|
|||||
|
Deferred
income tax
|
12,096
|
9,342
|
|||||
|
Accrued
interest receivable
|
6,590
|
6,225
|
|||||
|
Other
assets
|
27,543
|
15,634
|
|||||
|
Total
assets
|
$
|
1,734,668
|
$
|
1,654,232
|
|||
|
Liabilities
|
|||||||
|
Deposits:
|
|||||||
|
Demand,
noninterest bearing
|
$
|
141,069
|
$
|
125,281
|
|||
|
Savings
and interest bearing checking
|
204,042
|
173,711
|
|||||
|
Money
market deposit accounts
|
184,146
|
212,780
|
|||||
|
Time
deposits less than $100,000
|
507,348
|
509,231
|
|||||
|
Time
deposits $100,000 and greater
|
341,360
|
294,311
|
|||||
|
Total
deposits
|
1,377,965
|
1,315,314
|
|||||
|
Repurchase
agreements and federal funds purchased
|
6,543
|
15,010
|
|||||
|
Borrowings
|
167,000
|
132,000
|
|||||
|
Subordinated
debentures
|
30,930
|
30,930
|
|||||
|
Other
liabilities
|
12,445
|
12,464
|
|||||
|
Total
liabilities
|
1,594,883
|
1,505,718
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Shareholders’
Equity
|
|||||||
|
Preferred
stock, $1,000 par value; 100,000 shares authorized; 41,279 shares issued
and outstanding (liquidation preference of $41,279)
|
40,127
|
39,839
|
|||||
|
Common
stock, no par value; 50,000,000 shares authorized; 11,348,117 and
11,238,085 shares issued and outstanding
|
139,909
|
139,209
|
|||||
|
Accumulated
deficit
|
(44,206
|
)
|
(31,420
|
)
|
|||
|
Accumulated
other comprehensive income
|
3,955
|
886
|
|||||
|
Total
shareholders’ equity
|
139,785
|
148,514
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
1,734,668
|
$
|
1,654,232
|
|||
The
accompanying notes are an integral part of these consolidated financial
statements.
CAPITAL BANK CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
For
the Years Ended December 31, 2009, 2008 and
2007
|
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands except per share data)
|
||||||||||
|
Interest
income:
|
||||||||||
|
Loans
and loan fees
|
$
|
70,178
|
$
|
72,494
|
$
|
82,066
|
||||
|
Investment
securities:
|
||||||||||
|
Taxable
interest income
|
9,849
|
8,935
|
7,731
|
|||||||
|
Tax-exempt
interest income
|
3,026
|
3,169
|
3,237
|
|||||||
|
Dividends
|
46
|
294
|
451
|
|||||||
|
Federal
funds and other interest income
|
42
|
128
|
1,052
|
|||||||
|
Total
interest income
|
83,141
|
85,020
|
94,537
|
|||||||
|
Interest
expense:
|
||||||||||
|
Deposits
|
28,037
|
33,042
|
39,700
|
|||||||
|
Borrowings
and repurchase agreements
|
6,226
|
9,382
|
10,723
|
|||||||
|
Total
interest expense
|
34,263
|
42,424
|
50,423
|
|||||||
|
Net
interest income
|
48,878
|
42,596
|
44,114
|
|||||||
|
Provision
for loan losses
|
23,064
|
3,876
|
3,606
|
|||||||
|
Net
interest income after provision for loan losses
|
25,814
|
38,720
|
40,508
|
|||||||
|
Noninterest
income:
|
||||||||||
|
Service
charges and other fees
|
3,883
|
4,545
|
3,907
|
|||||||
|
Bank
card services
|
1,539
|
1,332
|
1,064
|
|||||||
|
Mortgage
origination and other loan fees
|
1,935
|
2,148
|
2,536
|
|||||||
|
Brokerage
fees
|
698
|
732
|
601
|
|||||||
|
Bank-owned
life insurance
|
1,830
|
952
|
841
|
|||||||
|
Gain
on sale of branch
|
–
|
374
|
–
|
|||||||
|
Net
gain (loss) on investment securities
|
103
|
249
|
(49
|
)
|
||||||
|
Total
other-than-temporary impairment losses
|
(1,082
|
)
|
–
|
–
|
||||||
|
Portion
of impairment losses recognized in other comprehensive
loss
|
584
|
–
|
–
|
|||||||
|
Net
impairment losses recognized in earnings
|
(498
|
)
|
–
|
–
|
||||||
|
Other
|
27
|
669
|
240
|
|||||||
|
Total
noninterest income
|
9,517
|
11,001
|
9,140
|
|||||||
|
Noninterest
expense:
|
||||||||||
|
Salaries
and employee benefits
|
22,112
|
20,951
|
19,416
|
|||||||
|
Occupancy
|
5,630
|
4,458
|
4,897
|
|||||||
|
Furniture
and equipment
|
3,155
|
3,135
|
2,859
|
|||||||
|
Data
processing and telecommunications
|
2,317
|
2,135
|
1,637
|
|||||||
|
Advertising
and public relations
|
1,610
|
1,515
|
1,442
|
|||||||
|
Office
expenses
|
1,383
|
1,317
|
1,389
|
|||||||
|
Professional
fees
|
1,488
|
1,479
|
1,289
|
|||||||
|
Business
development and travel
|
1,244
|
1,393
|
1,217
|
|||||||
|
Amortization
of deposit premiums
|
1,146
|
1,037
|
1,198
|
|||||||
|
Miscellaneous
loan handling costs
|
1,356
|
848
|
743
|
|||||||
|
Directors
fees
|
1,418
|
1,044
|
683
|
|||||||
|
FDIC
deposit insurance
|
2,721
|
685
|
270
|
|||||||
|
Goodwill
impairment charge
|
–
|
65,191
|
–
|
|||||||
|
Other
|
3,580
|
1,424
|
1,626
|
|||||||
|
Total
noninterest expense
|
49,160
|
106,612
|
38,666
|
|||||||
|
Net
(loss) income before tax (benefit) expense
|
(13,829
|
)
|
(56,891
|
)
|
10,982
|
|||||
|
Income
tax (benefit) expense
|
(7,013
|
)
|
(1,207
|
)
|
3,124
|
|||||
|
Net
(loss) income
|
$
|
(6,816
|
)
|
$
|
(55,684
|
)
|
$
|
7,858
|
||
|
Dividends
and accretion on preferred stock
|
2,352
|
124
|
–
|
|||||||
|
Net
(loss) income attributable to common shareholders
|
$
|
(9,168
|
)
|
$
|
(55,808
|
)
|
$
|
7,858
|
||
|
Earnings
(loss) per common share – basic
|
$
|
(0.80
|
)
|
$
|
(4.94
|
)
|
$
|
0.69
|
||
|
Earnings
(loss) per common share – diluted
|
$
|
(0.80
|
)
|
$
|
(4.94
|
)
|
$
|
0.68
|
||
The accompanying notes are an integral
part of these consolidated financial statements.
CAPITAL BANK CORPORATION
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND
COMPREHENSIVE INCOME (LOSS)
For
the Years Ended December 31, 2009, 2008 and 2007
|
Preferred
Stock
|
Common
Stock
|
Other
Comprehensive
|
Retained
Earnings
|
||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
(Loss)
Income
|
(Deficit)
|
Total
|
|||||||||||||||
|
(Dollars
in thousands except share data)
|
|||||||||||||||||||||
|
Balance
at January 1, 2007
|
–
|
$
|
–
|
11,393,990
|
$
|
139,484
|
$
|
(1,557
|
)
|
$
|
23,754
|
$
|
161,681
|
||||||||
|
Comprehensive
income:
|
|||||||||||||||||||||
|
Net
income
|
7,858
|
7,858
|
|||||||||||||||||||
|
Net
unrealized gain on investment securities, net of tax of
$407
|
649
|
649
|
|||||||||||||||||||
|
Net
unrealized gain related to cash flow hedge, net of tax of
$752
|
1,069
|
1,069
|
|||||||||||||||||||
|
Total
comprehensive income
|
9,576
|
||||||||||||||||||||
|
Repurchase
of outstanding common stock
|
(303,082
|
)
|
(4,523
|
)
|
(4,523
|
)
|
|||||||||||||||
|
Issuance
of common stock for options exercised
|
46,540
|
674
|
674
|
||||||||||||||||||
|
Stock
option expense
|
21
|
21
|
|||||||||||||||||||
|
Directors’
deferred compensation
|
32,329
|
498
|
498
|
||||||||||||||||||
|
Dividends
on common stock ($0.32 per share)
|
(3,627
|
)
|
(3,627
|
)
|
|||||||||||||||||
|
Balance
at December 31, 2007
|
–
|
$
|
–
|
11,169,777
|
$
|
136,154
|
$
|
161
|
$
|
27,985
|
$
|
164,300
|
|||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||||
|
Net
loss
|
(55,684
|
)
|
(55,684
|
)
|
|||||||||||||||||
|
Net
unrealized loss on investment securities, net of tax benefit of
$9
|
(13
|
)
|
(13
|
)
|
|||||||||||||||||
|
Net
unrealized gain related to cash flow hedge, net of tax of
$464
|
738
|
738
|
|||||||||||||||||||
|
Total
comprehensive loss
|
(54,959
|
)
|
|||||||||||||||||||
|
Issuance
of preferred stock with warrants, net of issuance costs
|
41,279
|
39,827
|
1,333
|
41,160
|
|||||||||||||||||
|
Accretion
of preferred stock discount
|
12
|
(12
|
)
|
–
|
|||||||||||||||||
|
Repurchase
of outstanding common stock
|
(10,166
|
)
|
(92
|
)
|
(92
|
)
|
|||||||||||||||
|
Issuance
of common stock for options exercised
|
26,591
|
206
|
206
|
||||||||||||||||||
|
Restricted
stock awards
|
24,000
|
288
|
288
|
||||||||||||||||||
|
Stock
option expense
|
32
|
32
|
|||||||||||||||||||
|
Modification
of directors’ deferred compensation plan
|
943
|
943
|
|||||||||||||||||||
|
Directors’
deferred compensation
|
27,883
|
345
|
345
|
||||||||||||||||||
|
Dividends
on preferred stock
|
(112
|
)
|
(112
|
)
|
|||||||||||||||||
|
Dividends
on common stock ($0.32 per share)
|
(3,597
|
)
|
(3,597
|
)
|
|||||||||||||||||
|
Balance
at December 31, 2008
|
41,279
|
$
|
39,839
|
11,238,085
|
$
|
139,209
|
$
|
886
|
$
|
(31,420
|
)
|
$
|
148,514
|
||||||||
|
Comprehensive
loss:
|
|||||||||||||||||||||
|
Net
loss
|
(6,816
|
)
|
(6,816
|
)
|
|||||||||||||||||
|
Net
unrealized gain on investment securities, net of tax of
$3,169
|
5,051
|
5,051
|
|||||||||||||||||||
|
Net
unrealized loss related to cash flow hedge, net of tax benefit of
$1,215
|
(1,936
|
)
|
(1,936
|
)
|
|||||||||||||||||
|
Prior
service cost recognized on SERP, net of amortization
|
(46
|
)
|
(46
|
)
|
|||||||||||||||||
|
Total
comprehensive loss
|
(3,747
|
)
|
|||||||||||||||||||
|
Accretion
of preferred stock discount
|
288
|
(288
|
)
|
–
|
|||||||||||||||||
|
Restricted
stock awards
|
16,692
|
107
|
107
|
||||||||||||||||||
|
Stock
option expense
|
50
|
50
|
|||||||||||||||||||
|
Directors’
deferred compensation
|
93,340
|
543
|
543
|
||||||||||||||||||
|
Dividends
on preferred stock
|
(2,064
|
)
|
(2,064
|
)
|
|||||||||||||||||
|
Dividends
on common stock ($0.32 per share)
|
(3,618
|
)
|
(3,618
|
)
|
|||||||||||||||||
|
Balance
at December 31, 2009
|
41,279
|
$
|
40,127
|
11,348,117
|
$
|
139,909
|
$
|
3,955
|
$
|
(44,206
|
)
|
$
|
139,785
|
||||||||
The accompanying notes are an integral
part of these consolidated financial statements.
CAPITAL BANK CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2009, 2008 and 2007
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
(loss) income
|
$
|
(6,816
|
)
|
$
|
(55,684
|
)
|
$
|
7,858
|
||
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities:
|
||||||||||
|
Provision
for loan losses
|
23,064
|
3,876
|
3,606
|
|||||||
|
Loss
on repurchase of mortgages
|
361
|
–
|
–
|
|||||||
|
Amortization
of deposit premium
|
1,146
|
1,037
|
1,198
|
|||||||
|
Depreciation
|
2,893
|
2,639
|
3,020
|
|||||||
|
Goodwill
impairment charge
|
–
|
65,191
|
–
|
|||||||
|
Stock-based
compensation
|
702
|
477
|
58
|
|||||||
|
Net
(gain) loss on investment securities
|
(103
|
)
|
(249
|
)
|
49
|
|||||
|
Other-than-temporary
impairment of investment securities
|
498
|
–
|
–
|
|||||||
|
Net
amortization of premium/discount on investment securities
|
180
|
80
|
80
|
|||||||
|
Loss
(gain) on disposal of premises, equipment and other real
estate
|
88
|
81
|
244
|
|||||||
|
Loss
on write-down of other real estate
|
217
|
–
|
–
|
|||||||
|
Deferred
income tax (benefit) expense
|
(4,708
|
)
|
(3,715
|
)
|
(1,091
|
)
|
||||
|
Gain
on sale of branch
|
–
|
(374
|
)
|
–
|
||||||
|
Funding
of loans held-for-sale
|
–
|
–
|
(106,640
|
)
|
||||||
|
Proceeds
from sale of loans held-for-sale
|
–
|
–
|
113,913
|
|||||||
|
Increase
in cash surrender value of bank-owned life insurance
|
(378
|
)
|
(779
|
)
|
(841
|
)
|
||||
|
Net
(increase) decrease in accrued interest receivable and other
assets
|
(6,042
|
)
|
1,344
|
(737
|
)
|
|||||
|
Net
(decrease) increase in accrued interest payable and other
liabilities
|
(220
|
)
|
(1,553
|
)
|
1,415
|
|||||
|
Net
cash provided by operating activities
|
10,882
|
12,371
|
22,132
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Loan
originations, net of principal repayments
|
(162,132
|
)
|
(124,503
|
)
|
(97,005
|
)
|
||||
|
Additions
to premises and equipment
|
(3,326
|
)
|
(4,750
|
)
|
(3,857
|
)
|
||||
|
Proceeds
from sales of premises, equipment and other real estate
|
5,686
|
7,693
|
(387
|
)
|
||||||
|
Net
cash paid in branch sale
|
–
|
(7,757
|
)
|
–
|
||||||
|
Net
cash received in business combination
|
–
|
50,573
|
–
|
|||||||
|
Net
(purchases) sales of FHLB and Silverton Bank stock
|
(20
|
)
|
1,272
|
296
|
||||||
|
Purchase
of securities – available for sale
|
(31,842
|
)
|
(91,243
|
)
|
(110,973
|
)
|
||||
|
Proceeds
from principal repayments/calls/maturities of securities – available for
sale
|
70,650
|
66,272
|
90,733
|
|||||||
|
Proceeds
from principal repayments/calls/maturities of securities – held to
maturity
|
1,503
|
4,824
|
802
|
|||||||
|
Net
cash used in investing activities
|
(119,481
|
)
|
(97,619
|
)
|
(120,391
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
increase in deposits
|
62,651
|
125,134
|
43,308
|
|||||||
|
Net
(decrease) increase in repurchase agreements
|
(8,467
|
)
|
(24,890
|
)
|
5,662
|
|||||
|
Proceeds
from borrowings
|
183,000
|
302,600
|
50,000
|
|||||||
|
Principal
repayments of borrowings
|
(148,000
|
)
|
(335,600
|
)
|
(13,000
|
)
|
||||
|
Net
(repayments) proceeds of federal funds borrowed
|
–
|
(5,395
|
)
|
5,395
|
||||||
|
Dividends
paid
|
(5,527
|
)
|
(3,592
|
)
|
(3,417
|
)
|
||||
|
Issuance
of preferred stock, net of issuance costs
|
–
|
41,160
|
–
|
|||||||
|
Issuance
of common stock for options exercised, including related tax
benefits
|
–
|
206
|
674
|
|||||||
|
Repurchase
of common stock
|
–
|
(92
|
)
|
(4,523
|
)
|
|||||
|
Net
cash provided by financing activities
|
83,657
|
99,531
|
84,099
|
|||||||
|
(continued
on next page)
|
||||||||||
CAPITAL
BANK CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
For
the Years Ended December 31, 2009, 2008 and 2007
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Net
change in cash and cash equivalents
|
$
|
(24,942
|
)
|
$
|
14,283
|
$
|
(14,160
|
)
|
||
|
Cash
and cash equivalents at beginning of period
|
54,455
|
40,172
|
54,332
|
|||||||
|
Cash
and cash equivalents at end of period
|
$
|
29,513
|
$
|
54,455
|
$
|
40,172
|
||||
|
Supplemental
Disclosure of Cash Flow Information
|
||||||||||
|
Transfers
of loans and premises to other real estate
|
$
|
15,356
|
$
|
2,645
|
$
|
2,862
|
||||
|
Cash
(received) paid for:
|
||||||||||
|
Income
taxes
|
$
|
(4,521
|
)
|
$
|
2,815
|
$
|
6,443
|
|||
|
Interest
|
$
|
35,364
|
$
|
41,983
|
$
|
50,223
|
||||
The
accompanying notes are an integral part of these consolidated financial
statements.
