As filed with the Securities and Exchange
Commission on February 10, 2011
Registration
No. 333-172025
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF
1933
CAPITAL BANK
CORPORATION
(Exact name of registrant as
specified in its charter)
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North Carolina
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6022
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56-2101930
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(IRS Employer
Identification Number)
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333 Fayetteville Street, Suite 700
Raleigh, North Carolina 27601
(919) 645-6400
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
R. Eugene Taylor, Chief Executive Officer
Capital Bank Corporation
333 Fayetteville Street, Suite 700
Raleigh, North Carolina 27601
(919) 645-6400
(Name, address, including zip
code, and
telephone number, including area
code, of agent for service)
Copies to:
David E. Shapiro, Esq.
Wachtell, Lipton, Rosen & Katz
51 West
52nd
Street
New York, New York 10019
(212) 403-1000
Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933 check the
following box:
þ
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. 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.
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company þ
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(Do not check if a smaller
reporting company)
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CALCULATION
OF REGISTRATION FEE
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Title of Each Class of Securities
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Proposed Maximum
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Amount of
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to be Registered
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Aggregate Offering Price
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Registration Fee
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Common Stock, no par value per share, underlying Subscription
Rights(1)
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$12,750,000(2)
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$1,480.28(3)
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(1) |
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This Registration Statement relates to the shares of Common
Stock deliverable upon the exercise of non-transferable
subscription rights pursuant to the rights offering described
herein. Pursuant to Rule 416(a) under the Securities Act of
1933, as amended (the Securities Act), this
Registration Statement also covers such additional shares of
Common Stock as may be issued to prevent dilution of the shares
of Common Stock covered hereby resulting from stock splits,
stock dividends or similar transactions. |
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(2) |
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Represents the gross proceeds from the assumed exercise of all
non-transferable subscription rights to be issued. |
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(3) |
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Calculated pursuant to Rule 457(o) under the Securities
Act. This fee is fully offset by a fee of $3,069.00, which was
previously paid in connection with the Registration Statement on
Form S-1
(File
No. 333-162637)
filed by Capital Bank Corporation on October 22, 2009. No
securities were issued or sold under the prior Registration
Statement. Pursuant to Rule 457(p) under the Securities
Act, such unused filing fee may be applied to the filing fee
payable in connection with this Registration Statement. |
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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SUBJECT TO COMPLETION, DATED
FEBRUARY 10, 2011
PROSPECTUS
Common Stock Underlying
Subscription Rights
to Purchase up to
5,000,000 Shares of Common
Stock
We are distributing at no charge to holders of our common stock,
no par value per share, non-transferable subscription rights to
purchase up to 5,000,000 shares of our common stock in the
aggregate. You will receive 0.3882637 subscription rights for
each share of common stock held by you of record as of
5:00 p.m., Eastern Standard time, on January 27, 2011.
Each whole subscription right will entitle you to purchase one
share of our common stock at a subscription price of $2.55 per
share of common stock, subject to an overall beneficial
ownership limit of 4.9% for each participant.
The subscription rights will expire if they are not exercised by
5:00 p.m., Eastern Standard time, on March 4, 2011,
unless we extend the offering period in our sole discretion. You
should carefully consider whether to exercise your subscription
rights before the expiration of the rights offering period. All
exercises of subscription rights are irrevocable. Our Board of
Directors is making no recommendation regarding your exercise of
the subscription rights. The subscription rights may not be sold
or transferred.
Investing in our common stock
involves risks. See Risk Factors
beginning on page 9 to read about factors you should
consider before exercising your subscription rights.
We may in our sole discretion cancel the rights offering at any
time and for any reason. If we cancel this offering, the
subscription agent will return all subscription payments it has
received for the cancelled rights offering without interest or
penalty. In addition, we reserve the right to change, prior to
the distribution of rights, the record date of the rights
offering, and we may be required to do so to comply with the
Companys bylaws if we are unable to distribute the rights
prior to the seventieth day following the original record date
of January 27, 2011. In the event of any such change of the
record date, NAFH will remain ineligible to participate in the
rights offering.
We have engaged Registrar and Transfer Company to serve as the
subscription agent and Eagle Rock Proxy Advisors, LLC as
information agent for the rights offering. The subscription
agent will hold in escrow the funds we receive from subscribers
until we complete or cancel the rights offering.
This is not an underwritten offering. The shares are being
offered directly by us without the services of an underwriter or
selling agent.
Shares of our common stock are traded on the NASDAQ Global
Select Market under the symbol CBKN. On
February 9, 2011, the closing sale price for our common
stock was $3.11 per share. The shares of common stock
issued in the rights offering will also be listed on the NASDAQ
Global Select Market under the same symbol. The subscription
rights will not be traded or quoted on NASDAQ or any other stock
exchange or trading market.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
These shares of common stock are not savings accounts,
deposits, or other obligations of our bank subsidiary or any of
our non-bank subsidiaries and are not insured by the Federal
Deposit Insurance Corporation or any other governmental
agency.
The date of this prospectus is
[ ],
2011.
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
additional or different information from that contained in this
prospectus. The information contained in this prospectus is
accurate only as of the date on the front cover of this
prospectus regardless of the time of delivery of this prospectus
or any exercise of the rights.
The distribution of this prospectus and the rights offering and
sale of shares of our common stock in certain jurisdictions may
be restricted by law. This prospectus does not constitute an
offer of, or a solicitation of an offer to buy, any shares of
common stock in any jurisdiction in which such offer or
solicitation is not permitted.
In this prospectus, all references to the Company,
we, us and our refer to
Capital Bank Corporation and its subsidiaries, unless the
context otherwise requires or where otherwise indicated.
References to Capital Bank or the Bank
mean our wholly-owned banking subsidiary.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information set forth in this prospectus may contain 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 our judgment concerning
the future and are subject to business, economic, and other
risks and uncertainties, both known and unknown, that could
cause our 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.
We caution that any such forward-looking statements are further
qualified by important factors that could cause our actual
operating results to differ materially from those in the
forward-looking statements, including without limitation:
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any effects of our recent change of control, in which North
American Financial Holdings, Inc. (NAFH) acquired a
majority ownership of our voting power, including any change in
management, strategic direction, business plan, or operations;
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our ability to comply with the minimum capital ratio
requirements imposed by the Banks Memorandum of
Understanding (MOU) with the Federal Deposit
Insurance Corporation (FDIC) and the North Carolina
Commissioner of Banks (the NC Commissioner) and the
potential negative consequences that may result;
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the effect of other requirements of the MOU and any further
regulatory actions;
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our new managements ability to successfully integrate into
our business and effectively execute our business plan;
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the inability to receive dividends from the Bank and to service
debt and satisfy obligations as they become due;
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local economic conditions affecting retail and commercial real
estate;
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our ability to manage disruptions in the credit and lending
markets;
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the risks of changes in interest rates on the levels,
composition and costs of deposits, loan demand and the values of
loan collateral, securities, and other interest-sensitive assets
and liabilities;
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risks related to loans secured by real estate, including further
adverse developments in the real estate markets that would
decrease the value and marketability of collateral;
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the failure of assumptions and estimates underlying the
establishment of reserves for possible loan losses and other
estimates;
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competition within the industry;
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our dependence on attracting and retaining the services of key
personnel and management;
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uncertainty regarding the amount of proceeds received from the
rights offering;
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effects of the rights offering or the terms thereof on the price
of our common stock;
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our ability to cancel the rights offering;
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the risk that we are required to change the record date for the
rights offering to comply with the bylaws of the Company;
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with respect to the participation in the rights offering by
participants and other account holders in the Capital Bank
401(k) Retirement Plan (the 401(k) Plan), a failure
to obtain an exemption from the U.S. Department of Labor
(the DOL), on a retroactive basis, effective to the
commencement of the rights offering, such that the acquisition,
holding, and exercise of the subscription rights by the 401(k)
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Plan would constitute a prohibited transaction under the
Employee Retirement Income Security Act of 1974, as amended
(ERISA), and Section 4975 of the Internal
Revenue Code of 1986, as amended (the Code); and
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the differing interests that NAFH, as a controlling shareholder,
may have from the interests of other shareholders;
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the other risk factors described under the heading Risk
Factors in this prospectus.
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Given these risks, uncertainties and other factors, you should
not place undue reliance on these forward-looking statements.
Also, these forward-looking statements represent our estimates
and assumptions only as of the date such forward-looking
statements are made.
You should read carefully this prospectus completely and with
the understanding that our actual future results may be
materially different from what we expect. We hereby qualify all
of our forward-looking statements by these cautionary
statements. Except as required by law, we assume no obligation
to update these forward-looking statements publicly or to update
the reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new
information becomes available in the future.
iii
QUESTIONS
AND ANSWERS RELATING TO THE RIGHTS OFFERING
The following are examples of what we anticipate will be
common questions about the rights offering. The answers are
based on selected information included elsewhere in this
prospectus. The following questions and answers do not contain
all of the information that may be important to you and may not
address all of the questions that you may have about the rights
offering. This prospectus contains more detailed descriptions of
the terms and conditions of the rights offering and provides
additional information about us and our business, including
potential risks related to the rights offering, the common stock
of the Company, and our business.
What is
the rights offering?
We are distributing to holders of our common stock as of
5:00 p.m., Eastern Standard time, on January 27, 2011,
which is the record date for the rights offering, at no charge,
non-transferable subscription rights to purchase shares of our
common stock. You will receive 0.3882637 subscription rights for
each share of common stock you owned as of 5:00 p.m.,
Eastern Standard time, on January 27, 2011. Each whole
subscription right will entitle you to purchase one share of our
common stock at a subscription price of $2.55 per share. The
subscription rights will not be evidenced by any certificates.
If our shareholders do not exercise their subscription rights in
full, we will not issue the full number of shares authorized for
issuance in connection with the rights offering.
Why are
we conducting the rights offering?
On November 3, 2010, the Company and the Bank entered into
an Investment Agreement (the Investment Agreement)
with North American Financial Holdings, Inc. (NAFH).
The Investment Agreement provides that the Company will commence
a rights offering following the closing of the sale to NAFH of
our common stock as contemplated by the Investment Agreement
(the Investment). Pursuant to the Investment
Agreement, shareholders of record as of a record date agreed
between the Company and NAFH will receive non-transferable
rights to purchase a number of shares of our common stock
proportional to the number of shares of common stock held by
such holders on such date, at a purchase price equal to $2.55
per share, subject to a maximum issuance of
5,000,000 shares of common stock and a beneficial ownership
limit of 4.9% for each participant. The closing of the
Investment occurred on January 28, 2011. We are conducting
this rights offering as required by the Investment Agreement
(1) to raise equity capital and (2) to provide our
existing shareholders with the opportunity to increase their
ownership of shares of our common stock following the completion
of the Investment by NAFH.