1. Summary
of Significant Accounting Policies
Organization
and Nature of Operations
Capital
Bank Corporation (the “Company”) is a financial holding company incorporated
under the laws of North Carolina on August 10, 1998. The Company’s primary
wholly-owned subsidiary is Capital Bank (the “Bank”), a state-chartered banking
corporation that was incorporated under the laws of North Carolina on May 30,
1997 and commenced operations on June 20, 1997. In addition, the Company has
interest in three trusts, Capital Bank Statutory Trust I, II, and III
(hereinafter collectively referred to as the “Trusts”).
The Bank
is a community bank engaged in general commercial banking, providing a full
range of banking services. The majority of the Bank’s customers are individuals
and small- to medium-size businesses. The Bank’s primary source of revenue is
interest earned from loans to customers, interest earned from invested cash and
securities, and noninterest income derived from various fees. The Bank operates
throughout North Carolina with 32 banking offices in Asheville (4), Burlington
(3), Cary (2), Clayton, Fayetteville (4), Graham, Hickory, Holly Springs,
Mebane, Morrisville, Oxford, Pittsboro, Raleigh (5), Sanford (3), Siler City,
Wake Forest and Zebulon. The Company’s corporate headquarters is located at 333
Fayetteville Street in Raleigh, North Carolina.
The
Trusts were formed for the sole purpose of issuing trust preferred securities
and are not consolidated with the financial statements of the Company. The
proceeds from such issuances were loaned to the Company in exchange for the
subordinated debentures, which are the sole assets of the Trusts. A portion of
the proceeds from the issuance of the subordinated debentures were used by the
Company to repurchase shares of Company common stock. The Company’s obligation
under the subordinated debentures constitutes a full and unconditional guarantee
by the Company of the Trust’s obligations under the trust preferred securities.
The Trusts have no operations other than those that are incidental to the
issuance of the trust preferred securities (see Note 9, Subordinated
Debentures).
Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. Assets held by the Company
in trust are not assets of the Company and are not included in the consolidated
financial statements.
Use
of Estimates in the Preparation of Financial Statements
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States (“U.S. GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, and disclosure of contingent assets and liabilities, at
the date of the consolidated financial statements, and the reported amounts of
revenues and expenses during the reporting period. The more significant
estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses, other-than-temporary impairment
on investment securities, income tax valuation allowances, and impairment of
long-lived assets. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
Cash and
cash equivalents include demand and time deposits (with original maturities of
90 days or less) at other institutions, federal funds sold and other short-term
investments. Generally, federal funds are purchased and sold for one-day
periods. At times, the Company places deposits with high credit quality
financial institutions in amounts, which may be in excess of federally insured
limits. Depository institutions are required to maintain reserve and clearing
balances with the Federal Reserve Bank (“FRB”). Accordingly, the Company has
amounts restricted for this purpose of $6.1 million and $4.7 million included in
cash and due from banks on the consolidated balance sheet as of December 31,
2009 and 2008, respectively.
Investment
Securities
Investments
in certain securities are classified into three categories and accounted for as
follows:
|
•
|
Held
to Maturity – Debt securities that the institution has the positive intent
and ability to hold to maturity are classified as held to maturity and
reported at amortized cost; or
|
|
|
•
|
Trading
Securities – Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
trading securities and reported at fair value, with unrealized gains and
losses included in earnings; or
|
|
|
•
|
Available
for Sale – Debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified as
available-for-sale securities and reported at fair value, with unrealized
gains and losses reported as other comprehensive income, a separate
component of shareholders’ equity.
|
The
initial classification of securities is determined at the date of purchase.
Gains and losses on sales of investment securities, computed based on specific
identification of the adjusted cost of each security, are included in
noninterest income at the time of the sales. Premiums and discounts on debt
securities are recognized in interest income using the level interest yield
method over the period to maturity, or when the debt securities are
called.
At each
reporting date, the Company evaluates each held to maturity and available for
sale investment security in a loss position for other-than-temporary impairment.
The review includes an analysis of the facts and circumstances of each
individual investment such as (1) the length of time and the extent to which the
fair value has been below cost, (2) changes in the earnings performance, credit
rating, asset quality, or business prospects of the issuer, (3) the ability of
the issuer to make principal and interest payments, (4) changes in the
regulatory, economic, or technological environment of the issuer, and (5)
changes in the general market condition of either the geographic area or
industry in which the issuer operates.
Regardless
of these factors, if the Company has developed a plan to sell the security or it
is likely that the Company will be forced to sell the security in the near
future, then the impairment is considered other-than-temporary and the carrying
value of the security is permanently written down to the current fair value with
the difference between the new carrying value and the amortized cost charged to
earnings. If the Company does not intend to sell the security and it is not more
likely than not that the Company will be required to sell the security before
recovery of its amortized cost basis less any current period credit loss, the
other-than-temporary impairment is separated into the following: (1) the amount
representing the credit loss and (2) the amount related to all other factors.
The amount of the total other-than-temporary impairment related to the credit
loss is recognized in earnings, and the amount of the total other-than-temporary
impairment related to other factors is recognized in other comprehensive income,
net of applicable taxes.
Other
investments primarily include Federal Home Loan Bank of Atlanta (“FHLB”) stock,
which does not have a readily determinable fair value because its ownership is
restricted and lacks a market for trading. This investment is carried at cost
and is periodically evaluated for impairment.
Loans
Loans are
stated at the amount of unpaid principal, net of any unearned income,
charge-offs, net deferred loan origination fees and costs, and unamortized
premiums or discounts. Interest on loans is calculated by using the simple
interest method on daily balances
of the
principal amount outstanding. Deferred loan fees and costs are amortized to
interest income over the contractual life of the loan using the level interest
yield method.
Nonperforming
Assets
Loans are
generally classified as nonaccrual if they are past due as to maturity or
payment of principal or interest for a period of more than 90 days, unless such
loans are well secured and in the process of collection. If a loan or a portion
of a loan is classified as doubtful or as partially charged off, the loan is
generally classified as nonaccrual. Loans that are on a current payment status
or past due less than 90 days may also be classified as nonaccrual if repayment
in full of principal and/or interest is in doubt. Loans may be returned to
accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance of
interest and principal by the borrower in accordance with the contractual
terms.
While a
loan is classified as nonaccrual and the future collectability of the recorded
loan balance is doubtful, collections of interest and principal are generally
applied as a reduction to the principal outstanding, except in the case of loans
with scheduled amortizations where the payment is generally applied to the
oldest payment due. When the future collectability of the recorded loan balance
is expected, interest income may be recognized on a cash basis. In the case
where a nonaccrual loan had been partially charged off, recognition of interest
on a cash basis is limited to that which would have been recognized on the
recorded loan balance at the contractual interest rate. Receipts in excess of
that amount are recorded as recoveries to the allowance for loan losses until
prior charge-offs have been fully recovered.
Assets
acquired as a result of foreclosure are recorded at estimated fair value in
other real estate. Any excess of cost over estimated fair value at the time of
foreclosure is charged to the allowance for loan losses. Valuations are
periodically performed on these properties, and any subsequent write-downs are
charged against other noninterest income. Routine maintenance and other holding
costs are included in noninterest expense. As of December 31, 2009 and 2008,
there were $10.7 million and $1.3 million, respectively, of foreclosed
properties and other real estate included in other assets on the Consolidated
Balance Sheets.
Allowance
for Loan Losses
The
allowance for loan losses is established through a provision for loan losses
charged to expense. Loans are charged against the allowance for loan losses when
management believes that the collectability of principal is unlikely. Subsequent
recoveries, if any, are credited to the allowance. The allowance for loan losses
represents management’s best estimate of probable credit losses that are
inherent in the loan portfolio at the balance sheet date and is determined by
management through quarterly evaluations of the loan portfolio.
The
allowance calculation consists of specific and general reserves. Specific
reserves are applied to individually impaired loans. A loan is considered
impaired, based on current information and events, if it is probable that the
Company will be unable to collect the scheduled payments of principal and
interest when due according to the contractual terms of the loan agreement.
Specific reserves on impaired loans that are collateral-dependent are based on
the fair value of the underlying collateral while specific reserves on loans
that are not collateral-dependent are based on either an observable market
price, if available, or the present value of expected future cash flows
discounted at the historical effective interest rate. Management evaluates loans
that are classified as doubtful, substandard or special mention to determine
whether or not they are impaired. This evaluation includes several factors,
including review of the loan payment status and the borrower’s financial
condition and operating results such as cash flows, operating income or loss,
etc. General reserves are determined by applying loss percentages to pools of
loans that are grouped according to loan type and internal risk ratings. Loss
percentages are based on the Company’s historical loss experience in each pool
and management’s consideration of environmental factors such as changes in
economic conditions, credit quality trends, collateral values, concentrations of
credit risk, and loan review as well as regulatory exam findings.
The
evaluation of the allowance for loan losses is inherently subjective, and
management uses the best information available to establish this estimate.
However, if factors such as economic conditions differ substantially from
assumptions, or if amounts and timing of future cash flows expected to be
received on impaired loans vary substantially from the estimates, future
adjustments to the allowance for loan losses may be necessary. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company’s allowance for loan losses. Such agencies may
require the Company to recognize additions to the allowance for loan losses
based on their judgments about all relevant information available to them at the
time of their examination. Any adjustments to original estimates are made in the
period in which the factors and other considerations indicate that adjustments
to the allowance for loan losses are necessary.
Loans
classified as impaired totaled $77.3 million and $13.7 million as of December
31, 2009 and 2008, respectively. As of December 31, 2009 and 2008, the allowance
for loan losses totaled $6.1 million and $0.9 million, respectively, for these
impaired loans.
Bank-Owned
Life Insurance
The
Company has purchased life insurance policies on certain key employees and
directors. These policies are recorded in other assets at their cash surrender
value, or the amount that can be realized. Income from these policies and
changes in the net cash surrender value are recorded in noninterest
income.
Premises
and Equipment
Premises
and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed by the straight-line method based on
estimated service lives of assets. Useful lives range from 3 to 10 years for
furniture and equipment, and 10 to 40 years for buildings. The cost of leasehold
improvements is being amortized using the straight-line method over the terms of
the related leases. Repairs and maintenance are charged to expense as incurred.
Upon disposition, the asset and related accumulated depreciation and/or
amortization are relieved, and any gains or losses are reflected in
earnings.
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. An impairment loss is
recognized if the sum of the undiscounted future cash flows is less than the
carrying amount of the asset. Assets to be disposed of are transferred to other
real estate owned and are reported at the lower of the carrying amount or fair
value less costs to sell.
Goodwill
and Other Intangible Assets
Goodwill
represents the cost in excess of the fair value of net assets acquired
(including identifiable intangibles) in transactions accounted for as business
combinations. Goodwill has an indefinite useful life and is evaluated for
impairment annually, or more frequently if events and circumstances indicate
that the asset might be impaired. An impairment loss is recognized to the extent
that the carrying amount exceeds the asset’s fair value. The goodwill impairment
analysis is a two-step test. The first, used to identify potential impairment,
involves comparing each reporting unit’s estimated fair value to its carrying
value, including goodwill. If the estimated fair value of a reporting unit
exceeds its carrying value, goodwill is considered not to be impaired. If the
carrying value exceeds estimated fair value, there is an indication of potential
impairment and the second step is performed to measure the amount of
impairment.
If
required, the second step involves calculating an implied fair value of goodwill
for each reporting unit for which the first step indicated impairment. The
implied fair value of goodwill is determined in a manner similar to the amount
of goodwill calculated in a business combination, by measuring the excess of the
estimated fair value of the reporting unit, as determined in the first step,
over the aggregate estimated fair values of the individual assets, liabilities
and identifiable intangibles as if the reporting unit was being acquired in a
business combination. If the implied fair value of goodwill exceeds the carrying
value of goodwill assigned to the reporting unit, there is no impairment. If the
carrying value of goodwill assigned to a reporting unit exceeds the implied fair
value of the goodwill, an impairment charge is recorded for the excess. The
Company’s annual goodwill impairment evaluation in 2008 resulted in a goodwill
impairment charge of $65.2 million which was recorded to noninterest expense for
the year ended December 31, 2008. This impairment charge, representing the full
amount of goodwill on the consolidated balance sheet, was primarily due to a
significant decline in the market value of the Company’s common stock during
2008 to below tangible book value for an extended period of time.
Other
intangible assets include premiums paid for acquisitions of core deposits and
other identifiable intangible assets. Intangible assets other than goodwill,
which are determined to have finite lives, are amortized based upon the
estimated economic benefits received.
Income
Taxes
Deferred
tax asset and liability balances are determined by application to temporary
differences of the tax rate expected to be in effect when taxes will become
payable or receivable. Temporary differences are differences between the tax
basis of assets and liabilities and their reported amounts in the consolidated
financial statements that will result in taxable or deductible amounts in future
years. The effect of a change in tax rates on deferred taxes is recognized in
income in the period that includes the enactment date. A valuation allowance is
recorded for deferred tax assets if the Company determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.
A tax
position is recognized as a benefit only if it is more likely than not that the
tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax
benefit that is greater than 50% likely of being realized on examination. For
tax positions not meeting the “more likely than not” test, no tax benefit is
recorded. The Company had no tax benefits determined to be uncertain tax
positions, and therefore disallowed, as of December 31, 2009 and
2008.
Derivative
Instruments
The
Company uses derivative instruments to manage and mitigate interest rate risk,
to facilitate asset and liability management strategies, and to manage other
risk exposures. A derivative is a financial instrument that derives its cash
flows, and therefore its value, by reference to an underlying instrument, index,
or referenced interest rate. The only type of derivative instrument the Company
has utilized in the past has been interest rate swaps.
Derivatives
are recorded on the consolidated balance sheet at fair value. For fair value
hedges, the change in the fair value of the derivative and the corresponding
change in fair value of the hedged risk in the underlying item being hedged are
accounted for in earnings. Any difference in these two changes in fair value
results in hedge ineffectiveness that results in a net impact to earnings. For cash flow hedges, changes in the fair value of the
derivative are, to the extent that the hedging relationship is effective,
recorded as other comprehensive income and subsequently recognized in earnings
at the same time that the hedged item is recognized in earnings. Any portion of
a hedge that is ineffective is recognized immediately as other noninterest
income or expense.
Derivative
contracts are written in amounts referred to as notional amounts. Notional
amounts only provide the basis for calculating payments between counterparties
and do not represent amounts to be exchanged between parties and are not a
measure of financial risk. Like other financial
instruments, derivatives contain an element of credit risk, which is the
possibility that the Company will incur a loss because a counterparty fails to
meet its contractual obligations. Potential credit losses are minimized through
careful evaluation of counterparty credit standing, selection of counterparties
from a limited group of high quality institutions, and other contract
provisions.
Advertising
Costs
The
Company expenses advertising costs as they are incurred and advertising
communications costs the first time the advertising takes place. The Company may
establish accruals for committed advertising costs as incurred within the course
of a current year.
Stock-Based
Compensation
Compensation
cost is recognized for stock options and restricted stock awards issued to
employees in addition to stock issued through a deferred compensation plan for
non-employee directors. Compensation cost is measured as the fair value of these
awards on their date of grant. A Black-Scholes option pricing model is utilized
to estimate the fair value of stock options, while the market price of the
Company’s common stock at the date of grant is used as the fair value of
restricted stock awards. Compensation cost is recognized over the required
service period, generally defined as the vesting period for stock options awards
and as the restriction period for restricted stock awards.
Option
pricing models require the use of highly subjective assumptions, including
expected stock volatility, which if changed can materially affect fair value
estimates. The expected life of options used in the option pricing model is the
period the options are expected to remain outstanding. Expected stock price
volatility is based on the historical volatility of the Company’s common stock
for a period approximating the expected life of the option, the expected
dividend yield is based on the Company’s historical annual dividend payout, and
the risk-free rate is based on the implied yield available on U.S. Treasury
issues.
Fair
Value Measurements
Fair
value is defined as the exchange price that would be received to sell an asset
or paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants on
the measurement date. The Company follows the fair value hierarchy which gives
the highest priority to quoted prices in active markets (observable inputs) and
the lowest priority to the management’s assumptions (unobservable inputs). For
assets and liabilities recorded at fair value, the Company’s policy is to
maximize the use of observable inputs and minimize the use of unobservable
inputs when developing fair value measurements.
The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Available-for-sale investment securities and derivatives are recorded at fair
value on a recurring basis. Additionally, the Company may be required to record
at fair value other assets on a nonrecurring basis, such as loans held for sale,
impaired loans and certain other assets. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting
or write-downs of individual assets.
The
Company groups assets and liabilities at fair value in three levels, based on
the markets in which the assets and liabilities are traded and the reliability
of the assumptions used to determine fair value. An adjustment to the pricing
method used within either Level 1 or Level 2 inputs could generate a fair value
measurement that effectively falls to a lower level in the hierarchy. These
levels are described as follows:
|
•
|
Level
1 – Valuations for assets and liabilities traded in active exchange
markets, such as the New York Stock Exchange.
|
|
|
•
|
Level
2 – Valuations for assets and liabilities that can be obtained from
readily available pricing sources via independent providers for market
transactions involving similar assets or liabilities. The Company’s
principal market for these securities is the secondary institutional
markets, and valuations are based on observable market data in those
markets.
|
|
|
•
|
Level
3 – Valuations for assets and liabilities that are derived from other
valuation methodologies, including option pricing models, discounted cash
flow models and similar techniques, and not based on market exchange,
dealer, or broker traded transactions. Level 3 valuations incorporate
certain assumptions and projections in determining the fair value assigned
to such assets or liabilities.
|
The
determination of where an asset or liability falls in the fair value hierarchy
requires significant judgment. The Company evaluates its hierarchy disclosures
at each reporting period and based on various factors, it is possible that an
asset or liability may be classified differently from quarter to quarter.
However, the Company expects changes in classifications between levels will be
rare.
Earnings
per Share
Basic earnings per share (“EPS”) excludes dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS assumes
the conversion, exercise or issuance of all potential common stock instruments,
such as stock options and warrants, unless the effect is to reduce a loss or
increase earnings. Basic EPS is adjusted for outstanding stock options and
warrants using the treasury stock method in order to compute diluted EPS.
Weighted average shares outstanding for 2009, 2008 and 2007 were as
follows:
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands except share data)
|
||||||||||
|
Earnings
(loss) attributable to common shareholders
|
$
|
(9,168
|
)
|
$
|
(55,808
|
)
|
$
|
7,858
|
||
|
Shares
used in the computation of earnings per share:
|
||||||||||
|
Weighted
average number of shares outstanding – basic
|
11,470,314
|
11,302,769
|
11,424,171
|
|||||||
|
Incremental
shares from assumed exercise of stock options
|
–
|
–
|
68,557
|
|||||||
|
Weighted
average number of shares outstanding – diluted
|
11,470,314
|
11,302,769
|
11,492,728
|
|||||||
Due to
the net loss attributable to common shareholders for the years ended December
31, 2009 and 2008, the Company excluded potential shares from its EPS
calculations since the effect of including those potential shares would have
been antidilutive to the per share amounts. For the year ended December 31,
2007, options to purchase 203,924 shares of common stock were used in the
diluted calculation, and options to purchase 180,151 shares of common stock were
excluded from the diluted calculation because the option price exceeded the
average fair market value of the associated shares of common stock.
Comprehensive
Income (Loss)
Comprehensive
income (loss) represents the change in the Company’s equity during the period
from transactions and other events and circumstances from non-owner sources.
Total comprehensive income (loss) consists of net income (loss) and other
comprehensive income (loss). The Company’s other comprehensive income (loss) and
accumulated other comprehensive income (loss) are comprised of unrealized gains
and losses on certain investments in debt securities and derivatives that
qualify as cash flow hedges to the extent that the hedge is effective.
Information concerning the Company’s other comprehensive income (loss) for the
years ended December 31, 2009, 2008 and 2007 is as follows:
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Unrealized
gains (losses) on available-for-sale investment securities
|
$
|
8,220
|
$
|
(22
|
)
|
$
|
1,056
|
|||
|
Unrealized
(loss) gain on change in fair value of cash flow hedge
|
(3,151
|
)
|
1,202
|
1,821
|
||||||
|
Prior
service cost recognized on SERP, net of amortization
|
(46
|
)
|
–
|
–
|
||||||
|
Income
tax expense
|
(1,954
|
)
|
(455
|
)
|
(1,159
|
)
|
||||
|
Other
comprehensive income
|
$
|
3,069
|
$
|
725
|
$
|
1,718
|
||||
Segment
Information
Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company has determined that it has one significant operating
segment, which is the providing of general commercial financial services to
individuals and businesses primarily located in North Carolina. The Company’s
various products and services are those generally offered by community banks,
and the allocation of its resources is based on the overall performance of the
institution versus individual regions, branches or products and
services.
Reclassifications
Certain
amounts previously reported have been reclassified to conform to the current
year’s presentation. These reclassifications impacted certain noninterest income
and noninterest expense items as well as the breakout between interest earning
and noninterest earning cash and had no effect on total assets, net income, or
shareholders’ equity previously reported. The noninterest income and noninterest
expense reclassifications were made in an effort to classify certain items more
consistently with regulatory reporting requirements, and the cash
reclassification was made after the FRB began paying interest on required
reserves and excess balances late in 2008.
Current
Accounting Developments
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) 2010-06, Improving Disclosures about Fair
Value Measurements, to amend FASB Accounting Standards Codification
(“ASC”) Topic 820, Fair Value
Measurements and Disclosures. The amendments in this update require more
robust disclosures about (1) the different classes of assets and liabilities
measured at fair value, (2) the valuation techniques and inputs used, (3) the
activity in Level 3 fair value measurements, and (4) the transfers between
Levels 1, 2, and 3. The new disclosures and clarifications of existing
disclosures are effective for interim and annual reporting periods beginning
December 15, 2009, except for the disclosures about purchases, sales, issuances,
and settlements in the roll forward of activity in Level 3 fair value
measurements. Those disclosures are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Adoption
of the amendments in this update will have no impact on the Company’s financial
position or results of operations.
In
December 2009, the FASB issued ASU 2009-16, Accounting for Transfers of
Financial Assets, to amend ASC Topic 860, Transfers and Servicing, for
the issuance of FASB Statement No. 166, Accounting for Transfers of
Financial Assets—an amendment of FASB Statement No. 140. The amendments
in this update eliminate the exceptions for qualifying special-purpose entities
from the consolidation guidance and the exception that permitted sale accounting
for certain mortgage securitizations when a transferor has not surrendered
control over the transferred financial assets. In addition, the amendments
require enhanced disclosures about the risks that a transferor continues to be
exposed to because of its continuing involvement in transferred financial
assets. The amendments in this update are the result of FASB Statement No. 166
and are effective for annual reporting periods beginning after November 15, 2009
and interim and annual reporting periods thereafter. The Company is currently
evaluating the impact that adoption of the amendments in this update will have
on its consolidated financial statements.
In August
2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair
Value, to amend ASC Topic 820 to clarify how entities should estimate the
fair value of liabilities. The amendments to this update include clarifying
guidance for circumstances in which a quoted price in an active market is not
available, the effect of the existence of liability transfer restrictions, and
the effect of quoted prices for the identical liability, including when the
identical liability is traded as an asset. The amended guidance on measuring
liabilities at fair value is effective for the first interim or annual reporting
period beginning after August 28, 2009. The Company is currently evaluating
the impact that adoption of the amendments in this update will have on its
consolidated financial statements.
In June
2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No.
168, The
FASB
Accounting Standards Codification™ and
the Hierarchy of Generally Accepted Accounting Principles. This Statement
was incorporated into ASC Topic 105 and became the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the SEC under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. Adoption
of the Accounting Standards Codification had no impact on the Company’s
financial condition or results of operations.
In May
2009, the FASB issued SFAS No. 165, Subsequent Events. This
Statement was incorporated into ASC Topic 855 and establishes general standards
of accounting for and disclosure of events that occur after the balance sheet
date but before financial statements are issued or are available to be issued.
ASC Topic 855 became effective for the quarterly period ended June 30, 2009, and
adoption had no impact on the Company’s financial condition or results of
operations. In connection with the adoption of ASC Topic 855, the Company has
evaluated all subsequent events and has disclosed all material subsequent events
in Note 21 (Subsequent Events).
In April
2009, the FASB issued Staff Position (“FSP”) FAS 157-4, Determining Fair Value of a
Financial Asset When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not
Orderly. This FSP was incorporated into ASC Topic 820 and provides
additional guidance for estimating fair value when the volume and level of
activity for the asset or liability have significantly decreased and also
provides guidance on identifying circumstances that indicate a transaction is
not orderly. Provisions of this FSP incorporated into ASC Topic 820 became
effective for the quarterly period ended June 30, 2009, and adoption had no
impact on the Company’s financial condition or results of
operations.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP was incorporated into ASC
Topic 320 and amends the other-than-temporary impairment guidance in U.S. GAAP
for debt securities to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt and
equity securities in the financial statements. The FSP did not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. Provisions of this FSP incorporated into ASC Topic 320
became effective for the quarterly period ended June 30, 2009. See discussion of
the Company’s other-than-temporary impairment analysis and its impact on the
Company’s financial condition and results of operations in Note 3 (Investment
Securities).
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133. This Statement was incorporated into ASC Topic 815 and is intended
to improve financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial condition, financial
performance, and cash flows. Provisions of this Statement incorporated into ASC
Topic 815 became effective for the quarterly period ended March 31,
2009, and adoption had no impact on the Company’s financial condition or results
of operations. See Note 14 (Derivative Financial Instruments) for disclosures
required by these provisions of ASC Topic 815.
2. Mergers
and Acquisitions
On
December 12, 2008, the Company acquired the four Fayetteville, North Carolina,
area branches of Omni National Bank in a cash transaction. Omni National Bank
was the banking subsidiary of Omni Financial Services, Inc., before being closed
by the Office of the Comptroller of the Currency (“OCC”) on March 27, 2009. As a
result of this transaction, the Company assumed deposits and purchased selected
loans. In addition, the Company acquired the real estate assets and fixed
capital equipment associated with the four branches, plus two offsite ATMs. Upon
completion of the transaction, the Fayetteville-area branches began operating as
full-service Capital Bank branches.
As
required for business combinations accounted for under the purchase method, the
assets acquired and liabilities assumed were recorded at their respective fair
values as of the acquisition date. The Company recorded $5.4 million of goodwill
and a deposit premium of $1.3 million associated with this transaction. The
deposit premium was recorded based on its estimated fair value and is being
amortized over an estimated useful life of eight years using an accelerated
method. Because this business combination was a purchase of four branch offices,
which comprised the North Carolina operations of Omni National Bank, along with
certain loans and all existing deposit relationships, pro forma results have not
been included.
A summary
of estimated fair values of assets acquired and liabilities assumed is as
follows:
|
As
of
December 12, 2008 |
||||
|
(Dollars
in thousands)
|
||||
|
Loans,
net of allowance for loan losses
|
$
|
41,428
|
||
|
Premises
and equipment
|
3,445
|
|||
|
Deposit
premium
|
1,325
|
|||
|
Goodwill
|
5,415
|
|||
|
Other
assets
|
137
|
|||
|
Deposits
|
(101,924
|
)
|
||
|
Other
liabilities
|
(399
|
)
|
||
|
Net
cash received in transaction
|
$
|
(50,573
|
)
|
|
3. Investment
Securities
Investment
securities as of December 31, 2009 and 2008 are summarized as
follows:
|
Amortized
Cost |
Unrealized
Gains |
Unrealized
Losses |
Fair
Value |
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
December
31, 2009
|
|||||||||||||
|
Available
for sale:
|
|||||||||||||
|
U.S.
agency obligations
|
$
|
1,000
|
$
|
29
|
$
|
–
|
$
|
1,029
|
|||||
|
Municipal
bonds
|
72,556
|
1,006
|
668
|
72,894
|
|||||||||
|
Mortgage-backed
securities issued by GSEs
|
144,762
|
6,896
|
–
|
151,658
|
|||||||||
|
Non-agency
mortgage-backed securities
|
8,345
|
19
|
567
|
7,797
|
|||||||||
|
Other
securities
|
2,252
|
–
|
204
|
2,048
|
|||||||||
|
228,915
|
7,950
|
1,439
|
235,426
|
||||||||||
|
Held
to maturity:
|
|||||||||||||
|
Municipal
bonds
|
$
|
300
|
$
|
7
|
$
|
–
|
$
|
307
|
|||||
|
Mortgage-backed
securities issued by GSEs
|
1,576
|
84
|
–
|
1,660
|
|||||||||
|
Non-agency
mortgage-backed securities
|
1,800
|
–
|
145
|
1,655
|
|||||||||
|
3,676
|
91
|
145
|
3,622
|
||||||||||
|
Other
investments
|
6,390
|
–
|
–
|
6,390
|
|||||||||
|
Total
at December 31, 2009
|
$
|
238,981
|
$
|
8,041
|
$
|
1,584
|
$
|
245,438
|
|||||
|
December
31, 2008
|
|||||||||||||
|
Available
for sale:
|
|||||||||||||
|
U.S.
agency obligations
|
$
|
5,000
|
$
|
448
|
$
|
–
|
$
|
5,448
|
|||||
|
Municipal
bonds
|
75,489
|
38
|
5,097
|
70,430
|
|||||||||
|
Mortgage-backed
securities issued by GSEs
|
178,198
|
3,778
|
70
|
181,906
|
|||||||||
|
Non-agency
mortgage-backed securities
|
6,429
|
–
|
620
|
5,809
|
|||||||||
|
Other
securities
|
3,250
|
–
|
187
|
3,063
|
|||||||||
|
268,366
|
4,264
|
5,974
|
266,656
|
||||||||||
|
Held
to maturity:
|
|||||||||||||
|
Municipal
bonds
|
$
|
300
|
$
|
1
|
$
|
–
|
$
|
301
|
|||||
|
Mortgage-backed
securities issued by GSEs
|
2,103
|
54
|
–
|
2,157
|
|||||||||
|
Non-agency
mortgage-backed securities
|
2,791
|
–
|
564
|
2,227
|
|||||||||
|
5,194
|
55
|
564
|
4,685
|
||||||||||
|
Other
investments
|
6,288
|
–
|
–
|
6,288
|
|||||||||
|
Total
at December 31, 2008
|
$
|
279,848
|
$
|
4,319
|
$
|
6,538
|
$
|
277,629
|
|||||
The
following table summarizes the gross unrealized losses and fair value of the
Company’s investments in an unrealized loss position for which
other-than-temporary impairments have not been recognized in earnings,
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position, as of December 31, 2009 and
2008:
|
Less
than 12 Months
|
12
Months or Greater
|
Total
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
|
December
31, 2009
|
|||||||||||||||||||
|
Available
for sale:
|
|||||||||||||||||||
|
Municipal
bonds
|
$
|
21,194
|
$
|
448
|
$
|
2,382
|
$
|
220
|
$
|
23,576
|
$
|
668
|
|||||||
|
Non-agency
mortgage-backed securities
|
3,711
|
93
|
2,791
|
474
|
6,502
|
567
|
|||||||||||||
|
Other
securities
|
–
|
–
|
1,546
|
204
|
1,546
|
204
|
|||||||||||||
|
24,905
|
541
|
6,719
|
898
|
31,624
|
1,439
|
||||||||||||||
|
Held
to maturity:
|
|||||||||||||||||||
|
Non-agency
mortgage-backed securities
|
–
|
–
|
1,655
|
145
|
1,655
|
145
|
|||||||||||||
|
Total
at December 31, 2009
|
$
|
24,905
|
$
|
541
|
$
|
8,374
|
$
|
1,043
|
$
|
33,279
|
$
|
1,584
|
|||||||
|
Less
than 12 Months
|
12
Months or Greater
|
Total
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||
|
December
31, 2008
|
|||||||||||||||||||
|
Available
for sale:
|
|||||||||||||||||||
|
Municipal
bonds
|
$
|
57,368
|
$
|
4,425
|
$
|
5,717
|
$
|
672
|
$
|
63,085
|
$
|
5,097
|
|||||||
|
Mortgage-backed
securities issued by GSEs
|
2,357
|
24
|
929
|
46
|
3,286
|
70
|
|||||||||||||
|
Non-agency
mortgage-backed securities
|
1,763
|
32
|
4,047
|
588
|
5,810
|
620
|
|||||||||||||
|
Other
securities
|
–
|
–
|
1,063
|
187
|
1,063
|
187
|
|||||||||||||
|
61,488
|
4,481
|
11,756
|
1,493
|
73,244
|
5,974
|
||||||||||||||
|
Held
to maturity:
|
|||||||||||||||||||
|
Non-agency
mortgage-backed securities
|
291
|
9
|
1,936
|
555
|
2,227
|
564
|
|||||||||||||
|
Total
at December 31, 2008
|
$
|
61,779
|
$
|
4,490
|
$
|
13,692
|
$
|
2,048
|
$
|
75,471
|
$
|
6,538
|
|||||||
At each
quarterly reporting period, the Company makes an assessment to determine whether
there have been any events or economic circumstances to indicate that a
marketable security on which there is an unrealized loss is impaired on an
other-than-temporary basis. The Company considers many factors, including the
severity and duration of the impairment and recent events specific to the issuer
or industry, including any changes in credit ratings.
Based on
its assessment as of December 31, 2009, management determined that three of its
investment securities were other-than-temporarily impaired. The first of these
investments was a private label mortgage security with a book value and
unrealized loss of $810,000 and $381,000, respectively, as of December 31, 2009.