Am I
required to exercise the subscription rights I receive in the
rights offering?
No. You may exercise any whole number of your subscription
rights, or you may choose not to exercise any subscription
rights. However, if you choose not to exercise your subscription
rights or you exercise less than all of your subscription rights
and other shareholders fully exercise their subscription rights
or exercise a greater proportion of their subscription rights
than you exercise, the percentage of our common stock owned by
these other shareholders will increase relative to your
ownership percentage, and your voting and other rights in the
Company will likewise be diluted.
What is a
subscription right?
For each whole subscription right that you own, you will have a
right to buy from us one share of our common stock at a
subscription price of $2.55 per share, subject to an overall
beneficial ownership limit of 4.9% for each participant. You may
exercise some or all of your subscription rights, subject to the
overall beneficial ownership limit of 4.9%, or you may choose
not to exercise any of your subscription rights. Fractional
subscription rights will be eliminated by rounding down to the
nearest whole number of subscription rights and may not be
exercised.
For example, if you owned 1,000 shares of our common stock
as of 5:00 p.m., Eastern Standard time, on the record date,
you would receive 388.2637 subscription rights and would have
the right to purchase 388 shares of common stock (rounded
down from 388.2637 subscription rights) for $2.55 per share.
iv
Is there
an over-subscription privilege or a backstop?
There is no over-subscription privilege associated with the
rights offering. In addition, no shareholder, including NAFH,
will backstop the rights offering. This means that neither you
nor any shareholder, including NAFH, will have the opportunity
to purchase additional shares not purchased by other
shareholders pursuant to their subscription rights.
What are
the limitations on the exercise of subscription
rights?
Each participant in this offering is subject to an overall
beneficial ownership limit of 4.9%, calculated with respect to
the approximately 88,877,846 shares of common stock
potentially outstanding after the consummation of this rights
offering if all rights are exercised. Any rights exercised by a
rights holder for common stock subscribed for by that holder
that would cause such holder to exceed the 4.9% ownership limit
will not be considered exercised or subscribed for by that
holder. The portion of the subscription price paid by a holder
for common stock not considered subscribed for will be returned
to that holder, without interest or penalty, as soon as
practicable after completion of this offering.
We will also require each rights holder exercising its rights to
represent to us in the subscription rights election form that,
together with any of its affiliates or any other person with
whom it is acting in concert or as a partnership, syndicate or
other group for the purpose of acquiring, holding or disposing
of our securities, it will not beneficially own more than 4.9%
of our outstanding shares of common stock, calculated based on
the approximately 88,877,846 shares potentially outstanding
after the consummation of this rights offering if all rights are
exercised.
Any rights holder found to be in violation of such
representation will have granted to us in the subscription
rights election form, with respect to any such excess shares,
(1) an irrevocable proxy and (2) a right for a limited
period of time to repurchase such excess shares at the lesser of
the subscription price and the market price for such shares,
each as set forth in more detail in the subscription rights
election form. See also The Rights Offering
Limitation on Exercise of Subscription Rights.
How soon
must I act to exercise my subscription rights?
The rights may be exercised beginning on the date of this
prospectus through the expiration of the rights offering period,
which is 5:00 p.m., Eastern Standard time, on March 4,
2011, unless we elect to extend the rights offering. If you
elect to exercise any rights, the subscription agent must
actually receive all required documents and payments from you
(and your payment must clear) before the expiration of the
rights offering period. Although we have the option of extending
the expiration date of the subscription period, we currently do
not intend to do so.
Although we will make reasonable attempts to provide this
prospectus to our shareholders, the rights offering and all
subscription rights will expire on the expiration date, whether
or not we have been able to locate each person entitled to
subscription rights.
May I
transfer my rights?
No, you may not sell, transfer or assign your rights to anyone
else.
Are we
requiring a minimum subscription to complete the rights
offering?
No, there is no minimum subscription required.
How was
the subscription price determined?
The Investment Agreement required the subscription price to be
$2.55 per share of common stock, which is the same per share
purchase price paid by NAFH in the Investment. The subscription
price is not necessarily related to our book value, results of
operations, cash flows, financial condition or the future market
value of our common stock. The market price of our common stock
may decline during or after the rights offering, and
v
you may not be able to sell the underlying shares of our common
stock purchased during the rights offering at a price equal to
or greater than the subscription price. We do not intend to
change the subscription price in response to changes in the
trading price of our common stock prior to the closing of the
rights offering. You should obtain a current quote for our
common stock before exercising your subscription rights and make
your own assessment of our business and financial condition, our
prospects for the future and the terms of the rights offering.
Are there
any conditions to completion of the rights offering?
Yes. The completion of the rights offering is subject to the
conditions described under The Rights Offering
Conditions and Cancellation.
Can the
rights offering be cancelled?
Yes. We may cancel the rights offering at any time before the
completion of the rights offering and for any reason. If the
rights offering is cancelled, all subscription payments received
by the subscription agent will be returned, without interest or
penalty, as soon as practicable to those persons who subscribed
for shares in the rights offering. In addition, we reserve the
right to change, prior to the distribution of rights, the record
date of the rights offering, and we may be required to do so to
comply with the Companys bylaws if we are unable to
distribute the rights prior to the seventieth day following the
record date of January 27, 2011. In the event of any such
change of the record date, NAFH will remain ineligible to
participate in the rights offering.
How do I
exercise my subscription rights?
You must properly complete the enclosed subscription rights
election form and deliver it, along with the full subscription
price, to the subscription agent, Registrar and Transfer
Company, before 5:00 p.m., Eastern Standard time, on
March 4, 2011. Do not deliver documents to the Company.
If you send a payment that is insufficient to purchase the
number of shares you requested, or if the number of shares you
requested is not specified in the form, the payment received
will be applied to exercise your subscription rights to the
fullest extent possible based on the amount of the payment
received, subject to the elimination of fractional shares. If
the payment exceeds the subscription price for the full exercise
of your subscription rights, or if you subscribe for more shares
than you are eligible to purchase (including if you attempt to
exercise a fractional subscription right), then the excess will
be returned to you as soon as practicable after completion of
this offering. You will not receive interest on any payments
refunded to you under the rights offering.
If the
rights offering is not completed, will my subscription payment
be refunded to me?
Yes. The subscription agent will hold all funds it receives in a
segregated bank account until completion of the rights offering.
If the rights offering is not completed, the subscription agent
will return all subscription payments, without interest or
penalty, as soon as practicable. If you own shares in
street name, it may take longer for you to receive
payment because the subscription agent will return payments
through the record holder of the shares.
What form
of payment must I use to pay the subscription price?
You must timely pay the full subscription price for the full
number of shares of common stock you wish to acquire in the
rights offering by delivering to the subscription agent a
personal check or wire transfer of same day funds that clears
before the expiration of the rights offering period. If you wish
to use any other form of payment, then you must obtain the prior
approval of the subscription agent and make arrangements in
advance with the subscription agent for the delivery of such
payment.
vi
What
should I do if I want to participate in the rights offering, but
my shares are held in the name of my broker, dealer, custodian
bank or other nominee?
If your shares of common stock are held in the name of a broker,
dealer, custodian bank or other nominee, then your broker,
dealer, custodian bank or other nominee is the record holder of
the shares you own. The record holder must exercise the
subscription rights on your behalf for the shares of common
stock you wish to purchase.
We will ask your broker, dealer, custodian bank or other nominee
to notify you of the rights offering. You should complete and
return to the record holder of your shares the form entitled
Beneficial Owner Election Form. You should receive
this form from the record holder of your shares with the other
rights offering materials.
If you wish to participate in the rights offering and purchase
shares of our common stock, please contact the record holder of
your shares promptly. Your broker, dealer, custodian bank or
other nominee is the holder of the shares you own and must
exercise the subscription rights on your behalf for shares you
wish to purchase. Your broker, dealer, custodian bank or other
nominee may establish a participation deadline prior to
5:00 p.m., Eastern Standard time on March 4, 2011, the
expiration date of the rights offering.
What
should I do if I want to participate in the rights offering, but
my subscription rights are held in my account in the
Companys 401(k) Plan?
If you held shares of our common stock in your 401(k) Plan
account as of the record date, you may exercise your
subscription rights with respect to those shares of common stock
by electing what amount (if any) of your subscription rights you
would like to exercise by properly completing a special election
form, called the 401(k) Plan Participant Election
Form, that is provided to you. You must return your
properly completed 401(k) Plan Participant Election Form to the
subscription agent in the prescribed manner. Your 401(k) Plan
Participant Election Form must be received by the subscription
agent by 5:00 p.m., Eastern Standard time, on
February 24, 2011. If your 401(k) Plan Participant Election
Form is not received by such special deadline, your election to
exercise your subscription rights that are held in your 401(k)
Plan account will not be effective. This is a special deadline
that applies to participants (and other account holders) in the
401(k) Plan (notwithstanding the different deadline set forth in
this prospectus for shareholders generally) and solely with
respect to the shares held through the 401(k) Plan as of the
record date. Any subscription rights credited to your 401(k)
Plan account will expire unless they are properly exercised by
this special deadline. If you elect to exercise some or all of
the subscription rights in your 401(k) Plan account, you must
also ensure that you have provided in your 401(k) Plan
Participant Election Form instructions for the liquidation and
transfer of the total amount of the funds required for such
exercise to the Capital Bank Corporation Subscription Fund in
your 401(k) Plan account and that such amount remains in the
Capital Bank Corporation Subscription Fund until
February 28, 2011.
Also note that, notwithstanding any election that you make
regarding the exercise of your subscription rights held by your
401(k) Plan account, no subscription rights held by the 401(k)
Plan will be exercised if the closing price of our common stock
on March 3, 2011, as reported by NASDAQ, is not greater
than or equal to the subscription price of $2.55 per share. For
additional information, see The Rights
Offering Special Instructions for Participants in
Our 401(k) Plan.
After I
exercise my subscription rights, can I change my mind?
No. Except as explained below with respect to the 401(k) Plan,
all exercises of subscription rights are irrevocable (unless we
are required by law to permit revocation), even if you later
learn information that you consider to be unfavorable to the
exercise of your subscription rights. You should not exercise
your subscription rights unless you are certain that you wish to
purchase additional shares of our common stock at the
subscription price of $2.55 per share.