This impairment determination was based on the extent and duration of the
unrealized loss as well as a recent credit rating downgrade from one rating
agency to below investment grade. Based on its analysis of expected cash flows,
management expects to receive all contractual principal and interest from this
security and therefore did not consider any of the unrealized loss to represent
credit impairment. The second of these investments was subordinated debt of a
corporate financial institution with a book value and unrealized loss of $1.0
million and $203,000, respectively, as of December 31, 2009. This impairment
determination was based on the extent of the unrealized loss as well as adverse
economic and market conditions for community banks in general. Based on its
review of capital, liquidity and earnings of this institution, management
expects to receive all contractual principal and interest from this security and
therefore did not consider any of the unrealized loss to represent credit
impairment. Unrealized losses from these two investments were related to factors
other than credit and were recorded to other comprehensive income. The third
other-than-temporarily impaired investment was trust preferred securities of a
corporate financial institution with an original book value and unrealized loss
of $1.0 million and $498,000, respectively. Based on its financial review of
this institution and notice by the issuer of suspension of interest payments on
the securities, management determined the unrealized loss to represent credit
impairment and therefore charged the full amount of unrealized loss to
earnings.
The
securities in an unrealized loss position as of December 31, 2009 not determined
to be other-than-temporarily impaired are all still performing and are expected
to perform through maturity, and the issuers have not experienced significant
adverse events that would call into question their ability to repay these debt
obligations according to contractual terms. Further, because the Company does
not intend to sell these investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their
amortized cost bases, which may be maturity, the Company does not consider such
securities to be other-than-temporarily impaired as of December 31,
2009.
Other
investment securities primarily include an investment in FHLB stock, which has
no readily determinable market value and is recorded at cost. As of
December 31, 2009 and 2008, the Company’s investment in FHLB stock totaled
$6.0 million. The following factors have been evaluated and considered by
management in determining whether any impairment of FHLB stock has occurred: (1)
The Company currently has sufficient liquidity to meet all operational needs for
the foreseeable future and does not need to dispose of this stock below the
recorded amount; (2) Redemptions of FHLB stock occur at the discretion of the
FHLB, subject to outstanding borrowing levels, and totaled $225,000, at par,
during 2009; (3) Rating agencies have concluded that debt ratings are likely to
remain unchanged and the FHLB has the ability to absorb economic losses, given
the expectation that the various FHLBanks have a very high degree of government
support; (4) Unrealized losses related to securities owned by the FHLB are
manageable given its capital levels; (5) All of the FHLBanks are currently
meeting their debt obligations; and (6) The FHLB declared and paid second and
third quarter dividends on its stock in 2009.
Based on
the evaluation described above, management has concluded that the Company’s
investment in FHLB stock was not impaired as of December 31, 2009 and that
ultimate recoverability of the par value of this investment is probable. During
the year ended December 31, 2009, the Company recorded an investment loss of
$320,000 related to an equity investment in Silverton Bank, a correspondent
financial institution that was closed by the OCC on May 1, 2009. The loss
represented the full amount of the Company’s investment in Silverton Bank and
was recorded as a reduction to noninterest income on the Consolidated Statements
of Operations.
The
amortized cost and estimated market values of debt securities as of December 31,
2009 by contractual maturities are summarized in the table below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
|
Available
for Sale
|
Held
to Maturity
|
||||||||||||
|
(Dollars
in thousands)
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||
|
Debt
securities:
|
|||||||||||||
|
Due
within one year
|
$
|
–
|
$
|
–
|
$
|
–
|
$
|
–
|
|||||
|
Due
after one year through five years
|
1,565
|
1,638
|
300
|
307
|
|||||||||
|
Due
after five years through ten years
|
10,340
|
10,346
|
1,030
|
1,091
|
|||||||||
|
Due
after ten years
|
216,260
|
222,693
|
2,346
|
2,224
|
|||||||||
|
Total
debt securities
|
228,165
|
234,677
|
3,676
|
3,622
|
|||||||||
|
Total
equity securities
|
750
|
749
|
–
|
–
|
|||||||||
|
Total
investment securities
|
$
|
228,915
|
$
|
235,426
|
$
|
3,676
|
$
|
3,622
|
|||||
During
the years ended December 31, 2009, 2008 and 2007, the Company recognized gross
gains and (losses) of $522,000 and ($419,000), respectively; $323,000 and
($74,000), respectively; $28,000 and ($77,000), respectively; on sales of
available-for-sale investment securities. Proceeds received from these sales
totaled $23.5 million, $48.6 million and $81.9 million in 2009, 2008 and 2007,
respectively. As of December 31, 2009 and 2008, investment securities with book
values totaling $149.7 million and $224.3 million, respectively, were pledged to
secure public deposits, repurchase agreements, swap agreements, FHLB advances
and other borrowings.
4. Loans
and Allowance for Loan Losses
The
composition of the loan portfolio by loan classification as of December 31, 2009
and 2008 was as follows:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Commercial
real estate:
|
|||||||
|
Construction
and land development
|
$
|
452,120
|
$
|
454,094
|
|||
|
Commercial
non-owner occupied
|
245,674
|
201,064
|
|||||
|
Total
commercial real estate
|
697,794
|
655,158
|
|||||
|
Consumer
real estate:
|
|||||||
|
Residential
mortgage
|
165,374
|
139,975
|
|||||
|
Home
equity lines
|
97,129
|
95,713
|
|||||
|
Total
consumer real estate
|
262,503
|
235,688
|
|||||
|
Commercial
owner occupied
|
194,359
|
148,399
|
|||||
|
Commercial
and industrial
|
183,733
|
186,474
|
|||||
|
Consumer
|
9,692
|
11,215
|
|||||
|
Other
loans
|
41,851
|
17,357
|
|||||
|
1,389,932
|
1,254,291
|
||||||
|
Deferred
loan fees and origination costs, net
|
370
|
77
|
|||||
|
$
|
1,390,302
|
$
|
1,254,368
|
||||
Loans
pledged as collateral for certain borrowings totaled $279.6 million and $247.8
million as of December 31, 2009 and 2008, respectively.
In the
normal course of business, certain directors and executive officers of the
Company, including their immediate families and companies in which they have an
interest, may be borrowers. Total loans to such groups and activity during the
year ended December 31, 2009 is summarized as follows:
|
(Dollars
in thousands)
|
||||
|
Balance
as of December 31, 2008
|
$
|
76,056
|
||
|
Advances
|
31,878
|
|||
|
Repayments
|
(4,608
|
)
|
||
|
Balance
as of December 31, 2009
|
$
|
103,326
|
In
addition, such groups had available unused lines of credit in the amount of $3.3
million as of December 31, 2009. These transactions were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable loans with persons not related to the Company. Certain deposits are held by related parties, and the
rates and terms of these accounts are consistent with those of non-related
parties. Further, the Company paid an aggregate of $1.2 million, $1.1
million and $0.7 million to companies owned by members of the board of directors
or immediate family members for leased space, equipment, construction and
consulting services during 2009, 2008 and 2007, respectively.
A summary
of activity in the allowance for loan losses for the years ended December 31,
2009, 2008 and 2007 is as follows:
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Balance
at beginning of year
|
$
|
14,795
|
$
|
13,571
|
$
|
13,347
|
||||
|
Acquired
in business combination
|
–
|
845
|
–
|
|||||||
|
Provision
for loan losses
|
23,064
|
3,876
|
3,606
|
|||||||
|
Loans
charged off, net of recoveries
|
(11,778
|
)
|
(3,497
|
)
|
(3,382
|
)
|
||||
|
Balance
at end of year
|
$
|
26,081
|
$
|
14,795
|
$
|
13,571
|
||||
The
allowance for credit losses includes the allowance for loan losses, detailed
above, and the reserve for unfunded lending commitments, which is included in
other liabilities on the Consolidated Balance Sheets. As of December 31, 2009
and 2008, the reserve for unfunded lending commitments totaled $351,000 and
$292,000, respectively.
The
following is a summary of information related to nonperforming assets as of
December 31, 2009 and 2008:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Nonperforming
assets:
|
|||||||
|
Nonaccrual
loans
|
$
|
39,512
|
$
|
9,115
|
|||
|
Accruing
loans greater than 90 days past due
|
–
|
–
|
|||||
|
Total
nonperforming loans
|
39,512
|
9,115
|
|||||
|
Other
real estate
|
10,732
|
1,347
|
|||||
|
Total
nonperforming assets
|
$
|
50,244
|
$
|
10,462
|
|||
For the
years ended December 31, 2009, 2008 and 2007, no interest income was recognized
on loans while in nonaccrual status. Cumulative interest payments collected on
nonaccrual loans and applied as a reduction to the principal balance of the
respective loans totaled $366,000 and $280,000 as of December 31, 2009 and 2008,
respectively.
5. Premises
and Equipment
Premises
and equipment as of December 31, 2009 and 2008 were as follows:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Land
|
$
|
6,210
|
$
|
6,898
|
|||
|
Buildings
and leasehold improvements
|
16,072
|
16,635
|
|||||
|
Furniture
and equipment
|
21,300
|
19,665
|
|||||
|
Automobiles
|
179
|
159
|
|||||
|
Construction
in progress
|
1,308
|
406
|
|||||
|
45,069
|
43,763
|
||||||
|
Less
accumulated depreciation and amortization
|
(21,313
|
)
|
(19,123
|
)
|
|||
|
$
|
23,756
|
$
|
24,640
|
||||
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $2.9 million,
$2.6 million, and $3.0 million, respectively.
6. Goodwill
and Other Intangible Assets
The
changes in carrying amounts of goodwill and other intangible assets (deposit
premium intangibles) for the years ended December 31, 2009, 2008 and 2007 were
as follows:
|
Goodwill
|
Deposit
Premium
|
||||||||||||
|
(Dollars
in thousands)
|
Gross
|
Accumulated
Amortization
|
Net
|
||||||||||
|
Balance
at January 1, 2007
|
$
|
59,776
|
$
|
7,089
|
$
|
(2,322
|
)
|
$
|
4,767
|
||||
|
Amortization
expense
|
–
|
–
|
(1,198
|
)
|
(1,198
|
)
|
|||||||
|
Balance
at December 31, 2007
|
59,776
|
7,089
|
(3,520
|
)
|
3,569
|
||||||||
|
Amortization
expense
|
–
|
–
|
(1,037
|
)
|
(1,037
|
)
|
|||||||
|
Branch
acquisition in December 2008
|
5,415
|
1,325
|
–
|
1,325
|
|||||||||
|
Goodwill
impairment charge
|
(65,191
|
)
|
–
|
–
|
–
|
||||||||
|
Balance
at December 31, 2008
|
–
|
8,414
|
(4,557
|
)
|
3,857
|
||||||||
|
Amortization
expense
|
–
|
–
|
(1,146
|
)
|
(1,146
|
)
|
|||||||
|
Balance
at December 31, 2009
|
$
|
–
|
$
|
8,414
|
$
|
(5,703
|
)
|
$
|
2,711
|
||||
Deposit
premiums are amortized over periods of up to ten years using an accelerated
method approximating the period of economic benefits received. Estimated
amortization expense for the next five years is as follows: 2010–$1.0 million;
2011–$0.7 million; 2012–$0.5 million; 2013–$0.3 million; 2014–$0.1 million; and
thereafter–$0.1 million.
Goodwill
is reviewed for potential impairment at least annually at the reporting unit
level. An impairment loss is recorded to the extent that the carrying amount of
goodwill exceeds its implied fair value. The Company’s annual goodwill
impairment evaluation in 2008 resulted in a goodwill impairment charge of $65.2
million, which was recorded to noninterest expense for the year ended December
31, 2008. This impairment charge, representing the full amount of goodwill on
the Consolidated Balance Sheets, was primarily due to a significant decline in
the market value of the Company’s common stock during 2008 to below tangible
book value for an extended period of time.
Other
intangible assets (deposit premiums intangibles) are evaluated for impairment if
events and circumstances indicate a potential for impairment. Such an evaluation
of other intangible assets is based on undiscounted cash flow projections. No
impairment charges were recorded for other intangible assets in 2009, 2008 and
2007.
7. Deposits
|
|
|
As of
December 31, 2009, the scheduled maturities of time deposits are as
follows:
|
Amount
|
Weighted
Average Rate |
||||||
|
(Dollars
in thousands)
|
|||||||
|
2010
|
$
|
438,401
|
2.6
|
%
|
|||
|
2011
|
52,404
|
2.3
|
|||||
|
2012
|
340,202
|
2.1
|
|||||
|
2013
|
6,952
|
3.9
|
|||||
|
2014
|
10,567
|
2.8
|
|||||
|
Thereafter
|
182
|
3.0
|
|||||
|
$
|
848,708
|
2.4
|
%
|
||||
In the
normal course of business, certain directors and executive officers of the
Company, including their immediate families and companies in which they have an
interest, may be deposit customers.
Deposit
overdrafts of $94,000 and $158,000 were included in total loans as of December
31, 2009 and 2008, respectively.
8. Borrowings
The
following is an analysis of federal funds purchased and securities sold under
agreements to repurchase as of December 31, 2009 and 2008:
|
End
of Period
|
Daily
Average Balance
|
|||||||||||||||
|
(Dollars
in thousands)
|
Balance
|
Weighted
Average Rate |
Balance
|
Interest
Rate |
Maximum
Outstanding at Any Month End |
|||||||||||
|
2009
|
||||||||||||||||
|
Repurchase
agreements and federal funds purchased
|
$
|
6,543
|
0.2%
|
|
$
|
10,919
|
0.2%
|
|
$
|
14,158
|
||||||
|
2008
|
||||||||||||||||
|
Repurchase
agreements and federal funds purchased
|
$
|
15,010
|
0.2%
|
|
$
|
30,426
|
1.3%
|
|
$
|
42,424
|
||||||
Interest
expense on federal funds purchased totaled $2,000, $34,000 and $56,000 for the
years ended December 31, 2009, 2008 and 2007, respectively. Interest expense on
securities sold under agreements to repurchase totaled $21,000, $353,000 and
$1.4 million in 2009, 2008 and 2007, respectively. Repurchase agreements were
collateralized by mortgage-backed securities with a total book value of $14.8
million as of December 31, 2009.
The
following table presents information regarding the Company’s outstanding
borrowings as of December 31, 2009 and 2008:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
FHLB
advances without call options or where call options expired prior to
December 31, 2009; fixed interest rates ranging from 4.56% to 5.50%;
maturity dates ranging from November 29, 2010 to November 7,
2011
|
$
|
39,000
|
$
|
57,000
|
|||
|
FHLB
advance with next quarterly call option on February 22, 2010; fixed
interest rate of 3.63%; matures on August 21, 2017
|
10,000
|
10,000
|
|||||
|
FHLB
advance with quarterly adjustable rate; original maturity date of April
30, 2013; prepaid without penalty at rate reset date in
2009
|
–
|
5,000
|
|||||
|
FHLB
overnight borrowings; interest rate of 0.36% as of December 31, 2009,
subject to change daily
|
18,000
|
–
|
|||||
|
Structured
repurchase agreements without call options or where call options expired
prior to December 31, 2009; fixed interest rate of 3.72% on repurchase
agreement outstanding as of December 31, 2009; remaining agreement matures
on December 18, 2017
|
10,000
|
20,000
|
|||||
|
Structured
repurchase agreements with various forms of call options remaining; fixed
interest rates ranging from 3.56% to 4.75% as of December 31, 2009;
maturity dates ranging from November 6, 2016 to March 24,
2019
|
40,000
|
40,000
|
|||||
|
Federal
Reserve Bank primary credit facility; fixed interest rate of 0.50% as of
December 31, 2009; maturity dates ranging from January 11, 2010 to March
30, 2010
|
50,000
|
–
|
|||||
|
$
|
167,000
|
$
|
132,000
|
Advances
from the FHLB totaled $49.0 million and $72.0 million as of December 31, 2009
and 2008, respectively, and had a weighted average rate of 4.7% as of December
31, 2009 and 2008. In addition, FHLB overnight borrowings on the Company’s
credit line at that institution totaled $18.0 million and zero as of December
31, 2009 and 2008, respectively. These advances as well as the Company’s credit
line with the FHLB were collateralized by eligible 1–4 family mortgages, home
equity loans and commercial loans totaling $118.0 million and $108.3 million as
of December 31, 2009 and 2008, respectively. In addition, the Company pledged
certain mortgage-backed securities with a book value of $46.4 million and $72.5
million as of December 31, 2009 and 2008, respectively. As of December 31, 2009,
the Company had $41.5 million of available borrowing capacity with the
FHLB.
Outstanding
structured repurchase agreements totaled $50.0 million and $60.0 million as of
December 31, 2009 and 2008, respectively. These repurchase agreements had a
weighted average rate of 4.1% and 4.3% as of December 31, 2009 and 2008,
respectively, and were collateralized by certain U.S. agency and mortgage-backed
securities with a book value of $57.4 million and $65.0 million as of December
31, 2009 and 2008, respectively.
The
Company maintains a credit line at the FRB discount window that is used for
short-term funding needs and as an additional source of liquidity. Primary
credit borrowings as well as the Company’s credit line at the discount window
were collateralized by eligible commercial construction as well as commercial
and industrial loans totaling $161.6 million and $139.4 million as of December
31, 2009 and 2008, respectively. As of December 31, 2009, the Company had $17.7
million of available borrowing capacity with the FRB.
As of
December 31, 2009, the scheduled maturities of borrowings are as
follows:
|
Balance
|
Weighted
Average Rate |
||||||
|
(Dollars
in thousands)
|
|||||||
|
2010
|
$
|
76,000
|
0.9
|
%
|
|||
|
2011
|
31,000
|
5.0
|
|||||
|
2012
|
–
|
–
|
|||||
|
2013
|
–
|
–
|
|||||
|
2014
|
–
|
–
|
|||||
|
Thereafter
|
60,000
|
4.0
|
|||||
|
$
|
167,000
|
2.8
|
%
|
||||
9.
Subordinated Debentures
The
Company formed Capital Bank Statutory Trust I, Capital Bank Statutory Trust II
and Capital Bank Statutory Trust III (the “Trusts”) in June 2003, December 2003
and December 2005, respectively. Each issued $10 million of its floating-rate
capital securities (the “trust preferred securities”), with a liquidation amount
of $1,000 per capital security, in pooled offerings of trust preferred
securities. The Trusts sold their common securities to the Company for an
aggregate of $900,000, resulting in total proceeds from each offering equal to
$10.3 million, or $30.9 million in aggregate. The Trusts then used these
proceeds to purchase $30.9 million in principal amount of the Company’s Floating
Rate Junior Subordinated Deferrable Interest Debentures (the “Debentures”).
Following payment by the Company of a placement fee and other expenses of the
offering, the Company’s net proceeds from the offerings aggregated $30.0
million.
The trust
preferred securities have a 30-year maturity and are redeemable after five years
by the Company with certain exceptions. Prior to the redemption date, the trust
preferred securities may be redeemed at the option of the Company after the
occurrence of certain events, including without limitation events that would
have a negative tax effect on the Company or the Trusts, would cause the trust
preferred securities to no longer qualify as Tier 1 capital, or would result in
the Trusts being treated as an investment company. The Trusts’ ability to pay
amounts due on the trust preferred securities is solely dependent upon the
Company making payment on the Debentures. The Company’s obligation under the
Debentures constitutes a full and unconditional guarantee by the Company of the
Trusts’ obligations under the trust preferred securities.
The
securities associated with each trust are floating rate, based on 90-day LIBOR,
and adjust quarterly. Trust I securities adjust at LIBOR + 3.10%, Trust II
securities adjust at LIBOR + 2.85% and Trust III securities adjust at LIBOR
+1.40%.
The
Debentures, which are subordinate and junior in right of payment to all present
and future senior indebtedness and certain other financial obligations of the
Company, are the sole assets of the Trusts, and the Company’s payment under the
Debentures is the sole source of revenue for the Trusts.
The
assets and liabilities of the Trusts are not consolidated into the consolidated
financial statements of the Company. Interest on the Debentures is included in
the Consolidated Statements of Operations as interest expense. The Debentures
are presented as a separate category of long-term debt on the Consolidated
Balance Sheet entitled “Subordinated Debentures.” For regulatory purposes, the
$30 million of trust preferred securities qualifies as Tier 1 capital, subject
to certain limitations, or Tier 2 capital in accordance with regulatory
reporting requirements. The Company recorded interest expense on the Debentures
of $1.0 million, $1.7 million and $2.4 million for the years ended December 31,
2009, 2008 and 2007, respectively.
10. Leases
The
Company has non-cancelable operating leases for its corporate office, certain
branch locations and corporate aircraft that expire at various times through
2019. Certain of the leases contain escalating rent clauses, for which the
Company recognizes rent expense on a straight-line basis. The Company subleases
certain office space and the corporate aircraft to outside parties. Future
minimum lease payments under the leases and sublease receipts for years
subsequent to December 31, 2009 are as follows:
|
Lease
Payments
|
Sublease
Receipts
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
2010
|
$
|
3,227
|
$
|
441
|
|||
|
2011
|
2,781
|
346
|
|||||
|
2012
|
2,853
|
258
|
|||||
|
2013
|
2,770
|
233
|
|||||
|
2014
|
2,669
|
240
|
|||||
|
Thereafter
|
6,811
|
310
|
|||||
|
$
|
21,111
|
$
|
1,828
|
||||
Rent
expense under operating leases was $3.3 million, $2.7 million and $2.7 million
for the years ended December 31, 2009, 2008 and 2007, respectively.
11. Employee
Benefit Plans
401(k)
Retirement Plan
The
Company maintains the Capital Bank 401(k) Retirement Plan (the “Plan”) for the
benefit of its employees, which includes provisions for employee contributions,
subject to limitation under the Internal Revenue Code, and discretionary
matching contributions by the Company. The Plan provides that employee’s
contributions are 100% vested at all times, and the Company’s matching
contributions vest 20% after the second year of service, an additional 20% after
the third and fourth years of service and the remaining 40% after the fifth year
of service. Through May 31, 2009, the Company matched 100% of employee
contributions up to 6% of an employee’s salary. Effective June 1, 2009, the
Company suspended its discretionary matching contributions to the Plan.
Aggregate matching contributions, which are recorded in salaries and employee
benefits expense on the Consolidated Statements of Operations, for the years
ended December 31, 2009, 2008 and 2007 were $387,000, $772,000 and $757,000,
respectively.
Supplemental
Retirement Plans
In May
2005, the Company established two supplemental retirement plans for the benefit
of certain executive officers and certain directors of the Company. The Capital
Bank Defined Benefit Supplemental Executive Retirement Plan (“Executive Plan”)
covers the Company’s chief executive officer and certain other members of senior
management. Under the Executive Plan, the participants will receive a
supplemental retirement benefit equal to a targeted percentage of the
participant’s average annual salary during the last three years of employment.
Under the Executive Plan, benefits vest over an eight-year period with the first
20% vesting after four years of service and 20% vesting annually thereafter. The
Capital Bank Supplemental Retirement Plan for Directors (“Director Plan”) covers
certain directors and provides for a fixed annual retirement benefit to be paid
for a number of years equal to the director’s total years of service, up to a
maximum of ten years. As of December 31, 2009, there were four executives
participating in the Executive Plan and fourteen current and former directors
participating in the Director Plan
For the
years ended December 31, 2009, 2008 and 2007, the Company recognized $236,000,
$154,000 and $128,000, respectively, of expense related to the Executive Plan;
and $353,000, $315,000 and $313,000, respectively, of expense related to the
Director Plan. The obligations associated with the two plans are included in
other liabilities on the Consolidated Balance Sheets and totaled $0.8 million
and $0.5 million (Executive Plan) and $1.5 million and $1.2 million (Director
Plan) as of December 31, 2009 and 2008, respectively.
12. Stock-Based
Compensation
The
Company uses the following forms of stock-based compensation as an incentive for
certain employees and non-employee directors: stock options, restricted stock,
and stock issued through a deferred compensation plan for non-employee
directors.
Stock
Options
Pursuant
to the Capital Bank Corporation Equity Incentive Plan (“Equity Incentive Plan”),
the Company has a stock option plan providing for the issuance of up to
1,150,000 options to purchase shares of the Company’s stock to officers and
directors. As of December 31, 2009, options for 315,850 shares of common stock
were outstanding and options for 575,559 shares of common stock remained
available for future issuance. In addition, there were 566,071 options which
were assumed under various plans from previously acquired financial
institutions, of which 50,733 remain outstanding. Grants of options are made by
the Board of Directors or the Compensation/Human Resources Committee of the
Board. All grants must be made with an exercise price at no less than fair
market value on the date of grant, must be exercised no later than 10 years from
the date of grant, and may be subject to some vesting provisions.
A summary
of the activity during the years ending December 31, 2009, 2008 and 2007 of the
Company’s stock option plans, including the weighted average exercise price
(“WAEP”) is presented below:
|
2009
|
2008
|
2007
|
|||||||||||||||||
|
Shares
|
WAEP
|
Shares
|
WAEP
|
Shares
|
WAEP
|
||||||||||||||
|
Outstanding
at beginning of year
|
377,083
|
$
|
11.71
|
384,075
|
$
|
12.56
|
389,715
|
$
|
11.75
|
||||||||||
|
Granted
|
–
|
–
|
63,500
|
6.24
|
52,000
|
15.56
|
|||||||||||||
|
Exercised
|
–
|
–
|
(26,591
|
)
|
6.62
|
(46,540
|
)
|
8.13
|
|||||||||||
|
Forfeited
and expired
|
(10,500
|
)
|
10.09
|
(43,901
|
)
|
14.31
|
(11,100
|
)
|
16.70
|
||||||||||
|
Outstanding
at end of year
|
366,583
|
$
|
11.76
|
377,083
|
$
|
11.71
|
384,075
|
$
|
12.56
|
||||||||||
|
Options
exercisable at year end
|
285,983
|
$
|
12.33
|
273,783
|
$
|
12.41
|
332,075
|
$
|
12.09
|
||||||||||
The
following table summarizes information about the Company’s stock options as of
December 31, 2009:
|
Exercise
Price
|
Number
Outstanding |
Weighted
Average
Remaining
Contractual
Life in Years |
Number
Exercisable |
Intrinsic
Value |
|||||||||
|
$6.00 –
$9.00
|
129,631
|
4.34
|
81,631
|
$
|
–
|
||||||||
|
$9.01 –
$12.00
|
79,702
|
2.08
|
77,702
|
–
|
|||||||||
|
$12.01 –
$15.00
|
20,000
|
6.63
|
10,400
|
–
|
|||||||||
|
$15.01 –
$18.00
|
83,000
|
5.54
|
62,000
|
–
|
|||||||||
|
$18.01 –
$18.37
|
54,250
|
4.99
|
54,250
|
–
|
|||||||||
|
366,583
|
4.34
|
285,983
|
$
|
–
|
|||||||||
The fair
values of options granted are estimated on the date of the grants using the
Black-Scholes option pricing model. Option pricing models require the use of
highly subjective assumptions, including expected stock volatility, which when
changed can materially affect fair value estimates. The expected life of the
options used in this calculation is the period the options are expected to be
outstanding. Expected stock price volatility is based on the historical
volatility of the Company’s common stock for a period approximating the expected
life; the expected dividend yield is based on the Company’s historical annual
dividend payout; and the risk-free rate is based on the implied yield available
on U.S. Treasury issues. The following weighted-average assumptions were used in
determining fair value for options granted in the years ended December 31, 2009,
2008 and 2007, respectively:
|
2009
|
2008
|
2007
|
||||
|
Dividend
yield
|
–
|
6.3%
|
|
2.0%
|
|
|
|
Expected
volatility
|
–
|
26.3%
|
|
21.5%
|
|
|
|
Risk-free
interest rate
|
–
|
2.2%
|
|
4.4%
|
|
|
|
Expected
life
|
–
|
7
years
|
7
years
|
There
were no options granted in the year ended December 31, 2009. The weighted
average fair value of options granted for the years ended December 31, 2008 and
2007 was $0.77 and $3.96, respectively.
Capital
Bank Corporation – Notes to Consolidated Financial Statements
As of December 31, 2009, the Company had unamortized compensation expense
related to unvested stock options of $140,000, which is expected to be amortized
over the remaining vesting period of the respective option grants. For the years
ended December 31, 2009, 2008 and 2007, the Company recorded compensation
expense of $50,000, $32,000 and $21,000, respectively, related to stock
options.
Restricted
Stock
Pursuant
to the Equity Incentive Plan, the Board of Directors may grant restricted stock
to certain employees at its discretion. Restricted stock grants in 2008 and 2007
totaled 20,000 shares and 24,000 shares, respectively, which vest over three and
five year periods, respectively. There were no restricted stock grants during
the year ended December 31, 2009. Unvested shares are subject to forfeiture if
employment terminates prior to the vesting dates. The Company expenses the cost
of the stock awards, determined to be the fair value of the shares at the date
of grant, ratably over the period of the vesting. As of December 31, 2009, the
Company had 24,000 shares of unvested restricted stock grants, which represents
unrecognized compensation expense of $194,000 to be recognized over the
remaining vesting period of the respective grants. Total compensation expense
related to these restricted stock awards for the years ended December 31, 2009,
2008 and 2007 was $109,000, $98,000 and $0, respectively.
Deferred
Compensation for Non-employee Directors
The
Company administers the Capital Bank Corporation Deferred Compensation Plan for
Outside Directors (“Deferred Compensation Plan”). Eligible directors may elect
to participate in the Deferred Compensation Plan by deferring all or part of
their directors’ fees for at least one calendar year, in exchange for common
stock of the Company. If a director does not elect to defer all or part of his
fees, then he is not considered a participant in the Deferred Compensation Plan.
The amount deferred is equal to 125 percent of total director fees. Each
participant is fully vested in his account balance. The Deferred Compensation
Plan provides for payment of share units in shares of common stock of the
Company after the participant ceases to serve as a director for any reason. For
the years ended December 31, 2009, 2008 and 2007, the Company recognized
compensation expense of $543,000, $322,000 and $37,000, respectively, related to
the Deferred Compensation Plan.
Prior to
amendment on November 20, 2008, the Deferred Compensation Plan was classified as
a liability-based plan due to certain plan provisions which would have allowed
plan participants to receive payments in either cash or shares of common stock.
The Deferred Compensation Plan was reclassified to an equity-based plan when
amended after the plan terms were modified to require all participants in the
Deferred Compensation Plan to receive deferred payments in shares of common
stock. Upon amendment in 2008, the liability for plan benefits was adjusted to a
fair market value of $943,000 and was reclassified to equity. Benefits under
this plan are now recognized as compensation expense and a corresponding
increase to equity based on fair value of the deferred stock at date of
grant.
13. Income
Taxes
Income
taxes charged to operations for the years ended December 31, 2009, 2008 and 2007
consisted of the following components:
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Current
income tax (benefit) expense
|
$
|
(2,305
|
)
|
$
|
2,508
|
$
|
4,215
|
|||
|
Deferred
income tax benefit
|
(4,708
|
)
|
(3,715
|
)
|
(1,091
|
)
|
||||
|
Total
income tax (benefit) expense
|
$
|
(7,013
|
)
|
$
|
(1,207
|
)
|
$
|
3,124
|
||
Income
taxes for the years ended December 31, 2009, 2008 and 2007 were allocated as
follows:
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
(Loss)
income from continuing operations
|
$
|
(7,013
|
)
|
$
|
(1,207
|
)
|
$
|
3,124
|
||
|
Shareholders’
equity, for net unrealized gains on investment securities and cash flow
hedge
|
1,954
|
455
|
1,159
|
|||||||
|
Shareholders’
equity, for related tax benefits on stock options
exercised
|
–
|
(30
|
)
|
(284
|
)
|
|||||
|
$
|
(5,059
|
)
|
$
|
(782
|
)
|
$
|
3,999
|
|||
A
reconciliation of the difference between income tax expense and the amount
computed by applying the statutory federal income tax rate of 34% is as
follows:
|
Amount
|
Percent
of Pretax Loss/Income
|
||||||||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||
|
Tax
(benefit) expense at statutory rate on (loss) income before
taxes
|
$
|
(4,702
|
)
|
$
|
(19,342
|
)
|
$
|
3,734
|
34.00
|
%
|
34.00
|
%
|
34.00
|
%
|
|||||
|
State
taxes, net of federal benefit
|
(558
|
)
|
18
|
500
|
4.03
|
(0.03
|
)
|
4.55
|
|||||||||||
|
Increase
(reduction) in taxes resulting from:
|
|||||||||||||||||||
|
Tax
exempt interest
|
(1,184
|
)
|
(1,085
|
)
|
(1,061
|
)
|
8.56
|
1.91
|
(9.66
|
)
|
|||||||||
|
Nontaxable
life insurance income
|
(622
|
)
|
(324
|
)
|
(324
|
)
|
4.50
|
0.57
|
(2.95
|
)
|
|||||||||
|
Goodwill
impairment charge
|
–
|
19,360
|
–
|
–
|
(34.03
|
)
|
–
|
||||||||||||
|
Other,
net
|
53
|
166
|
275
|
(0.38
|
)
|
(0.29
|
)
|
2.50
|
|||||||||||
|
$
|
(7,013
|
)
|
$
|
(1,207
|
)
|
$
|
3,124
|
50.71
|
%
|
2.13
|
%
|
28.44
|
%
|
||||||
Significant
components of deferred tax assets and liabilities as of December 31, 2009 and
2008 are as follows:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Deferred
tax assets:
|
|||||||
|
Allowance
for loan losses
|
$
|
10,191
|
$
|
5,817
|
|||
|
Deferred
compensation
|
2,485
|
2,346
|
|||||
|
Intangible
assets
|
1,743
|
1,606
|
|||||
|
Net
operating loss carryforwards
|
–
|
148
|
|||||
|
Deferred
rent
|
242
|
214
|
|||||
|
Deferred
gain on sale-leaseback
|
359
|
400
|
|||||
|
Nonaccrual
interest
|
141
|
232
|
|||||
|
AMT
credit carryforward
|
596
|
–
|
|||||
|
Stock
offering costs
|
640
|
–
|
|||||
|
Other
|
496
|
196
|
|||||
|
Total
deferred tax assets
|
16,893
|
10,959
|
|||||
|
Deferred
tax liabilities:
|
|||||||
|
Depreciation
|
834
|
592
|
|||||
|
FHLB
stock dividends
|
343
|
343
|
|||||
|
Net
unrealized gain on investment securities and cash flow
hedge
|
2,510
|
556
|
|||||
|
Deferred
loan origination costs
|
493
|
–
|
|||||
|
Prepaid
expenses
|
328
|
–
|
|||||
|
Other
|
289
|
126
|
|||||
|
Total
deferred tax liabilities
|
4,797
|
1,617
|
|||||
|
Net
deferred tax assets
|
$
|
12,096
|
$
|
9,342
|
|||
As of
December 31, 2009 and 2008, the Company had net deferred tax assets of $12.1
million and $9.3 million, respectively. A valuation allowance is provided when
it is more likely than not that some portion of the deferred tax asset will not
be realized. In management’s opinion, it is more likely than not that the
results of future operations will generate sufficient taxable income to
recognize the deferred tax assets. In making this assessment, management
considered the following: the Company’s cumulative previous three-year pre-tax
book income (excluding the goodwill impairment in 2008), forecasted levels of
pre-tax book income and taxable income, the lack of any net operating loss in
deferred tax assets, the existence of 2008 taxable income available for
potential future loss carryback, and the availability of several realistic tax
planning strategies.