In the case of the 401(k) Plan, notwithstanding any election
forms received from participants (and other account holders) in
the 401(k) Plan regarding the exercise of the subscription
rights held by their 401(k) Plan
vii
accounts, no subscription rights held by the 401(k) Plan will
be exercised if the closing price of our common stock on
March 3, 2011, as reported by NASDAQ, is not greater than
or equal to the subscription price of $2.55 per share. For
additional information, see The Rights
Offering Special Instructions for Participants in
Our 401(k) Plan.
Are there
risks in exercising my subscription rights?
Yes. The exercise of your subscription rights involves numerous
risks. Exercising your subscription rights means buying shares
of our common stock and should be considered as carefully as you
would consider any other equity investment. Among other things,
you should carefully consider the risks described under the
heading Risk Factors in this prospectus.
Has our
Board of Directors or NAFH made a recommendation to our
shareholders regarding the rights offering?
No. Neither our Board of Directors nor NAFH is making any
recommendation regarding your exercise of the subscription
rights. Shareholders who exercise subscription rights risk
investment loss. We cannot assure you that the market price of
our common stock will be above the subscription price at the
time of exercise or at the expiration of the rights offering
period or that anyone purchasing shares at the subscription
price will be able to sell those shares in the future at the
same price or a higher price or at all. You are urged to decide
whether or not to exercise your subscription rights based on
your own assessment of our business and the rights offering.
Among other things, you should carefully consider the risks
described under the heading Risk Factors in this
prospectus.
Will our
directors, officers and NAFH participate in the rights
offering?
All holders of our common stock as of the record date for the
rights offering will receive, at no charge, the non-transferable
subscription rights to purchase shares of our common stock as
described in this prospectus. To the extent that our directors
and officers held shares of our common stock as of the record
date, they will receive the subscription rights and, while they
are under no obligation to do so, will be entitled to
participate in the rights offering. As NAFH was not a holder of
our common stock as of the record date, NAFH will not receive
subscription rights and will not be eligible to participate in
the rights offering. NAFH will remain ineligible to participate
in the rights offering even in the event that, prior to the
distribution of rights, we change the record date of the rights
offering, which may be required to comply with the
Companys bylaws if we are unable to distribute the rights
prior to the seventieth day following the original record date
of January 27, 2011.
What fees
or charges apply if I exercise my subscription rights?
We are not charging any fees or sales commissions to issue
subscription rights to you or to issue shares to you if you
exercise your subscription rights. If you exercise your
subscription rights through a broker or other holder of your
shares, you are responsible for paying any fees that person may
charge.
How do I
exercise my subscription rights if I live outside of the United
States or have an army post office or foreign post office
address?
The subscription agent will hold subscription rights election
forms for shareholders having addresses outside the United
States or who have an army post office or foreign post office
address. In order to exercise subscription rights, our foreign
shareholders and shareholders with an army post office or
foreign post office address must notify the subscription agent
and timely follow other procedures described below under the
heading The Rights Offering Foreign
Shareholders.
viii
Will I
receive interest on any funds I deposit with the subscription
agent?
No. You will not be entitled to any interest on any funds that
are deposited with the subscription agent pending completion or
cancellation of the rights offering. If the rights offering is
cancelled for any reason, the subscription agent will return
this money to subscribers, without interest or penalty, as soon
as practicable.
When will
I receive my new shares of common stock?
All shares that you purchase in the rights offering will be
issued in book-entry, or uncertificated, form. When issued, the
shares will be registered in the name of the subscription rights
holder of record. As soon as practicable after the expiration of
the rights offering period, the subscription agent will arrange
for the issuance of the shares of common stock purchased in the
rights offering. Subject to state securities laws and
regulations, we have the discretion to delay distribution of any
shares you may have elected to purchase by exercise of your
rights in order to comply with state securities laws.
When can
I sell the shares of common stock I receive upon exercise of the
subscription rights?
If you exercise your subscription rights, you will be able to
resell the shares of common stock purchased by exercising your
subscription rights once your account has been credited with
those shares, provided you are not otherwise restricted from
selling the shares (for example, because you are an affiliate
who holds control stock or because you possess material
nonpublic information about the Company). Although we will
endeavor to issue the shares as soon as practicable after
completion of the rights offering, there may be a delay between
the expiration date of the rights offering and the time that the
shares are issued. In addition, we cannot assure you that,
following the exercise of your subscription rights, you will be
able to sell your common stock at a price equal to or greater
than the subscription price.
Will the
subscription rights be listed on a stock exchange or trading
market?
The subscription rights may not be sold, transferred or assigned
to anyone else and will not be listed on NASDAQ or any other
stock exchange or trading market. Our common stock currently
trades on the NASDAQ Global Select Market under the symbol
CBKN, and the shares to be issued in connection with
the rights offering are expected to be eligible for trading on
NASDAQ under the same symbol.
What are
the U.S. federal income tax consequences of exercising my
subscription rights?
The receipt and exercise of subscription rights should generally
not be taxable for U.S. federal income tax purposes. You
should, however, seek specific tax advice from your tax advisor
in light of your particular circumstances and as to the
applicability and effect of any other tax laws. See
Certain Material U.S. Federal Income Tax
Considerations.
What
happens if I choose not to exercise my subscription
rights?
You are not required to exercise your subscription rights or
otherwise take any action in response to the rights offering.
However, if you choose not to exercise your subscription rights
or you exercise less than all of your subscription rights and
other shareholders fully exercise their subscription rights or
exercise a greater proportion of their subscription rights than
you exercise, the percentage of our common stock owned by these
other shareholders will increase relative to your ownership
percentage, and your voting and other rights in the Company will
likewise be diluted.
How many
shares of common stock will be outstanding after the rights
offering?
As of the record date, there were 12,877,846 shares of our
common stock outstanding. As of February 9, 2011, following
the closing of the Investment, there were 83,877,846 shares
of our common stock outstanding. If all of our shareholders
exercise their subscription rights in full, we will issue
5,000,000 shares of common stock in the rights offering,
which represents approximately 5.6% of the
88,877,846 shares of common stock potentially outstanding
upon the completion of the rights offering.
ix
How much
money will we receive from the rights offering and how will such
proceeds be used?
The total proceeds to us from the rights offering will depend on
the number of subscription rights that are exercised. If we
issue all 5,000,000 shares available in the rights
offering, the total proceeds to us, before expenses, will be
$12.75 million. We intend to use the net proceeds from the
rights offering for general corporate purposes, which may
include investment in the Bank.
What if I
have more questions?
If you have more questions about the rights offering or need
additional copies of the rights offering documents, please
contact Eagle Rock Proxy Advisors, LLC, by calling
(877) 864-5053
toll-free or, if you are a bank or broker,
(908) 497-2340.
What
effect will the rights offering have on holders of stock
options?
Option holders will not be eligible to participate in the rights
offering with respect to stock options that were unexercised as
of the record date. The rights offering will not affect the
rights of option holders under our equity compensation plans and
relevant stock option agreements.
To whom
should I send my forms and payment?
If your shares are held in the name of a broker, dealer,
custodian bank or other nominee, then you should send your
subscription documents and subscription payment to that record
holder. If you are the record holder, then you should send your
subscription rights election form and other documents, and
subscription payment by mail or overnight courier to the
subscription agent at:
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By mail:
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By hand or overnight courier:
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Registrar and Transfer Company
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Registrar and Transfer Company
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Attn: Reorg/Exchange Dept
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Attn: Reorg/Exchange Dept.
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P.O. Box 645
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10 Commerce Drive
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Cranford, New Jersey
07016-0645
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Cranford, New Jersey 07016
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You, or, if applicable, your nominee, are solely responsible for
completing delivery to the subscription agent of your
subscription rights election form and other documents and
subscription payment. You should allow sufficient time for
delivery of your subscription materials to the subscription
agent and clearance of payment before the expiration of the
rights offering period.
x
SUMMARY
This summary highlights the information contained elsewhere
in this prospectus. Because this is only a summary, it does not
contain all of the information that you should consider before
deciding whether to exercise your subscription rights. You
should carefully read this entire prospectus, including the
information contained in the sections entitled Risk
Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations,
our audited consolidated financial statements and the
accompanying notes for the year ended December 31, 2009,
and our unaudited consolidated financial statements for the
quarter ended September 30, 2010, in their entirety before
you decide to exercise your subscription rights.
Company
Information
Overview
Capital Bank Corporation is a bank holding company incorporated
under the laws of North Carolina on August 10, 1998. Our
primary wholly-owned subsidiary is Capital 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.
Capital Bank is a community bank engaged in the general
commercial banking business, primarily in growth markets in
central and western North Carolina. As of December 31,
2010, the Bank had assets of approximately $1.6 billion,
$1.3 billion in loans, $1.3 billion in deposits and
$76.9 million in shareholders equity. Our principal
executive office is located at 333 Fayetteville Street,
Suite 700, Raleigh, North Carolina 27601, and our telephone
number is
(919) 645-6400.
We operate 32 branch offices in North Carolina: five in Raleigh,
four in Asheville, three in Burlington, two in Cary, four in
Fayetteville, three in Sanford, and one each in Clayton, Graham,
Hickory, Holly Springs, Mebane, Morrisville, Oxford, Pittsboro,
Siler City, Wake Forest, and Zebulon.
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;
travelers 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
Banks 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.
As a bank holding company, we are subject to the supervision of
the Board of Governors of the Federal Reserve System (the
Federal Reserve). We are required to file with the
Federal Reserve reports and other information regarding our
business operations and the business operations of our
subsidiaries. As a North Carolina-chartered bank, the Bank is
subject to primary supervision, periodic examination and
regulation by the NC Commissioner and by the FDIC as its primary
federal regulator.
Memorandum
of Understanding
On October 28, 2010, the Bank entered into an informal
Memorandum of Understanding with the FDIC and the NC
Commissioner. In accordance with the terms of the MOU, the Bank
has agreed to, among other things, (i) increase regulatory
capital to achieve and maintain a minimum Tier 1 leverage
capital ratio of at least 8% and a total risk-based capital
ratio of at least 12%, (ii) monitor and reduce its
commercial real estate concentration, (iii) timely identify
and reduce its overall level of problem loans,
(iv) establish and maintain an adequate allowance for loan
losses, and (v) ensure adherence to loan policy guidelines.