The
Company and its subsidiaries are subject to U.S. federal income tax as well as
North Carolina income tax. The Company has concluded all U.S. federal income tax
matters for years through 2006.
14. Derivative
Financial Instruments
The
Company maintains positions in derivative financial instruments as necessary to
manage interest rate risk, to facilitate asset/ liability management strategies,
and to manage other risk exposures. As of December 31, 2009, the Company
maintained no active derivative positions; however, the following paragraphs
provide a description of the Company’s interest rate swaps that were either
terminated or expired in 2009.
In
October 2006, the Company entered into a $100.0 million (notional) three-year
interest rate swap agreement to convert a portion of its prime-based loan
portfolio to a fixed rate of 7.81%. Prior to its expiration on October 9, 2009,
the Company accounted for this swap as a cash flow hedge of the volatility in
cash flows resulting from changes in interest rates. For cash flow hedges, changes in the fair value of the
derivative are, to the extent that the hedging relationship is effective,
recorded as other comprehensive income and are subsequently recognized in
earnings at the same time that the hedged item is recognized in earnings. Any
portion of the change in fair value of a cash flow hedge related to hedge
ineffectiveness is recognized immediately as other noninterest income. The fair
value of this cash flow hedge was $3.2 million as of December 31, 2008 and was
recorded in other assets on the Consolidated Balance Sheets. Unrealized
gains/losses, net of taxes, are recorded in other comprehensive income on the
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive
Income. Prior to its expiration, no portion of the cash flow hedge was
considered to be ineffective, and no portion of the change in fair value of the
cash flow hedge was charged to other noninterest income during the years ended
December 31, 2009, 2008 and 2007.
In July
2003, the Company entered into $25.0 million (notional) of interest rate swap
agreements to convert portions of its fixed-rate FHLB advances to variable
interest rates. Prior to their expiration and/or termination in 2009, the
Company accounted for these interest rate swaps as a hedge of the fair value of
the designated FHLB advances. For fair
value hedges, the change in the fair value of the derivative and the
corresponding change in fair value of the hedged risk in the underlying item
being hedged are accounted for in earnings. Because of the effectiveness of the
swap agreements against the related debt instruments, the adjustments needed to
record the swaps at fair value were offset by the adjustments needed to record
the related debt instruments at fair value, and the net difference between those
amounts were not material for the years ended December 31, 2008 and
2007.
15. Commitments,
Contingencies and Concentrations of Credit Risk
To meet
the financial needs of its customers, the Company is party to financial
instruments with off-balance-sheet risk in the normal course of business. These
financial instruments are comprised of unused lines of credit, overdraft lines
and standby letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the balance
sheet.
The
Company’s exposure to credit loss in the event of nonperformance by the other
party is represented by the contractual amount of those instruments. The Company
uses the same credit policies in making these commitments as it does for
on-balance-sheet instruments. The amount of collateral obtained, if deemed
necessary by the Company, upon extension of credit is based on management’s
credit evaluation of the borrower. Collateral held varies but may include trade
accounts receivable, property, plant and equipment, and income-producing
commercial properties. Since many unused lines of credit expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements.
The
Company’s exposure to off-balance-sheet credit risk as of December 31, 2009 and
2008 was as follows:
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Unused
lines of credit and overdraft lines
|
$
|
231,691
|
$
|
263,663
|
|||
|
Standby
letters of credit
|
9,144
|
4,233
|
|||||
|
Total
commitments
|
$
|
240,835
|
$
|
267,896
|
|||
Because
the majority of the Company’s lending is concentrated in Alamance, Buncombe,
Catawba, Chatham, Cumberland, Granville, Johnston, Lee and Wake counties in
North Carolina, economic conditions in those and surrounding counties
significantly impact the ability of borrowers to repay their loans. As of
December 31, 2009 and 2008, $1.2 billion (83%) and $1.0 billion (83%),
respectively, of the total loan portfolio was secured by real estate, including
commercial owner occupied loans. The credits in the loan portfolio are well
diversified, and the Company does not have any significant concentrations to any
one credit relationship. Credit risk is managed through a number of methods,
including loan grading of commercial loans, approval of larger loans by the loan
committee of the Board of Directors, and class and purpose coding of loans. The
Company’s lending policies require either independent appraisals or internal
real estate evaluations, depending on the dollar amount, on real estate
collateral used to secure loans.
The
Company has limited partnership investments in two related private investment
funds which totaled $1.8 million and $1.7 million as of December 31, 2009 and
2008, respectively, and were included in other assets on the Consolidated
Balance Sheets. Remaining capital commitments for these funds totaled $1.6
million as of December 31, 2009.
The
Company discovered that the 1st State Bancorp, Inc. Employee Stock Ownership
Plan (“ESOP”), which was to be terminated immediately prior to the Company’s
merger with 1st State Bank in 2006, was not correctly terminated. Among other
things, management has discovered that certain required filings with the
Internal Revenue Service (“IRS”) related to the termination of the ESOP were
never made, insufficient withholding taxes may have been submitted to the IRS,
and incorrect distributions may have been made from the ESOP, resulting in
potential overpayment of certain accounts and underpayment of others. The
Company is currently in the process of determining the source and extent of
these potential errors and has engaged outside counsel and an independent third
party record keeper to assist with correcting the errors and preparing the
necessary filings with the IRS and U.S. Department of Labor (“DOL”). The Company
may be subject to penalties and interest from the IRS due to the delinquent
filings and insufficient payment of taxes and potential liability to
participants in the ESOP. The Company may also be required to reimburse certain
funds if improperly distributed from the ESOP.
For the
year ended December 31, 2009, the Company recorded total expense of $244,000
related to this ESOP matter, which represented corrective amounts that the
Company contributed to the ESOP as well as professional fees incurred through
the end of the year. Such expense was recorded in other noninterest expense on
the Consolidated Statements of Operation. The Company is still in the process of
determining the final corrective amounts to be contributed to the ESOP, and in
future periods, may record expense related to additional contributions and/or
penalties and interest from the IRS or DOL as additional facts become
known.
16. Fair
Value Measurements
The
Company utilizes fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Investment securities, available for sale, and derivatives are recorded at fair
value on a recurring basis. Additionally, the Company may be required to record
at fair value other assets on a nonrecurring basis, such as loans held for sale,
impaired loans and certain other assets. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting
or write-downs of individual assets. The following is a description of valuation
methodologies used for assets and liabilities recorded at fair
value.
Investment
securities, available for sale, are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted
prices are not available, fair values are measured using independent pricing
models or other model-based valuation techniques such as the present value of
future cash flows, adjusted for the security’s credit rating, prepayment
assumptions and other factors such as credit loss assumptions. Level 1
securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities and
corporate entities as well as municipal bonds. Securities classified as Level 3
include corporate debt instruments that are not actively traded.
Derivative
instruments held or issued by the Company for risk management purposes are
traded in over-the-counter markets where quoted market prices are not readily
available. For those derivatives, the Company measures fair value using models
that use primarily market observable inputs, such as yield curves and option
volatilities, and include the value associated with counterparty credit risk.
The Company classifies derivatives instruments held or issued for risk
management purposes as Level 2.
Loans are
not recorded at fair value on a recurring basis. However, from time to time, a
loan is considered impaired, and a valuation allowance is established based on
the estimated value of the loan. The fair value of impaired loans is estimated
using one of several methods, including collateral value, market value of
similar debt, enterprise value, liquidation value and discounted cash flows.
Those impaired loans not requiring an allowance represent loans for which the
fair value of the expected repayments or collateral exceed the recorded
investments in such loans. Impaired loans where an allowance is established
based on the fair value of collateral require classification in the fair value
hierarchy. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the impaired loan
as nonrecurring Level 2. When an appraised value is not available or management
determines the fair value of the collateral is further impaired below the
appraised value and there is no observable market price, the Company classifies
the impaired loan as nonrecurring Level 3.
Other
real estate, which includes foreclosed assets, is adjusted to fair value upon
transfer of loans and premises to other real estate. Subsequently, other real
estate is carried at the lower of carrying value or fair value. Fair value is
based upon independent market prices, appraised values of the collateral or
management’s estimation of the value of the collateral. When the fair value of
the collateral is based on an observable market price or a current appraised
value, the Company records other real estate as nonrecurring Level 2. When an
appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no
observable market price, the Company classifies other real estate as
nonrecurring Level 3.
Assets
and liabilities measured at fair value on a recurring basis as of December 31,
2009 and 2008 are summarized below:
|
Quoted
Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
December
31, 2009
|
|||||||||||||
|
Investment
securities, available for sale
|
$
|
748
|
$
|
233,378
|
$
|
1,300
|
$
|
235,426
|
|||||
|
December
31, 2008
|
|||||||||||||
|
Investment
securities, available for sale
|
$
|
1,063
|
$
|
263,593
|
$
|
2,000
|
$
|
266,656
|
|||||
|
Cash
flow interest rate swap
|
–
|
3,151
|
–
|
3,151
|
|||||||||
|
$
|
1,063
|
$
|
266,744
|
$
|
2,000
|
$
|
269,807
|
||||||
The table
below presents a reconciliation and income statement classification of gains and
losses for all assets measured at fair value on a recurring basis using
significant unobservable inputs (Level 3) for the year ended
December 31, 2009:
|
Level
3
Investment Securities |
||||
|
(Dollars
in thousands)
|
||||
|
Balance
at December 31, 2008
|
$
|
2,000
|
||
|
Total
unrealized losses included in:
|
||||
|
Net
income
|
(498
|
)
|
||
|
Other
comprehensive income
|
(202
|
)
|
||
|
Purchases,
sales and issuances, net
|
–
|
|||
|
Transfers
in and (out) of Level 3
|
–
|
|||
|
Balance
at December 31, 2009
|
$
|
1,300
|
Assets
and liabilities measured at fair value on a nonrecurring basis as of December
31, 2009 and 2008 are summarized below:
|
Quoted
Prices in
Active Markets for Identical Assets (Level 1) |
Significant
Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
Total
|
||||||||||
|
(Dollars
in thousands)
|
|||||||||||||
|
December
31, 2009
|
|||||||||||||
|
Impaired
loans
|
$
|
–
|
$
|
–
|
$
|
71,153
|
$
|
71,153
|
|||||
|
Other
real estate
|
–
|
–
|
10,732
|
10,732
|
|||||||||
|
$
|
–
|
$
|
–
|
$
|
81,885
|
$
|
81,885
|
||||||
|
December
31, 2008
|
|||||||||||||
|
Impaired
loans
|
$
|
–
|
$
|
–
|
$
|
12,778
|
$
|
12,778
|
|||||
|
Other
real estate
|
–
|
–
|
1,347
|
1,347
|
|||||||||
|
$
|
–
|
$
|
–
|
$
|
14,125
|
$
|
14,125
|
||||||
17. Fair
Value of Financial Instruments
Due to
the nature of the Company’s business, a significant portion of its assets and
liabilities consist of financial instruments. Accordingly, the estimated fair
values of these financial instruments are disclosed. Quoted market prices, if
available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of the
Company’s financial instruments, the fair value of such instruments has been
derived based on management’s assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net amounts ultimately collected could be materially different
from the estimates presented below. In addition, these estimates are only
indicative of the values of individual financial instruments and should not be
considered an indication of the fair value of the Company taken as a
whole.
Fair
values of cash and due from banks and federal funds sold are equal to the
carrying value due to the nature of the financial instruments. Estimated fair
values of investment securities are based on quoted market prices, if available,
or model-based values from pricing sources for mortgage-backed securities and
municipal bonds. Fair value of the net loan portfolio has been estimated using
the present value of future cash flows, discounted at an interest rate giving
consideration to estimated prepayment risk. The credit risk component of the
loan portfolio has been set at the recorded allowance for loan losses balance
for purposes of estimating fair value. Thus, there is no difference between the
carrying amount and estimated fair value attributed to credit risk in the
portfolio. Carrying amounts for accrued interest approximate fair value given
the short-term nature of interest receivable and payable. Derivative financial
instruments are carried on the consolidated balance sheets at fair value based
on external pricing sources.
Fair
values of time deposits and borrowings are estimated by discounting the future
cash flows using the current rates offered for similar deposits and borrowings
with the same remaining maturities. Fair value of subordinated debt is estimated
based on current market prices for similar trust preferred issues of financial
institutions with equivalent credit risk. The estimated fair value for the
Company’s subordinated debt is significantly lower than carrying value since
credit spreads (i.e., spread to LIBOR) on similar trust preferred issues are
currently much wider than when these securities were originally issued.
Interest-bearing deposit liabilities and repurchase agreements with no stated
maturities are predominately at variable rates and, accordingly, the fair values
have been estimated to equal the carrying amounts (the amount payable on
demand).
The
carrying values and estimated fair values of the Company’s financial instruments
as of December 31, 2009 and 2008 are as follows:
|
2009
|
2008
|
||||||||||||
|
(Dollars
in thousands)
|
Carrying
Amount |
Estimated
Fair Value |
Carrying
Amount |
Estimated
Fair Value |
|||||||||
|
Financial
Assets:
|
|||||||||||||
|
Cash
and cash equivalents
|
$
|
29,513
|
$
|
29,513
|
$
|
54,455
|
$
|
54,455
|
|||||
|
Investment
securities
|
245,492
|
245,438
|
278,138
|
277,629
|
|||||||||
|
Loans
|
1,364,221
|
1,368,233
|
1,239,573
|
1,235,216
|
|||||||||
|
Accrued
interest receivable
|
6,590
|
6,590
|
6,225
|
6,225
|
|||||||||
|
Cash
flow hedge
|
–
|
–
|
3,151
|
3,151
|
|||||||||
|
Financial
Liabilities:
|
|||||||||||||
|
Non-maturity
deposits
|
$
|
529,257
|
$
|
529,257
|
$
|
511,772
|
$
|
511,772
|
|||||
|
Time
deposits
|
848,708
|
861,378
|
803,542
|
810,691
|
|||||||||
|
Repurchase
agreements and federal funds purchased
|
6,543
|
6,543
|
15,010
|
15,010
|
|||||||||
|
Borrowings
|
167,000
|
171,278
|
132,000
|
136,220
|
|||||||||
|
Subordinated
debt
|
30,930
|
12,200
|
30,930
|
10,700
|
|||||||||
|
Accrued
interest payable
|
1,824
|
1,824
|
2,925
|
2,925
|
|||||||||
The
carrying amount and estimated fair value of the fair value interest rate swaps
on certain fixed-rate FHLB advances was $619,000 as of December 31, 2008. Since
these swaps were considered to be effective hedges, there were offsetting
adjustments to the fair value of the underlying FHLB advances for the same
amount at that date. These interest rate swaps were either terminated or matured
during the year ended December 31, 2009 and were no longer outstanding at the
balance sheet date. There is no material difference between the carrying amount
and estimated fair value of off-balance-sheet commitments totaling $240.8
million and $267.9 million as of December 31, 2009 and 2008, respectively, which
are primarily comprised of unfunded loan commitments and standby letters of
credit. The Company’s remaining assets and liabilities are not considered
financial instruments.
18. Capital
Purchase Program
On
December 12, 2008, the Company entered into a Securities Purchase
Agreement—Standard Terms ( “Securities Purchase Agreement”) with the U.S.
Treasury Department (“Treasury”) pursuant to which, among other things, the
Company sold to the Treasury for an aggregate purchase price of $41.3 million,
41,279 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock of the
Company (“Series A Preferred Stock”) and warrants to purchase up to 749,619
shares of common stock (“Warrants”) of the Company.
The
Series A Preferred Stock ranks senior to the Company’s common shares and pays a
compounding cumulative dividend, in cash, at a rate of 5% per annum for the
first five years, and 9% per annum thereafter on the liquidation preference of
$1,000 per share. The Company is prohibited from paying any dividend with
respect to shares of common stock or repurchasing or redeeming any shares of the
Company’s common shares unless all accrued and unpaid dividends are paid on the
Series A Preferred Stock for all past dividend periods (including the latest
completed dividend period). The Series A Preferred Stock is non-voting, other
than class voting rights on matters that could adversely affect the Series A
Preferred Stock. The Series A Preferred Stock is callable at par after three
years. Prior to the end of three years, the Series A Preferred Stock may be
redeemed with the proceeds from one or more qualified equity offerings of any
Tier 1 perpetual preferred or common stock of at least $10.3 million. In
connection with the adoption of ARRA, subject to the approval of the Treasury
and the Federal Reserve, the Company may redeem the Series A Preferred Stock at
any time regardless of whether or not it has replaced such funds from any other
source. The Treasury may also transfer the Series A Preferred Stock to a third
party at any time. The Series A Preferred Stock qualifies as Tier 1 capital in
accordance with regulatory capital requirements (see Note 19, Regulatory Matters
and Restrictions).