In addition, the Bank must obtain regulatory approval prior to
paying any dividends to the Company. The MOU will remain in
effect until modified, terminated, lifted, suspended or set
aside by the regulatory authorities. In addition, the
1
Company consults with the Federal Reserve Bank of Richmond prior
to payment of any dividends or interest on debt.
Closing
of the Investment
On January 28, 2011, the Company completed the issuance and
sale to NAFH of 71,000,000 shares of common stock for
$181,050,000 in cash. The Companys shareholders approved
the issuance of such shares to NAFH, and an amendment to the
Companys articles of incorporation to increase the
authorized shares of common stock to 300,000,000 shares
from 50,000,000 shares, at a special meeting of
shareholders held on December 16, 2010. In connection with
the Investment, each existing Company shareholder received one
contingent value right (CVR) per share that entitles
the holder to receive up to $0.75 in cash per CVR at the end of
a five-year period based on the credit performance of the
Banks existing loan portfolio. Also in connection with the
Investment, pursuant to an agreement among NAFH, the
U.S. Department of the Treasury (the Treasury),
and the Company, the Companys Fixed Rate Cumulative
Perpetual Preferred Stock, Series A (the
Series A Preferred Stock) and warrant to
purchase shares of common stock issued by the Company to the
Treasury in connection with the Treasurys Troubled Asset
Relief Program (TARP) were repurchased (the
TARP Repurchase). Following the TARP Repurchase, the
Series A Preferred Stock and warrant are no longer
outstanding, and accordingly the Company no longer expects to be
subject to the restrictions imposed upon us by the terms of our
Series A Preferred Stock, or certain regulatory provisions
of the Emergency Economic Stabilization Act of 2008
(EESA) and the American Recovery and Reinvestment
Act (ARRA) that are imposed on TARP recipients.
As a result of the Investment, NAFH currently owns approximately
84.6% of the Companys common stock. This rights offering
is being conducted pursuant to an obligation of the Company
under the Investment Agreement.
Appointments
to the Board of Directors and Management
Effective as of the closing of the Investment, R. Eugene Taylor
(Chairman), Christopher G. Marshall, Peter N. Foss, William A.
Hodges, and R. Bruce Singletary were named to the Board of
Directors of the Company and the Bank. Oscar A. Keller, III
and Charles F. Atkins, existing members of the Company and Bank
Boards of Directors, remained as such following the closing. All
other members of the Board of Directors of the Company and the
Bank resigned effective January 28, 2011. In addition, the
Company has appointed several new executive officers: R. Eugene
Taylor as Chief Executive Officer, Christopher G. Marshall as
Chief Financial Officer, and R. Bruce Singletary as Chief Risk
Officer. See Management.
Fiscal
2010 Results
On January 31, 2011, the Company announced financial
results for the fourth quarter and full year of 2010. Key items
for the fourth quarter and full year of 2010 and a subsequent
event from early 2011 included the following:
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On January 28, 2011, North American Financial Holdings,
Inc. (NAFH) completed its investment of
approximately $181 million in the Company through the
purchase of 71 million shares of the Companys common
stock at $2.55 per share, resulting in NAFH owning approximately
85% of the Companys outstanding common stock and leaving
the Company in a well capitalized position.
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Net loss to common shareholders was ($34.1) million, or
($2.59) per share in the fourth quarter of 2010 compared with
($7.8) million, or ($0.68) per share, in the fourth quarter
of 2009. In 2010, net loss to common shareholders was
($63.8) million, or ($4.98) per share, compared with
($9.2) million, or ($0.80) per share, in 2009.
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Net interest margin was 3.16% in the fourth quarter of 2010
compared with 3.48% in the third quarter of 2010 and 3.25% in
the fourth quarter of 2009.
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Nonperforming assets, including accruing restructured loans,
were 5.98% of total assets as of December 31, 2010 compared
with 5.69% as of September 30, 2010 and 4.87% as of
December 31, 2009.
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Allowance for loan losses increased to 2.87% of total loans as
of December 31, 2010 from 2.74% as of September 30,
2010 and 1.88% as of December 31, 2009.
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Provision for loan losses was $20.0 million in the fourth
quarter of 2010 compared with $6.8 million in the third
quarter of 2010 and $11.8 million in the fourth quarter of
2009. In 2010, provision for loan losses was $58.5 million
compared with $23.1 million in 2009.
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Deferred tax assets were fully reserved with the valuation
allowance increasing to $33.3 million as of
December 31, 2010 from $8.8 million as of
September 30, 2010 and $0 as of December 31, 2009.
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Net
Interest Income
Net interest income decreased by $691 thousand, declining from
$13.0 million in the fourth quarter of 2009 to
$12.3 million in the fourth quarter of 2010. This decrease
was primarily due to a 4.3% drop in average earning assets from
the fourth quarter of 2009 to the fourth quarter of 2010. Among
other things, principal paydowns and charge-offs on the loan
portfolio contributed to the reduction in earning assets.
Additionally, net interest margin decreased from 3.25% in the
fourth quarter of 2009 to 3.16% in the fourth quarter of 2010.
Net interest margin was negatively affected by a decline in
asset yields, partially offset by a decline in funding costs.
Yields on earning assets fell from 5.15% for the quarter ended
December 31, 2009 to 4.68% for the quarter ended
December 31, 2010, and rates on total interest-bearing
liabilities fell from 2.18% for the quarter ended
December 31, 2009 to 1.71% for the quarter ended
December 31, 2010.
In 2010, net interest income increased by $2.1 million,
rising from $48.9 million in 2009 to $51.0 million in
2010. This improvement was due to an increase in net interest
margin from 3.14% in 2009 to 3.27% in 2010, partially offset by
a 0.4% decline in average earning assets. Yields on earning
assets fell from 5.27% in 2009 to 4.93% in 2010, and rates on
total interest-bearing liabilities fell from 2.45% in 2009 to
1.88% in 2010. The Companys interest rate swap on
prime-indexed commercial loans, which expired in October 2009,
increased interest income by $3.5 million in 2009,
representing a benefit to net interest margin of 0.22%. Since
the swap expired in 2009, the Company received no benefit in
2010.
Provision
for Loan Losses and Asset Quality
Provision for loan losses for the quarter ended
December 31, 2010 totaled $20.0 million, an increase
from $11.8 million for the quarter ended December 31,
2009 and an increase from $6.8 million for the quarter
ended September 30, 2010. The loan loss provision increased
significantly in the current quarter due to higher levels of
nonperforming assets, increased charge-offs, and downgrades to
risk ratings of certain loans in the portfolio. Net charge-offs
totaled $20.2 million, or 6.24% of average loans
(annualized), in the fourth quarter of 2010, an increase from
$5.3 million, or 1.52% of average loans (annualized), in
the fourth quarter of 2009 and an increase from
$6.3 million, or 1.87% of average loans (annualized), in
the third quarter of 2010. Of the fourth quarter 2010
charge-offs, $9.5 million was related to one residential
development project in the Companys Triangle region.
Provision for loan losses totaled $58.5 million in 2010, an
increase from $23.1 million in 2009. Net charge-offs
increased from $11.8 million, or 0.89% of average loans, in
2009 to $48.6 million, or 3.60% of average loans, in 2010.
The loan loss provision also increased significantly in 2010 due
to higher levels of nonperforming assets, increased charge-offs,
and downgrades to risk ratings of certain loans in the portfolio.
Nonperforming assets, which include nonperforming loans and
other real estate, totaled 5.69% of total assets as of
December 31, 2010, an increase from 5.32% as of
September 30, 2010 and 2.90% as of December 31, 2009.
Nonperforming assets, including accruing restructured loans,
totaled 5.98% of total assets as of December 31, 2010, an
increase from 5.69% as of September 30, 2010 and 4.87% as
of December 31, 2009. Loans past due more than
30 days, excluding nonperforming loans, increased to 1.08%
of total loans as of December 31, 2010 compared to 1.00% of
total loans as of September 30, 2010 and 0.67% as of
3
December 31, 2009. The allowance for loan losses increased
to 2.87% of total loans as of December 31, 2010 compared to
2.74% as of September 30, 2010 and 1.88% as of
December 31, 2009. The allowance for loan losses covered
50% of nonperforming loans as of December 31, 2010, which
was a decrease from 52% as of September 30, 2010 and 66% as
of December 31, 2009.
Prior to the fourth quarter of 2010, the Company provided
specific reserves on many of its impaired loans as part of the
allowance for loan losses and charged down impaired loans to
estimated fair value only if legal action had begun against a
borrower in default or where a confirmed loss
existed. However, during the fourth quarter of 2010, the Company
began charging down all impaired loans to current fair value,
and specific reserves are no longer provided. This change in
practice has not impacted the amount of loan loss provision,
since under both methods impaired loans are valued the same, but
the change does increase the amount of net charge-offs recorded
and decreases the level of allowance for loan losses. As of
December 31, 2010 and 2009, the Company had recorded
cumulative charge-offs of $17.9 million and
$6.7 million, respectively, on impaired loans. If these
cumulative charge-offs had instead been recorded as specific
reserves, the allowance for loan losses would have increased
from 2.87% of total loans to 4.24% of total loans as of
December 31, 2010 and would have increased from 1.88% of
total loans to 2.35% of total loans as of December 31, 2009.
Noninterest
Income
Noninterest income increased by $6.2 million, rising from
$1.8 million in the fourth quarter of 2009 to
$8.0 million in the fourth quarter of 2010. This increase
was primarily related to net gains of $5.3 million recorded
on the sale of investment securities during the fourth quarter
of 2010. The Company sold a significant portion of its agency
bond and mortgage-backed securities portfolios and reinvested
the proceeds in an effort to reposition the investment portfolio
to execute certain interest rate risk management, liquidity, and
tax strategies. Further, mortgage origination and other loan
fees increased by $338 thousand as robust demand for residential
mortgage originations and refinancings benefited income.
Noninterest income was decreased in the fourth quarter of 2009
by an other-than-temporary impairment loss of $498 thousand that
was recorded on an investment in trust preferred securities
issued by a single entity.
In 2010, noninterest income increased by $5.4 million,
rising from $10.2 million in 2009 to $15.5 million in
2010. This increase was primarily related to net gains of
$5.9 million recorded on the sale of investment securities
in 2010 as compared to net gains of $173 thousand recorded in
2009. Additionally, noninterest income was decreased in 2009 as
an other-than-temporary impairment loss was recorded on an
investment in trust preferred securities. The increase in
noninterest income was partially offset by a nonrecurring BOLI
gain of $913 thousand recognized in 2009.