The
Warrants have a term of 10 years and are exercisable at any time, in whole or in
part, at an exercise price of $8.26 per share (subject to certain anti-dilution
adjustments).
The $41.3
million in proceeds was allocated to the Series A Preferred Stock and the
Warrants based on their relative fair values at issuance (approximately $40.0
million was allocated to the Series A Preferred Stock and approximately $1.3
million to the Warrants). The difference between the initial value allocated to
the Series A Preferred Stock of approximately $40.0 million and the liquidation
value of $41.3 million will be charged to retained earnings and accreted to
preferred stock over the first five years of the contract as an adjustment to
the dividend yield using the effective yield method. Thus, at the end of the
five year accretion period, the preferred stock balance will equal the
liquidation value of $41.3 million. The amount charged to retained earnings is
deducted from the numerator in calculating basic and diluted earnings per common
share. During the years ended December 31, 2009 and 2008, the Company recorded
accretion of the preferred stock discount of $288,000 and $12,000,
respectively.
The fair
value of the Series A Preferred Stock was estimated using a discount rate of
11%, which approximated the dividend yield on the S&P U.S. Preferred Stock
Index on the issuance date, and an expected life of five years. The fair value
of each Warrant issued was estimated to be $1.42 on the date of issuance using
the Black-Scholes option pricing model. The following assumptions were used in
determining fair value for the Warrants:
|
Warrant
Assumptions
|
||
|
Dividend
yield
|
4.4%
|
|
|
Expected
volatility
|
26.4%
|
|
|
Risk-free
interest rate
|
2.6%
|
|
|
Expected
life
|
10
years
|
19. Regulatory
Matters and Restrictions
The
Company and the Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company’s financial position and results of operation.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios, as set
forth in the table below. As of December 31, 2008, the most recent completed
examination from regulators, the Company and the Bank were categorized as “well
capitalized” by regulatory authorities. There are no conditions or events since
that date that management believes could have an adverse effect on the Company
or the Bank’s capital rating. Management believes that as of December 31, 2009,
the Company meets all capital requirements to which it is subject.
The Bank,
as a North Carolina banking corporation, may pay dividends only out of undivided
profits as determined pursuant to North Carolina General Statutes Section 53–87.
However, state and federal regulatory authorities may limit payment of dividends
by any bank for other reasons, including when it is determined that such a
limitation is in the public interest and is necessary to ensure financial
soundness of the Bank. During 2009, the Office of the Commissioner of Banks
authorized a one-time transfer of funds from the Bank’s permanent surplus
account to undivided profits for the purpose of paying dividends to the
Company.
On
February 1, 2010, the Company announced that its Board of Directors voted to
suspend payment of the Company’s quarterly cash dividend to its common
shareholders.
To be
categorized as well capitalized, the Company and the Bank must maintain minimum
amounts and ratios. The Company’s and the Bank’s actual capital amounts and
ratios as of December 31, 2009 and 2008 and the minimum requirements are
presented in the following table:
|
Minimum
Requirements To Be:
|
|||||||||||||||||||
|
Actual
|
Adequately
Capitalized
|
Well
Capitalized
|
|||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
|
Capital
Bank Corporation:
|
|||||||||||||||||||
|
2009
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
$
|
173,261
|
11.41
|
%
|
$
|
121,460
|
8.00
|
%
|
$
|
151,826
|
10.00
|
%
|
|||||||
|
Tier
I capital (to risk-weighted assets)
|
154,227
|
10.16
|
60,730
|
4.00
|
91,095
|
6.00
|
|||||||||||||
|
Tier
I capital (to average assets)
|
154,227
|
8.94
|
69,043
|
4.00
|
86,304
|
5.00
|
|||||||||||||
|
2008
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
$
|
187,385
|
13.24
|
%
|
$
|
113,228
|
8.00
|
%
|
$
|
141,535
|
10.00
|
%
|
|||||||
|
Tier
I capital (to risk-weighted assets)
|
172,298
|
12.17
|
56,614
|
4.00
|
84,921
|
6.00
|
|||||||||||||
|
Tier
I capital (to average assets)
|
172,298
|
10.58
|
65,137
|
4.00
|
81,421
|
5.00
|
|||||||||||||
|
Capital
Bank:
|
|||||||||||||||||||
|
2009
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
$
|
172,748
|
11.40
|
%
|
$
|
121,231
|
8.00
|
%
|
$
|
151,539
|
10.00
|
%
|
|||||||
|
Tier
I capital (to risk-weighted assets)
|
153,714
|
10.14
|
60,615
|
4.00
|
90,923
|
6.00
|
|||||||||||||
|
Tier
I capital (to average assets)
|
153,714
|
8.92
|
68,934
|
4.00
|
86,167
|
5.00
|
|||||||||||||
|
2008
|
|||||||||||||||||||
|
Total
capital (to risk-weighted assets)
|
$
|
185,699
|
13.15
|
%
|
$
|
112,934
|
8.00
|
%
|
$
|
141,168
|
10.00
|
%
|
|||||||
|
Tier
I capital (to risk-weighted assets)
|
170,612
|
12.09
|
56,467
|
4.00
|
84,701
|
6.00
|
|||||||||||||
|
Tier
I capital (to average assets)
|
170,612
|
10.47
|
65,195
|
4.00
|
81,494
|
5.00
|
|||||||||||||
Capital
Bank Corporation – Notes to Consolidated Financial Statements
20. Parent
Company Financial Information
Condensed
financial information of the financial holding company of the Bank as of
December 31, 2009 and 2008 and for the years ended December 31, 2009, 2008 and
2007 is presented below:
Condensed
Balance Sheets
|
As
of December 31,
|
|||||||
|
2009
|
2008
|
||||||
|
(Dollars
in thousands)
|
|||||||
|
Assets:
|
|||||||
|
Cash
|
$
|
1,523
|
$
|
330
|
|||
|
Equity
investment in subsidiary
|
168,633
|
176,827
|
|||||
|
Other
assets
|
2,810
|
3,583
|
|||||
|
Total
assets
|
$
|
172,966
|
$
|
180,740
|
|||
|
Liabilities:
|
|||||||
|
Subordinated
debentures
|
$
|
30,930
|
$
|
30,930
|
|||
|
Dividends
payable
|
1,166
|
1,011
|
|||||
|
Other
liabilities
|
1,085
|
285
|
|||||
|
Total
liabilities
|
33,181
|
32,226
|
|||||
|
Shareholders’
equity
|
139,785
|
148,514
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
172,966
|
$
|
180,740
|
|||
Condensed
Statements of Operations
|
For
the Years Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Dividends
from wholly-owned subsidiaries
|
$
|
6,409
|
$
|
2,750
|
$
|
6,000
|
||||
|
Undistributed
net (loss) income of subsidiaries
|
(11,245
|
)
|
(57,256
|
)
|
3,411
|
|||||
|
Other
income
|
46
|
106
|
186
|
|||||||
|
Interest
expense
|
1,072
|
1,800
|
2,444
|
|||||||
|
Other
expenses
|
1,974
|
92
|
95
|
|||||||
|
Net
(loss) income before tax benefits
|
(7,836
|
)
|
(56,292
|
)
|
7,058
|
|||||
|
Income
tax benefit
|
(1,020
|
)
|
(608
|
)
|
(800
|
)
|
||||
|
Net
(loss) income
|
$
|
(6,816
|
)
|
$
|
(55,684
|
)
|
$
|
7,858
|
||
Capital Bank Corporation – Notes to Consolidated Financial Statements
Condensed
Statements of Cash Flows
|
For
the Years Ended December 31,
|
||||||||||
|
2009
|
2008
|
2007
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Operating
activities:
|
||||||||||
|
Net
(loss) income
|
$
|
(6,816
|
)
|
$
|
(55,684
|
)
|
$
|
7,858
|
||
|
Equity
in undistributed net loss (income) of subsidiaries
|
11,245
|
57,256
|
(3,411
|
)
|
||||||
|
Net
change in other assets and liabilities
|
1,591
|
(412
|
)
|
(265
|
)
|
|||||
|
Net
cash provided by operating activities
|
6,020
|
1,160
|
4,182
|
|||||||
|
Investing
activities:
|
||||||||||
|
Additional
investment in subsidiary
|
–
|
(41,279
|
)
|
–
|
||||||
|
Net
cash used in investing activities
|
–
|
(41,279
|
)
|
–
|
||||||
|
Financing
activities:
|
||||||||||
|
Proceeds
from issuance of preferred stock
|
–
|
41,279
|
–
|
|||||||
|
Preferred
stock offering costs
|
–
|
(119
|
)
|
–
|
||||||
|
Proceeds
from issuance of common stock
|
700
|
872
|
1,193
|
|||||||
|
Payments
to repurchase common stock
|
–
|
(92
|
)
|
(4,523
|
)
|
|||||
|
Dividends
paid
|
(5,527
|
)
|
(3,592
|
)
|
(3,417
|
)
|
||||
|
Net
cash (used in) provided by financing activities
|
(4,827
|
)
|
38,348
|
(6,747
|
)
|
|||||
|
Net
change in cash and cash equivalents
|
1,193
|
(1,771
|
)
|
(2,565
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
330
|
2,101
|
4,666
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
1,523
|
$
|
330
|
$
|
2,101
|
||||
21. Subsequent
Events
On January 15, 2010, the Company withdrew its registration statement with respect to its
public offering of common stock due to unfavorable market conditions. The
Company incurred $1.9 million of direct nonrecurring expenses related to the
proposed public stock offering, which was recorded to other noninterest expense
on the Consolidated Statements of Operations for the year ended December 31,
2009. This amount reflects the entire cost of the proposed offering and
represents investment banking, legal and accounting costs as well as other
miscellaneous filing and printing costs directly related to the proposed
offering. Additionally, the Company entered into a letter of intent with
a private equity fund on December 13, 2009 regarding an investment in the
Company’s common stock. That investment was not consummated, and the letter of
intent expired.
On
February 1, 2010, the Company announced that its Board of Directors voted to
suspend payment of the Company’s quarterly cash dividend to its common
shareholders to preserve capital.
Capital Bank Corporation – Notes
to Consolidated Financial Statements
22. Selected Quarterly
Financial Data (Unaudited)
Selected
unaudited quarterly balances and results of operations as of and for the years
ended December 31, 2009 and 2008 are as follows:
|
Three
Months Ended
|
|||||||||||||
|
December
31
|
September
30
|
June
30
|
March
31
|
||||||||||
|
(Dollars
in thousands except per share data)
|
|||||||||||||
|
2009
|
|||||||||||||
|
Total
assets
|
$
|
1,734,668
|
$
|
1,734,950
|
$
|
1,695,342
|
$
|
1,665,611
|
|||||
|
Investment
securities
|
245,492
|
262,499
|
268,224
|
286,310
|
|||||||||
|
Loans
(gross)
|
1,390,302
|
1,357,243
|
1,293,340
|
1,277,064
|
|||||||||
|
Allowance
for loan losses
|
26,081
|
19,511
|
18,602
|
18,480
|
|||||||||
|
Deposits
|
1,377,965
|
1,385,250
|
1,380,842
|
1,340,974
|
|||||||||
|
Shareholders’
equity
|
139,785
|
149,525
|
143,306
|
142,674
|
|||||||||
|
Net
interest income
|
$
|
12,978
|
$
|
13,555
|
$
|
12,164
|
$
|
10,181
|
|||||
|
Provision
for loan losses
|
11,822
|
3,564
|
1,692
|
5,986
|
|||||||||
|
Noninterest
income
|
1,180
|
2,507
|
3,724
|
2,106
|
|||||||||
|
Noninterest
expense
|
14,033
|
11,098
|
12,465
|
11,564
|
|||||||||
|
Net
(loss) income before taxes
|
(11,697
|
)
|
1,400
|
1,731
|
(5,263
|
)
|
|||||||
|
Income
tax (benefit) expense
|
(4,452
|
)
|
(2,143
|
)
|
382
|
(800
|
)
|
||||||
|
Net
(loss) income
|
$
|
(7,245
|
)
|
$
|
3,543
|
$
|
1,349
|
$
|
(4,463
|
)
|
|||
|
Dividends
and accretion on preferred stock
|
588
|
590
|
587
|
587
|
|||||||||
|
Net
(loss) income attributable to common shareholders
|
$
|
(7,833
|
)
|
$
|
2,953
|
$
|
762
|
$
|
(5,050
|
)
|
|||
|
Earnings
(loss) per common share – basic
|
$
|
(0.68
|
)
|
$
|
0.26
|
$
|
0.07
|
$
|
(0.45
|
)
|
|||
|
Earnings
(loss) per common share – diluted
|
$
|
(0.68
|
)
|
$
|
0.26
|
$
|
0.07
|
$
|
(0.45
|
)
|
|||
|
2008
|
|||||||||||||
|
Total
assets
|
$
|
1,654,232
|
$
|
1,594,402
|
$
|
1,592,034
|
$
|
1,575,301
|
|||||
|
Investment
securities
|
278,138
|
244,310
|
246,468
|
258,086
|
|||||||||
|
Loans
(gross)
|
1,254,368
|
1,194,149
|
1,178,157
|
1,150,497
|
|||||||||
|
Allowance
for loan losses
|
14,795
|
14,017
|
13,910
|
13,563
|
|||||||||
|
Deposits
|
1,315,314
|
1,197,721
|
1,182,615
|
1,150,897
|
|||||||||
|
Shareholders’
equity
|
148,514
|
166,521
|
165,731
|
167,967
|
|||||||||
|
Net
interest income
|
$
|
9,932
|
$
|
10,827
|
$
|
10,928
|
$
|
10,909
|
|||||
|
Provision
for loan losses
|
1,701
|
760
|
850
|
565
|
|||||||||
|
Noninterest
income
|
2,293
|
3,507
|
2,936
|
2,265
|
|||||||||
|
Noninterest
expense
|
76,282
|
10,757
|
9,930
|
9,643
|
|||||||||
|
Net
(loss) income before taxes
|
(65,758
|
)
|
2,817
|
3,084
|
2,966
|
||||||||
|
Income
tax (benefit) expense
|
(3,680
|
)
|
805
|
869
|
799
|
||||||||
|
Net
(loss) income
|
$
|
(62,078
|
)
|
$
|
2,012
|
$
|
2,215
|
$
|
2,167
|
||||
|
Dividends
and accretion on preferred stock
|
124
|
–
|
–
|
–
|
|||||||||
|
Net
(loss) income attributable to common shareholders
|
$
|
(62,202
|
)
|
$
|
2,012
|
$
|
2,215
|
$
|
2,167
|
||||
|
Earnings
per common share – basic
|
$
|
(5.50
|
)
|
$
|
0.18
|
$
|
0.20
|
$
|
0.19
|
||||
|
Earnings
per common share – diluted
|
$
|
(5.50
|
)
|
$
|
0.18
|
$
|
0.20
|
$
|
0.19
|
||||
Report of Independent Registered Public Accounting
Firm
Board of
Directors and Shareholders
of
Capital Bank Corporation and Subsidiaries
We have
audited the accompanying consolidated balance sheet of Capital Bank Corporation
(a North Carolina corporation) and subsidiaries as of December 31, 2009 and
2008, and the related consolidated statements of operations, changes in
shareholders’ equity and comprehensive income (loss) and cash flows for each of
the three years in the period ended December 31, 2009. These consolidated
financial statements are the responsibility of the Corporation’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Capital Bank Corporation and
subsidiaries as of December 31, 2009 and 2008, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2009, in conformity with accounting principles generally accepted in the United
States of America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Capital Bank Corporation’s
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 10, 2010, expressed an
unqualified opinion.
/s/ GRANT
THORNTON LLP
Raleigh,
North Carolina
March 10,
2010
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls
and Procedures. The Company’s management, under the supervision of and
with the participation of the Company’s Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company’s disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period covered by this
report. Our disclosure controls and procedures were designed to provide
reasonable assurance of achieving their control objectives. Based on our
evaluation, the Company’s Chief Executive Officer and the Chief Financial
Officer have concluded that, as of the end of the period covered by this report,
the Company’s disclosure controls and procedures are effective at the reasonable
assurance level, in that they are reasonably designed to ensure that all
material information relating to the Company required to be included in the
Company’s reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC, and that such information is accumulated and
communicated to the Company’s management, including the Company’s Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over
Financial Reporting. There have not been any changes in the Company’s
internal control over financial reporting, as such term is defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act, during the Company’s fiscal
quarter ended December 31, 2009 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial
reporting. From time to time, the Company makes changes to its internal control
over financial reporting that are intended to enhance the effectiveness of its
internal control over financial reporting and which do not have a material
effect on its overall internal control over financial reporting.
Management’s Report on Internal
Control Over Financial Reporting. The Company’s management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. The Company’s internal control over financial reporting was
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United
States.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with policies or procedures may deteriorate.
Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2009. Management based its assessment on the
criteria for effective internal control over financial reporting set forth by
the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated
Framework. Based on this assessment, management concluded that, as of
December 31, 2009, the Company maintained effective internal control over
financial reporting.
Grant
Thornton LLP, an independent registered public accounting firm, who audited the
consolidated financial statements of the Company included in this Annual Report
on Form 10-K, has also audited the effectiveness of the Company’s internal
control over financial reporting. Such report is included
below.
Limitations on the Effectiveness of
Controls. A company’s internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
Further,
the design of disclosure controls and internal control over financial reporting
must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected.
The
Company plans to continue to evaluate the effectiveness of its disclosure
controls and procedures and its internal control over financial reporting on an
ongoing basis and will take action as appropriate.
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Shareholders
of
Capital Bank Corporation and Subsidiaries
We have
audited Capital Bank Corporation’s (a North Carolina corporation) internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Capital Bank Corporation’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management’s
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Corporation’s internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. In our opinion, Capital Bank
Corporation maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on criteria established
in Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Capital Bank
Corporation and subsidiaries as of December 31, 2009 and 2008, and the related
consolidated statements of operations, changes in shareholders’ equity and
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 2009, and our report dated March 10, 2010, expressed
an unqualified opinion on those financial statements.
/s/ GRANT
THORNTON LLP
Raleigh,
North Carolina
March 10,
2010
Item 9A(T). Controls and Procedures
Not
Applicable.
Item 9B. Other Information
Submission
of Matters to a Vote of Security Holders
A Special
Meeting of Shareholders was held on December 4, 2009. The following matter was
submitted to a vote of the shareholders with the results shown
below:
|
Approval
of amendment to the Articles of Incorporation to increase the authorized
shares of common stock of the Company to fifty million (50,000,000) shares
from twenty million (20,000,000) shares
|
||||
|
Votes
For
|
Votes
Against
|
Abstained
|
||
|
8,633,210
|
1,071,891
|
37,386
|
||
The
matter listed above is described in detail in our definitive proxy statement
dated November 2, 2009 for the Special Meeting of Shareholders held on December
4, 2009.
This Part
incorporates certain information from the definitive proxy statement (the “2010
Proxy Statement”) for the Company’s 2010 Annual Meeting of Shareholders, to be
filed with the SEC within 120 days after the end of the Company’s fiscal
year.
Item 10. Directors, Executive Officers and
Corporate Governance
Information
concerning the Company’s executive officers is included under the caption
“Executive Officers” in Part I. – Item 1. Business of this report. Information
concerning the Company’s directors and filing of certain reports of beneficial
ownership is incorporated by reference to the sections entitled “Proposal 1:
Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in the 2010 Proxy Statement. Information concerning the Audit
Committee of the Company’s Board of Directors is incorporated by reference to
the section entitled “Information about Our Board of Directors – Board of
Directors Committees – Audit Committee” in the 2010 Proxy Statement. There have
been no material changes to the procedures by which security holders may
recommend nominees to the Company’s Board of Directors since the date of the
Company’s Proxy Statement for the Company’s 2009 Annual Meeting of
Shareholders.
The
Company has adopted a Code of Business Conduct and Ethics (our “Code of Ethics”)
that applies to our employees, officers and directors. The complete Code of
Ethics is available on our website at www.capitalbank-us.com.
If at any time it is not available on our website, we will provide a copy upon
written request made to our Corporate Secretary, Capital Bank Corporation, 333
Fayetteville Street, Suite 700, Raleigh, North Carolina 27601, telephone (919)
645-6400. Information on our website is not part of this report. If we amend or
grant any waiver from a provision of our Code of Ethics that applies to our
executive officers, we will publicly disclose such amendment or waiver as
required by applicable law, including by posting such amendment or waiver on our
website at www.capitalbank-us.com
or by filing a Current Report on Form 8-K.
Item 11. Executive Compensation
This
information is incorporated by reference from the sections entitled
“Compensation,” “Compensation/Human Resources Committee Interlocks and Insider
Participation” and “Compensation/Human Resources Committee Report” in the 2010
Proxy Statement.
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
This
information is incorporated by reference from the sections entitled “Principal
Shareholders” and “Compensation – Equity Compensation Plan Information” in the
2010 Proxy Statement.
Item 13. Certain Relationships and
Related Transactions, and Director Independence
This
information is incorporated by reference from the sections entitled “Director
Compensation – Certain Transactions” and “Information about Our Board of
Directors” in the 2010 Proxy Statement.
Item 14. Principal Accounting Fees and
Services
This
information is incorporated by reference from the section entitled “Proposal 2:
Ratification of Appointment of Independent Registered Public Accounting Firm –
Audit Firm Fee Summary” in the 2010 Proxy Statement.
Item 15. Exhibits and Financial Statement
Schedules
|
(a)(1)
|
Financial Statements.
The financial statements and information listed below are included in this
report in Part II, Item 8:
|
Financial
Statements and Information
|
•
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
|
|
•
|
Consolidated
Statements of Operations for the years ended December 31, 2009, 2008 and
2007
|
|
|
•
|
Consolidated
Statements of Changes in Shareholders’ Equity and Comprehensive Income
(Loss) for the years ended December 31, 2009, 2008 and
2007
|
|
|
•
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009, 2008 and
2007
|
|
|
•
|
Notes
to Consolidated Financial Statements
|
|
|
•
|
Report
of Independent Registered Public Accounting Firm
|
|
|
(a)(2)
|
Financial Statement
Schedules. All applicable financial statement schedules required
under Regulation S-X and pursuant to Industry Guide 3 under the Securities
Act have been included in the Notes to the Consolidated Financial
Statements or in Part II Item 7.
|
|
|
(a)(3)
|
Exhibits. The exhibits
required by Item 601 of Regulation S-K are listed in the Exhibit Index
immediately following the signature pages to this
report.
|
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the
10th day of March 2010.
|
CAPITAL
BANK CORPORATION
|
|||
|
By:
|
/s/
B. Grant Yarber
|
||
|
B.
Grant Yarber
|
|||
|
President
and Chief Executive Officer
|
|||
SIGNATURES
AND POWER OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints B. Grant Yarber, Michael R. Moore, and David B. Therit,
and each of them, with full power to act without the other, his true and lawful
attorneys-in-fact and agents, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments to this report, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant in the
capacities indicated and on March 10, 2010.
|
Signature
|
Title
|
||
|
/s/ B. Grant
Yarber
|
President
and Chief Executive Officer and Director
|
||
|
B.
Grant Yarber
|
(Principal
Executive Officer)
|
||
|
/s/ Michael R.
Moore
|
Chief
Financial Officer
|
||
|
Michael
R. Moore
|
(Principal
Financial Officer)
|
||
|
/s/ David B.
Therit
|
Chief
Accounting Officer
|
||
|
David
B. Therit
|
(Principal
Accounting Officer)
|
||
|
/s/ Charles F.
Atkins
|
Director
|
||
|
Charles
F. Atkins
|
|||
|
/s/ John F. Grimes,
III
|
Director
|
||
|
John
F. Grimes, III
|
|||
|
/s/
Robert L.
Jones
|
Director
|
||
|
Robert
L. Jones
|
|||
|
/s/
Oscar A. Keller,
III
|
Chairman
of the Board
|
||
|
Oscar
A. Keller, III
|
|||
|
/s/
W. Carter
Keller
|
Director
|
||
|
W.
Carter Keller
|
|||
|
/s/
Ernest A. Koury,
Jr.
|
Director
|
||
|
Ernest
A. Koury, Jr.
|
|||
|
/s/
George R. Perkins,
III
|
Director
|
||
|
George
R. Perkins, III
|
|
Signature
|
Title
|
||
|
/s/
Don W.
Perry
|
Director
|
||
|
Don
W. Perry
|
|||
|
/s/
Carl H. Ricker,
Jr.
|
Director
|
||
|
Carl
H. Ricker, Jr.
|
|||
|
/s/
Samuel J. Wornom,
III
|
Director
|
||
|
Samuel
J. Wornom, III
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
|
2.01
|
Merger
Agreement, dated June 29, 2005, by and among Capital Bank Corporation and
1st State Bancorp, Inc. (incorporated by reference to Exhibit 2.1 to the
Company’s Current Report on Form 8-K filed with the SEC on June 29,
2005)
|
|
|
2.02
|
List
of Schedules Omitted from Merger Agreement included as Exhibit 2.1 above
(incorporated by reference to Exhibit 2.2 to the Company’s Current Report
on Form 8-K filed with the SEC on June 29, 2005)
|
|
|
3.01
|
Articles
of Incorporation of the Company, as amended (incorporated by reference to
Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC
on December 4, 2009)
|
|
|
3.02
|
Bylaws
of the Company, as amended to date (incorporated by reference to Exhibit
3.02 to the Company’s Annual Report on Form 10-K filed with the SEC on
March 29, 2002)
|
|
|
4.01
|
Specimen
Common Stock Certificate of the Company (incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (File No.
333-65853) filed with the SEC on October 19, 1998, as amended on November
10, 1998, December 21, 1998 and February 8, 1999)
|
|
|
4.02
|
In
accordance with Item 601(b) (4) (iii) (A) of Regulation S-K, certain
instruments respecting long-term debt of the registrant have been omitted
but will be furnished to the SEC upon request.
|
|
|
4.03
|
Specimen
Series A Preferred Stock Certificate of the Company (incorporated by
reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed
with the SEC on December 15, 2008)
|
|
|
4.04
|
Warrant
to Purchase up to 749,619 Shares of Common Stock (incorporated by
reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed
with the SEC on December 15, 2008)
|
|
|
10.01
|
Equity
Incentive Plan (incorporated by reference to Exhibit 10.02 to the
Company’s Annual Report on Form 10-K filed with the SEC on March 28,
2003)*
|
|
|
10.02
|
Form
of Stock Award Agreement under the Capital Bank Corporation Equity
Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the SEC on December 28,
2007)*
|
|
|
10.03
|
Form
of Incentive Stock Option Agreement under the Capital Bank Corporation
Equity Incentive Plan (incorporated by reference to Exhibit 99.3 to the
Company’s Registration Statement on Form S-8 (File No. 333-160699) filed
with the SEC on July 20, 2009)*
|
|
|
10.04
|
Amended
and Restated Deferred Compensation Plan for Outside Directors
(incorporated by reference from Appendix A to the Company’s Proxy
Statement for Annual Meeting held on May 26, 2005)*
|
|
|
10.05
|
Amended
and Restated Deferred Compensation Plan for Outside Directors, effective
November 20, 2008 (incorporated by reference to Exhibit 10.4 to the
Company’s Annual Report on Form 10-K filed with the SEC on March 16,
2009)*
|
|
|
10.06
|
Capital
Bank Defined Benefit Supplemental Executive Retirement Plan (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on May 27, 2005)*
|
|
|
10.07
|
Amended
and Restated Capital Bank Defined Benefit Supplemental Executive
Retirement Plan, effective December 18, 2008 (incorporated by reference to
Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed with the
SEC on March 16, 2009)*
|
|
|
10.08
|
Capital
Bank Supplemental Retirement Plan for Directors (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
SEC on May 27, 2005)*
|
|
|
10.09
|
Amended
and Restated Capital Bank Supplemental Retirement Plan for Directors,
effective December 18, 2008 (incorporated by reference to Exhibit 10.8 to
the Company’s Annual Report on Form 10-K filed with the SEC on March 16,
2009)*
|
|
Exhibit
No.
|
Description
|
|
|
10.10
|
Amended
and Restated Employment Agreement, dated September 17, 2008, by and
between Capital Bank Corporation, Capital Bank and B. Grant Yarber
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the SEC on September 22, 2008)*
|
|
|
10.11
|
Employment
Agreement, dated January 31, 2008, by and between Michael R. Moore and
Capital Bank Corporation (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K filed with the SEC on January 31,
2008)*
|
|
|
10.12
|
Employment
Agreement, dated January 25, 2008, by and between David C. Morgan and
Capital Bank Corporation (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the SEC on January 31,
2008)*
|
|
|
10.13
|
Amended
and Restated Employment Agreement, dated September 17, 2008, by and
between Capital Bank Corporation, Capital Bank and Mark Redmond
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report
on Form 8-K filed with the SEC on September 22, 2008)*
|
|
| 10.14 |
Letter
agreement, dated November 18, 2008, by and between Capital Bank and Ralph
J. Edwards*, **
|
|
|
10.15
|
Lease
Agreement, dated November 16, 1999, between Crabtree Park, LLC and the
Company (incorporated by reference to Exhibit 10.01 to the Company’s
Annual Report on Form 10-K filed with the SEC on March 27,
2000)
|
|
|
10.16
|
Lease
Agreement, dated November 1, 2005, by and between Capital Bank Corporation
and 333 Ventures, LLC (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the SEC on November 28,
2005)
|
|
|
10.17
|
Agreement,
dated November 2001, between Fiserv Solutions, Inc. and the Company
(incorporated by reference to Exhibit 10.08 to the Company’s Annual Report
on Form 10-K filed with the SEC on March 29, 2002)
|
|
|
10.18
|
Letter
agreement, dated December 12, 2008, including Securities Purchase
Agreement—Standard Terms incorporated by reference therein, by and between
the Company and the United States Department of the Treasury (incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on December 15, 2008)
|
|
|
10.19
|
Form
of Waiver with Senior Executive Officers (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the
SEC on December 15, 2008)
|
|
|
10.20
|
Form
of Letter Agreement Limiting Executive Compensation with Senior Executive
Officers (incorporated by reference to Exhibit 10.3 to the Company’s
Current Report on Form 8-K filed with the SEC on December 15,
2008)
|
|
|
10.21
|
Summary
of Material Terms of the Capital Bank Annual Incentive Plan (incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the period ended March 31, 2008 filed with the SEC on May 8,
2008)*
|
|
|
10.22
|
Purchase
and Assumption Agreement, dated September 25, 2008, by and between Capital
Bank, a wholly-owned subsidiary of Capital Bank Corporation, and Omni
National Bank (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the period ended September 30, 2008
filed with the SEC on November 7, 2008)
|
|
|
10.23
|
Real
Estate Purchase Agreement, dated October 6, 2008, by and between Capital
Bank, a wholly-owned subsidiary of Capital Bank Corporation, Michael R.
Moore and Viola V. Moore (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the SEC on October 9,
2008)
|
|
|
10.24
|
Letter
of Intent, dated December 13, 2009, between Patriot Financial Partners,
L.P., Patriot Financial Partners Parallel, L.P. and Capital Bank
Corporation (incorporated by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K filed with the SEC on December 14,
2009)
|
|
|
21.01
|
Subsidiaries
of the Registrant**
|
|
Exhibit
No.
|
Description
|
|
|
23.01
|
Consent
of Independent Registered Public Accounting Firm**
|
|
|
31.01
|
Certification
of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002**
|
|
|
31.02
|
Certification
of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a),
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002**
|
|
|
32.01
|
Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002. [This exhibit is being furnished pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
the extent required by that act, be deemed to be incorporated by reference
into any document or filed herewith for purposes of liability under the
Securities Exchange Act of 1934, as amended, or the Securities Act of
1933, as amended, as the case may be.]**
|
|
|
32.02
|
Certification
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of
The Sarbanes-Oxley Act of 2002. [This exhibit is being furnished pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to
the extent required by that act, be deemed to be incorporated by reference
into any document or filed herewith for purposes of liability under the
Securities Exchange Act of 1934, as amended, or the Securities Act of
1933, as amended, as the case may be.]**
|
|
|
99.01
|
Certification
of Chief Executive Officer Pursuant to Section 11(B)(4) of the Emergency
Economic Stabilization Act of 2008 and 31 C.F.R. §
30.15**
|
|
|
99.02
|
Certification
of Chief Financial Officer Pursuant to Section 11(B)(4) of the Emergency
Economic Stabilization Act of 2008 and 31 C.F.R. §
30.15**
|
|
|
|
*
|
Represents
a management contract or compensatory plan or
arrangement
|
|
|
**
|
Filed
herewith
|
Exhibit
21.01
SUBSIDIARIES
Capital
Bank
(North
Carolina)
Capital
Bank Investment Services, Inc.
(North
Carolina)
Capital
Bank Statutory Trust I
(Delaware)
Capital
Bank Statutory Trust II
(Delaware)
Capital
Bank Statutory Trust III
(Delaware)
CB
Capital Purchase, Inc.
(North
Carolina)
CB
Trustee, LLC
(North
Carolina)
Exhibit
23.01
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
have issued our reports dated March 10, 2010,with respect to the consolidated
financial statements and internal control over financial reporting included in
the Annual Report of Capital Bank Corporation on Form 10-K for the year ended
December 31, 2009. We hereby consent to the incorporation by reference of said
reports in the Registration Statements of Capital Bank Corporation on Form S-3
(File No. 333-155567, effective November 21, 2008) and Forms S-8 (File No.
333-148273, effective December 21, 2007, No. 333-125195, effective May 24, 2005,
No. 333-42628, effective July 31, 2000, No. 333-82602, effective February 12,
2002, No. 333-102774, effective January 28, 2003, No. 333-76919, effective April
23, 1999, No. 333-151782, effective June 19, 2008, No. 333-160689, effective
July 20, 2009 and No. 333-160699, effective July 20,
2009).
/s/ GRANT
THORNTON LLP
Raleigh,
North Carolina
March 10,
2010
- 101
-