Noninterest
Expense
Noninterest expense increased $446 thousand, or 3%, rising from
$14.7 million in the fourth quarter of 2009 to
$15.1 million in the fourth quarter of 2010. FDIC deposit
insurance expense increased by $979 thousand as the
Companys assessment rate was raised in 2010. Salaries and
employee benefits expense increased by $871 thousand due to
lower deferred loan costs, which decrease expense, and increased
employee health insurance expense. Other real estate losses and
miscellaneous loan costs increased by $440 thousand, of which
$307 thousand was related to valuation adjustments to and losses
on the sale of other real estate with the remaining increase
representing higher loan workout, appraisal and foreclosure
costs to resolve problem assets. Further, professional fees
increased by $412 thousand due to higher legal and consulting
expense. Partially offsetting the increase in noninterest
expense, other expense declined by $2.0 million. In the
fourth quarter of 2009, the Company incurred $1.9 million
of direct nonrecurring expenses related to its proposed public
stock offering. These expenses were recorded in other
noninterest expense and primarily represented investment
banking, legal and accounting costs related to the proposed
offering.
In 2010, noninterest expense increased $4.5 million, or 9%,
rising from $49.8 million in 2009 to $54.3 million in
2010. This increase was primarily due to a $3.4 million
increase in other real estate losses and miscellaneous loan
costs, of which $2.2 million was related to valuation
adjustments to and losses on the sale of other real estate. FDIC
deposit insurance expense increased by $1.1 million due to
an increase in the
4
Companys assessment rate in 2010. Professional fees
increased by $1.0 million from higher legal and consulting
expense. Partially offsetting the increase in noninterest
expense, other expense declined by $1.3 million. In the
fourth quarter of 2009, the Company incurred $1.9 million
of direct nonrecurring expenses related to its proposed public
stock offering. These expenses were recorded in other
noninterest expense and primarily represented investment
banking, legal and accounting costs related to the proposed
offering. In the third quarter of 2010, the Company also
incurred direct nonrecurring expenses related to a separate
proposed public stock offering that was later withdrawn.
Income
Taxes
Income taxes recorded in both the three months and year ended
December 31, 2010 were primarily impacted by an increased
valuation allowance recorded against deferred tax assets in
those periods. Due to continued net operating losses in 2010 and
ongoing stress on the Companys financial performance and
tax positions from elevated credit losses, the Company had fully
reserved its deferred tax assets as of December 31, 2010.
The valuation allowance recorded against deferred tax assets
increased to $33.3 million as of December 31, 2010
from $8.8 million as of September 30, 2010.
Deferred tax assets represent timing differences in the
recognition of certain tax benefits for accounting and income
tax purposes, including the expected value of future tax savings
that will be available to the Company to offset future taxable
income through the carry forward of net operating losses. 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 future periods, the Company may be able to reduce
some or all of the valuation allowance upon a determination that
it will be able to realize such tax savings.
Balance
Sheet
Loan balances declined by $135.8 million in 2010 due in
part to net charge- offs for the year as well as net principal
paydowns on outstanding loans. The declining loan portfolio
reflects an effort by the Company to de-leverage its balance
sheet to preserve capital and reduce its exposure to certain
sectors of the commercial real estate market. Total investment
securities decreased by $22.2 million over the same period
as management sold certain municipal bonds to reduce the
duration of its fixed income portfolio earlier in the year and
then repositioned its portfolio later in the year to execute
certain interest rate risk, liquidity, and tax strategies. The
cash surrender value of BOLI policies decreased by
$15.8 million after the Company surrendered certain BOLI
contracts on former employees and directors in 2010 for the
purpose of repositioning the BOLI portfolio for capital,
liquidity and tax planning purposes.
Total deposits declined by $34.7 million in 2010. Savings
accounts and time deposits increased by $1.7 million and
$24.6 million, respectively, during 2010 while checking
accounts and money market accounts decreased by
$14.3 million and $46.7 million, respectively.
Borrowings and securities sold under agreements to repurchase
decreased by $52.5 million in 2010 as the Company paid off
certain borrowings with increased liquidity from paydowns on
loans and investment securities as well as the surrender of
certain BOLI contracts.
Available
Information
The Company files annual, quarterly and current reports, proxy
statements and other information with the Securities and
Exchange Commission (the SEC). You may read and copy
any materials that the Company files with the SEC at the
SECs Public Reference Room at 100 F Street NE,
Washington, DC 20549. Please call the SEC at
1-800-SEC-0330
for more information about the operation of the Public Reference
Room. The SEC also maintains an Internet website, at
http://www.sec.gov,
that contains the Companys filed reports, proxy and
information statements and other information that the Company
files electronically with the SEC. Additionally, the Company
makes these filings available, free of charge, on its website at
http://www.capitalbank-us.com
as soon as reasonably practicable after the Company
electronically files such materials with, or furnishes them to,
the SEC. None of the information contained on, or that may be
accessed through, the Companys website is a prospectus or
constitutes part of, or is otherwise incorporated into, this
prospectus.
5
Rights
Offering Summary
The following summary describes the principal terms of the
rights offering, but is not intended to be complete. See the
information under the heading The Rights Offering in
this prospectus for a more detailed description of the terms and
conditions of the rights offering.
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Subscription Rights |
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We are distributing at no charge to record holders of our common
stock as of 5:00 p.m., Eastern Standard time, on the record
date of January 27, 2011, 0.3882637 non-transferable
subscription rights for each share of common stock then held of
record. |
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For each whole subscription right that you own, you will have a
right to buy from us one share of our common stock at a
subscription price of $2.55 per share, subject to an overall
beneficial ownership limit of 4.9% for each participant. You may
exercise some or all of your subscription rights, or you may
choose not to exercise any of your subscription rights. |
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No Over-Subscription Privilege or Backstop |
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There is no over-subscription privilege associated with the
rights offering. In addition, no shareholder, including NAFH,
will backstop the rights offering. Neither you nor any
shareholder, including NAFH, will have the opportunity to
purchase additional shares not purchased by other shareholders
pursuant to their subscription rights. |
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Subscription Price |
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$2.55 per share of common stock. To be effective, any payment
related to the exercise of a subscription right must clear prior
to the expiration of the rights offering period. |
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Limitation on Exercise of Subscription Rights |
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Each participant in this offering is subject to an overall
beneficial ownership limit of 4.9%, calculated based on the
approximately 88,877,846 shares of common stock potentially
outstanding after the consummation of this rights offering if
all rights are exercised. Any rights exercised by a rights
holder for common stock subscribed for by that holder that would
cause such holder to exceed the 4.9% ownership limit will not be
considered exercised or subscribed for by that holder. The
portion of the subscription price paid by a holder for common
stock not considered subscribed for will be returned to that
holder, without interest or penalty, as soon as practicable
after completion of this offering. |
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We will also require each rights holder exercising its rights to
represent to us in the subscription rights election form that,
together with any of its affiliates or any other person with
whom it is acting in concert or as a partnership, syndicate or
other group for the purpose of acquiring, holding or disposing
of our securities, it will not beneficially own more than 4.9%
of our outstanding shares of common stock as a result of the
exercise of rights. See The Rights Offering
Limitation on Exercise of Subscription Rights. |
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Record Date |
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January 27, 2011. |
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Expiration Date |
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The subscription rights will expire at 5:00 p.m., Eastern
Standard time, on March 4, 2011, unless the expiration date
is extended. |
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Procedure for Exercising Rights |
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You must properly complete the enclosed subscription rights
election form and deliver it, along with the full subscription
price, to the |
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subscription agent, Registrar and Transfer Company, before the
expiration of the rights offering period. Your payment must also
clear prior to the expiration of the rights offering period. |
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You may deliver the documents and payments by first class mail
or courier service. |
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If you are a beneficial owner of shares that are registered in
the name of a broker, dealer, custodian bank or other nominee,
you should instruct your broker, dealer, custodian bank or other
nominee to exercise your subscription rights on your behalf.
Please follow the instructions of your nominee, who may require
that you meet a deadline earlier than the expiration date of the
rights offering. |
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Use of Proceeds |
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The total proceeds to us from the rights offering will depend on
the number of subscription rights that are exercised. If we
issue all 5,000,000 shares available in the rights
offering, the total proceeds to us, before expenses, will be
$12.75 million. We intend to use the net proceeds from the
rights offering for general corporate purposes, which may
include investment in the Bank. |
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Non-Transferability/ No Listing of Rights |
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The subscription rights may not be sold, transferred or assigned
and will not be listed for trading on NASDAQ or any other stock
exchange or trading market. |
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No Revocation |
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All exercises of subscription rights are irrevocable (unless we
are required by law to permit revocation), even if you later
learn information about us that you consider unfavorable. You
should not exercise your subscription rights unless you are
certain that you wish to purchase the shares of common stock
offered pursuant to the rights offering. However,
notwithstanding any election forms received from participants
(and other account holders) in the 401(k) Plan regarding the
exercise of their subscription rights held by the 401(k) Plan,
no subscription rights held by the 401(k) Plan will be exercised
if the closing price of our common stock on March 3, 2011,
as reported by NASDAQ, is not greater than or equal to the
subscription price of $2.55 per share. For additional
information, see The Rights Offering Special
Instructions for Participants in Our 401(k) Plan. |
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Conditions to the Rights Offering |
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The completion of the rights offering is subject to the
conditions described under The Rights Offering
Conditions and Cancellation. |
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Amendment; Cancellation; Change of Record Date |
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We may amend the terms of the rights offering or extend the
subscription period of the rights offering. We also reserve the
right to cancel the rights offering at any time before the
completion of the rights offering and for any reason. If the
rights offering is cancelled, all subscription payments received
by the subscription agent will be returned, without interest or
penalty, as soon as practicable to those persons who subscribed
for shares in the rights offering. In addition, we reserve the
right to change, prior to the distribution of rights, the record
date of the rights offering, and we may be required to do so to
comply with the Companys bylaws if we are unable to
distribute the rights prior to the seventieth day following the
record date of |
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January 27, 2011. In the event of any such change of the
record date, NAFH will remain ineligible to participate in the
rights offering. |
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No Board or NAFH Recommendation |
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Neither our Board of Directors nor NAFH is making any
recommendation regarding your exercise of the subscription
rights. You are urged to make your own decision whether or not
to exercise your subscription rights based on your own
assessment of our business and the rights offering. See the
section entitled Risk Factors. |
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Issuance of Common Stock |
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If you purchase shares of common stock through the rights
offering, we will issue those shares to you in book-entry, or
uncertificated, form as soon as practicable after the completion
of the rights offering. Stock certificates will not be issued
for shares of our common stock purchased in the rights offering. |
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Listing of Common Stock |
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Our common stock is listed on the NASDAQ Global Select Market
under the symbol CBKN, and the shares to be issued
in connection with the rights offering will also be listed on
NASDAQ under the same symbol. |
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Federal Income Tax Consequences |
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The receipt and exercise of subscription rights should generally
not be taxable for U.S. federal income tax purposes. You should,
however, seek specific tax advice from your tax advisor in light
of your particular circumstances and as to the applicability and
effect of any other tax laws. See Certain Material U.S.
Federal Income Tax Considerations. |
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Subscription Agent |
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Registrar and Transfer Company. |
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Information Agent |
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Eagle Rock Proxy Advisors, LLC. |
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Shares Outstanding After Completion of the Rights Offering |
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88,877,846 (based on shares outstanding as of February 9,
2011 and assuming full exercise of rights). |
8
RISK
FACTORS
An investment in our common stock involves certain risks. You
should carefully consider the risks described below, together
with the other information contained in this prospectus before
making a decision to invest in our common stock. Additional
risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially and
adversely affect our business operations. If any of the
following risks actually occur, our business, results of
operations and financial condition could suffer. In that case,
the trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks
Related to the Rights Offering
The
subscription price determined for the rights offering is not an
indication of the value of our common stock.
The Investment Agreement required the subscription price to be
$2.55 per share of common stock, which is the same per share
purchase price paid by NAFH for the Investment. The subscription
price is not necessarily related to our book value, results of
operations, cash flows, financial condition or the future market
value of our common stock. We cannot assure you that the trading
price of our common stock will not decline during or after the
rights offering. We also cannot assure you that you will be able
to sell shares purchased during the rights offering at a price
equal to or greater than the subscription price or at all. We do
not intend to change the subscription price in response to
changes in the trading price of our common stock prior to the
closing of the rights offering.
The
rights offering may cause the price of our common stock to
decline.
Depending upon the trading price of our common stock at the time
of our announcement of the rights offering and its terms,
including the subscription price, together with the number of
shares of common stock we could issue if the rights offering is
completed, the rights offering may result in a decrease in the
trading price of our common stock. This decrease may continue
after the completion of the rights offering. If that occurs,
your purchase of shares of our common stock in the rights
offering may be at a price greater than the prevailing trading
price.
Because
you may not revoke or change your exercise of the subscription
rights unless we are required by law to permit revocation, you
could be committed to buying shares above the prevailing trading
price at the time the rights offering is completed even if you
later learn information about us that you consider
unfavorable.
Once you exercise your subscription rights, you may not revoke
or change the exercise unless we are required by law to permit
revocation. The trading price of our common stock may decline
before the subscription rights expire. If you exercise your
subscription rights, and, afterwards, the trading price of our
common stock decreases below the $2.55 per share subscription
price, you will have committed to buying shares of our common
stock at a price above the prevailing trading price and could
have an immediate unrealized loss. In addition, if you exercise
your subscription rights and later learn information about us
that you consider unfavorable, you will be committed to buying
shares and may not revoke or change your exercise. However,
notwithstanding any election forms received from participants
(and other account holders) in the 401(k) Plan regarding the
exercise of their subscription rights held in their 401(k) Plan
accounts, no subscription rights held by the 401(k) Plan will be
exercised if the closing price of our common stock on
March 3, 2011, as reported by NASDAQ, is not greater than
or equal to the subscription price of $2.55 per share. For
additional information, see The Rights
Offering Special Instructions for Participants in
Our 401(k) Plan.
Our common stock is currently traded on the NASDAQ Global Select
Market under the symbol CBKN, and the closing sale
price of our common stock on NASDAQ on February 9, 2011 was
$3.11 per share. There can be no assurances that the trading
price of our common stock will equal or exceed the subscription
price at the time of exercise or at the expiration date of the
rights offering or that our common stock will continue to be
listed on the NASDAQ Global Select Market.
9
You
may not be able to resell any shares of our common stock that
you purchase pursuant to the exercise of subscription rights
immediately upon expiration of the subscription rights offering
period or be able to sell your shares at a price equal to or
greater than the subscription price.
If you exercise your subscription rights, you may not be able to
resell the common stock purchased by exercising your
subscription rights until your account has been credited with
those shares. Moreover, you will have no rights as a shareholder
of the shares you purchased in the rights offering until we
issue the shares to you. Although we will endeavor to issue the
shares as soon as practicable after expiration of the rights
offering, there may be a delay between the expiration date of
the rights offering and the time that the shares are issued. In
addition, we cannot assure you that, following the exercise of
your subscription rights, you will be able to sell your common
stock at a price equal to or greater than the subscription price
or at all.
If you
do not exercise your subscription rights, you will suffer
dilution of your percentage of ownership.
If you do not exercise your subscription rights or you exercise
less than all of your rights, and other shareholders fully
exercise their rights or exercise a greater proportion of their
rights than you exercise, you will suffer dilution of your
percentage ownership of our equity securities relative to such
other shareholders. As of the record date, there were
12,877,846 shares of common stock outstanding. As of
February 9, 2011, following the closing of the Investment,
there were 83,877,846 shares of our common stock
outstanding. If all of our shareholders exercise their
subscription rights in full, we will issue 5,000,000 shares
of common stock in the rights offering, which represents
approximately 5.6% of the 88,877,846 shares of common stock
potentially outstanding upon the completion of the rights
offering.
The
subscription rights are non-transferable and thus there will be
no market for them.
You may not sell, transfer or assign your rights to anyone else.
We do not intend to list the rights on any securities exchange
or any other trading market. Because the subscription rights are
non-transferable, there is no market or other means for you to
directly realize any value associated with the subscription
rights.
We may
cancel the rights offering at any time before the completion of
the rights offering, and neither we nor the subscription agent
will have any obligation to you except to return your
subscription payment, without interest or penalty.
We may at our sole discretion cancel the rights offering at any
time before the completion of the rights offering. If we elect
to cancel the rights offering, neither we nor the subscription
agent will have any obligation with respect to the subscription
rights except to return to you, without interest or penalty, as
soon as practicable any subscription payments.
If you
do not act promptly and follow the subscription instructions,
your exercise of subscription rights will be
rejected.
Shareholders who desire to purchase shares in the rights
offering must act promptly to ensure that all required forms and
payments are actually received by the subscription agent, and
all payments clear, prior to the expiration of the rights
offering period. If you are a beneficial owner of shares, you
must act promptly to ensure that your broker, dealer, custodian
bank or other nominee acts for you and that all required forms
and payments are actually received by the subscription agent
prior to the expiration of the rights offering period. We are
not responsible if your broker, dealer, custodian bank or
nominee fails to ensure that all required forms and payments are
actually received by the subscription agent, and all payments
clear, prior to the expiration of the rights offering period. If
you fail to complete and sign the required subscription forms,
send an incorrect payment amount or otherwise fail to follow the
subscription procedures that apply to your exercise in the
rights offering or your payment does not clear prior to the
expiration of the rights offering period, the subscription agent
may, depending on the circumstances, reject your subscription or
accept it only to the extent of any payment that has been
received and has cleared. Neither we nor the subscription agent
will undertake to contact you concerning, or attempt to correct,
an incomplete or incorrect subscription form. We have the
10
sole discretion to determine whether the exercise of your
subscription rights properly and timely follows the subscription
procedures.
If you are a participant (or other account holder) in our 401(k)
Plan, you may exercise your subscription rights held by your
401(k) Plan account by properly completing the special election
form, called the 401(k) Plan Participant Election
Form, that is provided to you by the subscription agent,
Registrar and Transfer Company. You must return your completed
401(k) Plan Participant Election Form to the subscription agent
in the manner prescribed in the materials provided to you by
February 24, 2011. If your 401(k) Plan Participant Election
Form is not received by such special deadline, your election to
exercise the subscription rights held by your 401(k) Plan
account will not be effective. If you elect to exercise some or
all of the subscription rights in your 401(k) Plan account, you
must also ensure that you have provided in your 401(k) Plan
Participant Election Form instructions for the liquidation and
transfer of the total amount of the funds required for such
exercise to the Capital Bank Corporation Subscription Fund in
your 401(k) Plan account and that such amount remains in the
Capital Bank Corporation Subscription Fund until
February 28, 2011). See The Rights
Offering Special Instructions for Participants in
Our 401(k) Plan. If you fail to complete the 401(k) Plan
Participant Election Form, including instructions to liquidate
and transfer funds to the Capital Bank Corporation Subscription
Fund, correctly and timely, you may be unable to participate in
the rights offering. Neither we, the subscription agent, the
information agent, the 401(k) Plan trustee, nor anyone else will
be under any duty to notify you of any defect or irregularity in
connection with your submission of the 401(k) Plan Participant
Election Form or 401(k) Plan fund allocation and we will not be
liable for failure to notify you of any defect or irregularity.
Also note that, notwithstanding any election that you make
regarding the exercise of the subscription rights held by your
401(k) Plan account, your subscription rights will not be
exercised with respect to shares held by the 401(k) Plan if the
closing price of our common stock on March 3, 2011, as
reported by NASDAQ, is not greater than or equal to the
subscription price of $2.55 per share. For additional
information, see The Rights Offering Special
Instructions for Participants in Our 401(k) Plan.
If you
make payment of the subscription price by uncertified personal
check, your check may not clear in sufficient time to enable you
to purchase shares in the rights offering.
Any uncertified personal check used to pay the subscription
price in the rights offering must clear prior to the expiration
of the rights offering period, and the clearing process may
require five or more business days. As a result, if you choose
to use an uncertified personal check to pay the subscription
price, it may not clear prior to the expiration of the rights
offering period, in which event you would not be eligible to
exercise your subscription rights. You may eliminate this risk
by paying the subscription price by wire transfer of same day
funds.
Our
401(k) Plan, which is receiving subscription rights, is not
permitted to acquire, hold or dispose of subscription rights
absent an exemption from the DOL.
The 401(k) Plan is receiving subscription rights with respect to
the shares of common stock held by the 401(k) Plan on behalf of
the participants (and other account holders) as of the record
date even though 401(k) plans and other plans subject to ERISA,
such as ours, are not permitted under ERISA or Section 4975
of the Code to acquire, hold or dispose of subscription rights
absent an exemption from the DOL. We are submitting a request to
the DOL that an exemption be granted on a retroactive basis,
effective to the commencement of the rights offering, with
respect to the acquisition, holding and exercise of the
subscription rights by the 401(k) Plan and its participants (and
other account holders); however, the DOL may deny our exemption
application. If our exemption request is denied by the DOL, the
DOL may require us to take appropriate remedial action and the
IRS and DOL could impose certain taxes and penalties on us.
11
Because
we do not have any formal commitments from any of our
shareholders to participate in the rights offering and because
no minimum subscription is required, we cannot assure you of the
amount of proceeds, if any, that we will receive from the rights
offering.
We do not have any formal commitments from any of our
shareholders to participate in the rights offering and there is
no minimum subscription required. We cannot assure you that any
of our shareholders will exercise all or any part of their
subscription rights. Therefore, we cannot assure you of the
amount of proceeds that we will receive in the rights offering.
If our shareholders subscribe for fewer shares of our common
stock than anticipated, the net proceeds we receive from the
rights offering could be reduced and we could incur damage to
our reputation.
Our
management will have broad discretion over the use of the net
proceeds from the rights offering, and we may not invest the
proceeds successfully.
We currently intend to use the net proceeds from the rights
offering for general corporate purposes, which may include
investment in the Bank. Accordingly, you will be relying on the
judgment of our management with regard to the use of the
proceeds from the rights offering, and you will not have the
opportunity, as part of your investment decision, to assess
whether we are using the proceeds appropriately. It is possible
that we may invest the proceeds in a way that does not yield a
favorable, or any, return for us.
Prior
to the distribution of rights, we may change the record date of
the offering, and neither we nor the subscription agent will
have any obligation to holders of our common stock as of the
original record date.
We have reserved the right to change the record date of the
rights offering. If we are unable to distribute the rights prior
to the seventieth day following the record date of
January 27, 2011, including because the registration
statement of which this prospectus forms a part is not yet
effective, we may be required to change the record date in order
to comply with the Companys bylaws. Accordingly, if you
sell your shares following the original record date and prior to
the distribution of shares and we subsequently change the record
date, you may no longer be entitled to receive rights in the
rights offering and neither we nor the subscription agent will
have any obligation to you. However, in no event will NAFH be
eligible to participate in the rights offering.
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 capital and credit markets
have placed downward pressure on stock prices, and the
availability of capital, credit and liquidity has been adversely
affected for many issuers, in some cases, without regard to
those issuers underlying financial condition or
performance. Although we have not suffered any significant
liquidity problems 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 TARP, was enacted on October 3, 2008. As part
of TARP, the Treasury created the Capital Purchase Program
(CPP), which authorized the Treasury
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to 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, which securities are no longer outstanding as a
result of the TARP Repurchase. 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.
On July 21, 2010, President Obama signed into law the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the
Dodd-Frank Act), which was intended primarily to
overhaul the financial regulatory framework following the global
financial crisis and will impact all financial institutions
including our holding company and Capital Bank. The Dodd-Frank
Act contains provisions that will, among other things, establish
a Bureau of Consumer Financial Protection, establish a systemic
risk regulator, consolidate certain federal bank regulators and
impose increased corporate governance and executive compensation
requirements. While many of the provisions in the Dodd-Frank Act
are aimed at financial institutions significantly larger than
us, and some will affect only institutions with different
charters than us or institutions that engage in activities in
which we do not engage, it will likely increase our regulatory
compliance burden and may have a material adverse effect on us,
including by increasing the costs associated with our regulatory
examinations and compliance measures.
The Dodd-Frank Act requires various federal agencies to adopt a
broad range of new implementing rules and regulations and to
prepare numerous studies and reports for the U.S. Congress.
The federal agencies are given significant discretion in
drafting the implementing rules and regulations, and
consequently, many of the details and much of the impact of the
Dodd-Frank Act may not be known for many months or years. We are
closely monitoring all relevant sections of the Dodd-Frank Act
to ensure continued compliance with laws and regulations. While
the ultimate effect of the Dodd-Frank Act on us cannot be
determined yet, the law is likely to result in increased
compliance costs and fees paid to regulators, along with
possible restrictions on our operations.
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 the Dodd-Frank Act, 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 additional 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.
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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 September 30, 2010, approximately 84% 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
14
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 September 30, 2010, these loans totaled
$391.7 million, or 30% of our total loan portfolio.
Approximately $86.5 million of this amount was for
construction of residential properties and $61.1 million
was for construction of commercial properties. Additionally,
approximately $163.6 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 $80.5 million, or 6% of our portfolio, as
of September 30, 2010.
In general, construction and land lending involves additional
risks because of the inherent difficulty in estimating a
propertys 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 September 30, 2010, $71.0 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.
Nonperforming real estate land loans, construction loans and
acquisition and development loans totaled $50.2 million and
$24.6 million as of September 30, 2010 and
December 31, 2009, respectively.
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,
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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 September 30, 2010, our non-owner occupied commercial
real estate loans totaled $274.6 million, or 21% of our
total loan portfolio. Nonperforming non-owner occupied
commercial real estate loans totaled $4.6 million and
$1.0 million as of September 30, 2010 and
December 31, 2009, respectively.
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 September 30, 2010, our commercial business loans
totaled $345.5 million, or 26% of our total loan portfolio.
Of this amount, $180.0 million was secured by
owner-occupied real estate and $165.5 million was secured
by business assets. Nonperforming commercial business loans
totaled $8.4 million and $10.6 million as of
September 30, 2010 and December 31, 2009, respectively.
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 borrowers 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 borrowers
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
borrowers 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 September 30, 2010, we had a total of 28 active
residential and commercial acquisition, development and
construction loans funded by an interest reserve with a total
outstanding balance of $63.4 million, representing
approximately 5% of our total outstanding loans. Total
commitments on these loans equaled $74.6 million with total
remaining interest reserves of $2.0 million, representing a
weighted average term of approximately eight months of remaining
interest coverage.
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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 other qualitative factors; and
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our specific reserve, based on our evaluation of impaired 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 nine months ended September 30, 2010, we recorded a
provision for loan losses of $38.5 million compared to
$11.2 million for the nine months ended September 30,
2009, an increase of $27.3 million. We also recorded net
loan charge-offs of $28.4 million for the nine months ended
September 30, 2010 compared to $6.5 million for the
nine months ended September 30, 2009. As of
September 30, 2010 and December 31, 2009, our
allowance for loan losses totaled $36.2 million and
$26.1 million, respectively, which represented 52% and 66%
of nonperforming loans, respectively. 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 3% of our nonperforming loans as of
September 30, 2010. In addition, slowing housing sales have
been a contributing factor to the increase in nonperforming
loans as well as the increase in delinquencies. We are
experiencing increasing loan delinquencies and credit losses. As
of September 30, 2010, our total nonperforming loans
increased to $69.9 million, or 5.28% of total loans,
compared to $18.5 million, or 1.36% of total loans, as of
September 30, 2009. As of September 30, 2010, our
total past due loans, excluding nonperforming loans, increased
to
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$13.2 million, or 1.00% of total loans, compared to
$9.3 million, or 0.67% of total loans, as of
December 31, 2009 and decreased from $16.3 million, or
1.20% of total loans, as of September 30, 2009. 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
have extended the maturity date and terms of a large amount of
loans, which could increase the level of our troubled debt
restructured loans.
A significant portion of our loans are renewed, or extended,
upon maturity. As a prudent risk management strategy, in certain
situations we prefer to fund loans with a relatively short
maturity date, which provides us with the flexibility of
reviewing the borrowers financial condition and the
appropriateness of loan terms on a more frequent basis. Upon
renewal, loans are underwritten in the same manner and pursuant
to the same approval process as a new loan origination. As of
September 30, 2010, December 31, 2009, and
September 30, 2009, loans outstanding totaling
$720.4 million, $708.6 million, and
$709.3 million, respectively, had been renewed or had terms
extended at a previous maturity date.
While this practice provides certain benefits and flexibility to
us as the lender, the extension or renewal of loans carries
certain risks. If interest rates or other terms are modified
upon extension of credit or if loan terms are renewed in
situations where the borrower is experiencing financial
difficulty and a concession is granted, the modification or
renewal may require classification as a troubled debt
restructuring (TDR).
In accordance with accounting standards, we classify loans as
TDRs when certain modifications are made to the loan terms and
concessions are granted to the borrowers due to their financial
difficulty. Our practice is to only restructure 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 its business plan. With
respect to restructured loans, we grant 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. Restructured loans where a
concession has been granted through extension 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. In situations where a TDR
is unsuccessful and the borrower is unable to satisfy the terms
of the restructured agreement, the loan is placed on nonaccrual
status and is written down to the underlying collateral value.
As of September 30, 2010, December 31, 2009, and
September 30, 2009, performing and nonperforming TDRs
totaled $26.0 million, $50.3 million, and
$38.1 million, respectively. As of September 30, 2010,
December 31, 2009, and September 30, 2009, performing
TDRs totaled $6.1 million, $34.2 million, and
$29.0 million, respectively.
We
continue to hold and acquire a significant amount of other real
estate, which has led to increased operating expenses and
vulnerability to additional declines in real property
values.
We foreclose on and take title to the real estate serving as
collateral for many of our loans as part of our business. Real
estate owned by the Bank and not used in the ordinary course of
its operations is referred to as other real estate
or ORE property. At September 30, 2010, we had
ORE with an aggregate book value of $17.9 million, compared
to $10.7 million at December 31, 2009 and
$8.4 million at September 30, 2009. Increased ORE
balances have led to greater expenses as we incur costs to
manage and dispose of the properties. We expect that our
earnings will continue to be negatively affected by various
expenses associated with ORE, including personnel costs,
insurance and taxes, completion and repair costs, valuation
adjustments and other expenses associated with property
ownership, as well as by the funding costs associated with
assets that are tied up in ORE. Any further decrease in real
estate market prices may lead to additional ORE write-downs,
with a corresponding expense in our statement of operations. We
evaluate ORE properties periodically
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and write down the carrying value of the properties if the
results of our evaluation require it. The expenses associated
with ORE and any further property write-downs could have a
material adverse effect on 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 propertys 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 58% of our loans were
variable rate loans as of September 30, 2010, 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 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
September 30, 2010 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 September 30, 2010, we
maintained $184.7 million, or 94%, 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.
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.
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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. Banking regulations, designed primarily for the
protection of depositors, may limit our growth and the return to
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 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
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. If proposals such as
these, or other proposals limiting our rights as a creditor,
were to be implemented, we could experience higher credit losses
on our loans or increased expense in pursuing our remedies as a
creditor.
We
have entered into an MOU that requires us to maintain elevated
capital ratios and take other actions, and failure to comply
with the terms of the MOU may result in adverse
consequences.
On October 28, 2010, the Bank entered into an informal
Memorandum of Understanding with the FDIC and the NC
Commissioner. Regulatory oversight and actions are on the rise
as a result of the current severe economic conditions and the
related impact on the banking industry, specifically real estate
loans.
In accordance with the terms of the MOU, the Bank has agreed to,
among other things, (i) increase regulatory capital to
achieve and maintain a minimum Tier 1 leverage capital
ratio of at least 8% and a total risk-based capital ratio of at
least 12%, (ii) monitor and reduce its commercial real
estate concentration, (iii) timely identify and reduce its
overall level of problem loans, (iv) establish and maintain
an adequate allowance for loan losses, and (v) ensure
adherence to loan policy guidelines. The MOU will remain in
effect until modified, terminated, lifted, suspended or set
aside by the regulatory authorities. In addition, the Bank must
obtain regulatory approval prior to paying any dividends to the
Company. The MOU may limit our ability to commit capital
resources as we are required to preserve capital to meet the
MOUs requirements.
In addition, the Company consults with the Federal Reserve Bank
of Richmond prior to payment of any dividends or interest on
debt.
We are committed to expeditiously addressing and resolving all
the issues raised in the MOU, and our Board of Directors and
management have initiated actions to comply with its provisions,
including the recent completion of the Investment. A material
failure to comply with the terms of the MOU could subject us to
additional regulatory actions, including a cease and desist
order or other action, and further regulation, which may have a
material adverse effect on our future business, results of
operations and financial condition.
20
We are
subject to examination and scrutiny by a number of regulatory
authorities, and, depending upon the findings and determinations
of our regulatory authorities, we may be required to make
adjustments to our business, operations or financial position
and could become subject to formal or informal regulatory
orders.
We are subject to examination by federal and state banking
regulators. Federal and state regulators have the ability to
impose substantial sanctions, restrictions and requirements on
us and our banking subsidiaries if they determine, upon
conclusion of their examination or otherwise, violations of laws
with which we or our subsidiaries must comply or weaknesses or
failures with respect to general standards of safety and
soundness, including, for example, in respect of any financial
concerns that the regulators may identify and desire for us to
address. Such enforcement may be formal or informal and can
include directors resolutions, memoranda of understanding,
cease and desist orders, civil money penalties and termination
of deposit insurance and bank closures. Enforcement actions may
be taken regardless of the capital levels of the institutions,
and regardless of prior examination findings. In particular,
institutions that are not sufficiently capitalized in accordance
with regulatory standards may also face capital directives or
prompt corrective actions. Enforcement actions may require
certain corrective steps (including staff additions or changes),
impose limits on activities (such as lending, deposit taking,
acquisitions or branching), prescribe lending parameters (such
as loan types, volumes and terms) and require additional capital
to be raised, any of which could adversely affect our financial
condition and results of operations. The imposition of
regulatory sanctions, including monetary penalties, may have a
material impact on our financial condition and results of
operations
and/or
damage our reputation. In addition, compliance with any such
action could distract managements attention from our
operations, cause us to incur significant expenses, restrict us
from engaging in potentially profitable activities and limit our
ability to raise capital.
We are
dependent on our key personnel, including our senior management
and directors, and our inability to integrate our new management
and directors into our business and 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. In connection
with the Investment, R. Eugene Taylor, Christopher G. Marshall,
Peter N. Foss, William A. Hodges and R. Bruce Singletary were
appointed to our Board of Directors. Mr. Oscar A.
Keller, III and Charles F. Atkins remained as members of
our Board of Directors following the closing of the Investment
and all other prior directors of the Company resigned effective
January 28, 2011. In addition, we appointed several new
executive officers in connection with the Investment: R. Eugene
Taylor as President, Chief Executive Officer and Chairman of the
Board, Christopher G. Marshall as Executive Vice President and
Chief Financial Officer and R. Bruce Singletary as Executive
Vice President and Chief Risk Officer. B. Grant Yarber remained
with the Company as Market President for North Carolina and
Michael R. Moore, David C. Morgan and Mark Redmond remained with
the Company as Executive Vice Presidents. We may not be able to
integrate our new management and directors into our business
without encountering potential difficulties, including but not
limited to the loss of key employees and customers; possible
changes in strategic direction, business plan, operations,
control procedures and policies; and transitional issues related
to changing responsibilities of management.
In addition, successful execution of our growth strategy will
continue to place significant demands on our management and
directors. The loss of any such persons services may
disrupt our operations and growth, and there can be no assurance
that a suitable successor could be retained upon the terms and
conditions that we would offer. 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.
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, including through FDIC-assisted transactions. We may
also explore combinations with
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other banks or bank branches in which NAFH has a majority
interest at any time including during or immediately following
this rights offering. 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 managements 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 need 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
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 and results of operations.
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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.
We
have experienced net losses during the last three completed
fiscal years, and we are uncertain as to whether or when we will
again be profitable.
We have experienced net losses during the years ended
December 31, 2010, December 31, 2009 and
December 31, 2008, and losses may continue. Our ability to
generate profit in the future requires successful growth in
revenues and management of expenses, among other factors. While
we expect to be able to generate profit over time, our operating
losses may continue for an unknown period of time.
23
Risks
Related to Ownership of Our Common Stock
NAFH
is a controlling shareholder and may have interests that differ
from the interests of our other shareholders.
Upon completion of the NAFH investment, and before accounting
for any stock that may be issued pursuant to this rights
offering, NAFH owned approximately 84.6% of the Companys
outstanding voting power. As a result, NAFH will be able to
control the election of our directors, determine our corporate
and management policies and determine the outcome of any
corporate transaction or other matter submitted to our
shareholders for approval. Such transactions may include mergers
and acquisitions (which may include mergers of the Company
and/or its
subsidiaries with or into NAFH
and/or
NAFHs other subsidiaries), sales of all or some of the
Companys assets (including sales of such assets to NAFH
and/or
NAFHs other subsidiaries) or purchases of assets from NAFH
and/or
NAFHs other subsidiaries, and other significant corporate
transactions.
Five of our seven directors, our Chief Executive Officer, our
Chief Financial Officer, and our Chief Risk Officer are
affiliated with NAFH. NAFH also has sufficient voting power to
amend our organizational documents. The interests of NAFH may
differ from those of our other shareholders, and it may take
actions that advance its interests to the detriment of our other
shareholders. Additionally, NAFH is in the business of making
investments in or acquiring financial institutions and may, from
time to time, acquire and hold interests in businesses that
compete directly or indirectly with us. NAFH may also pursue,
for its own account, acquisition opportunities that may be
complementary to our business, and as a result, those
acquisition opportunities may not be available to us.
This concentration of ownership could also have the effect of
delaying, deferring or preventing a change in our control or
impeding a merger or consolidation, takeover or other business
combination that could be favorable to the other holders of our
common stock, and the trading price of our common stock may be
adversely affected by the absence or reduction of a takeover
premium in the trading price.
As a
controlled company, we are exempt from certain NASDAQ corporate
governance requirements.
Our common stock is currently listed on the NASDAQ Global Select
Market. NASDAQ generally requires a majority of directors to be
independent and requires independent director oversight over the
nominating and executive compensation functions. However, under
NASDAQs rules, if another company owns more than 50% of
the voting power for the election of directors of a listed
company, that company is considered a controlled
company and exempt from rules relating to independence of
the board of directors and the compensation and nominating
committees. We are a controlled company because NAFH owns more
than 50% of our voting power for the election of directors.
Accordingly, we are exempt from certain corporate governance
requirements, and holders of our common stock may not have all
the protections that these rules are intended to provide.
The
trading volume in our common stock has been low, and market
conditions and other factors may affect the value of our common
stock, which may make it difficult for you to sell your shares
at times, volumes or prices you find attractive.
While our common stock is traded on the NASDAQ Global Select
Market, we cannot assure you that an active trading market for
our common stock will develop or be sustained after the rights
offering. Our common stock is thinly traded and has
substantially less liquidity than the average trading market for
many other publicly traded companies. Trading volume may remain
low as a result of the Investment and NAFHs acquisition of
a majority stake in the Company. 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
24
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
choose to voluntarily delist our common stock from NASDAQ or
cease to be a reporting issuer under SEC rules.
We may choose to, or our majority shareholder NAFH may cause us
to, voluntarily delist from the NASDAQ Global Select Market. If
we were to delist from NASDAQ, we may or may not list ourselves
on another exchange, and may or may not be required to continue
to file periodic and current reports and other information as a
reporting issuer under SEC rules. A delisting of our common
stock could negatively impact you by reducing the liquidity and
market price of our common stock, reducing information available
to you about the Company on an ongoing basis and potentially
reducing the number of investors willing to hold or acquire our
common stock. In addition, if we were to delist from NASDAQ, we
would no longer be subject to any of the corporate governance
rules applicable to NASDAQ listed companies. See also
As a controlled company, we are exempt from
certain NASDAQ corporate governance requirements.
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 300,000,000 shares of
common stock. As of February 9, 2011, we had
83,877,846 shares of common stock outstanding, will issue
up to 5,000,000 additional shares of common stock in this rights
offering, and had reserved for issuance 297,880 shares
underlying options that are exercisable at an average price of
$12.11 per share. In addition, as of February 9, 2011, we
had the ability to issue 604,359 shares of common stock
pursuant to options and restricted stock that may be granted in
the future under our existing equity compensation plans.
Although we presently do not have any intention of issuing
additional common stock (other than pursuant to our equity
compensation plans), we may do so in the future in order to meet
our capital needs and regulatory requirements, and we will be
able to do so without shareholder approval. 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.
Our
ability to pay dividends and other obligations is subject to
regulatory limitations and the Banks ability to pay
dividends to us, which is also subject to regulatory
limitations.
Our ability to pay our obligations and declare and pay dividends
depends on certain federal regulatory considerations, including
the guidelines of the Federal Reserve regarding capital adequacy
and dividends. The Company consults with the Federal Reserve
Bank of Richmond prior to payment of any dividends or interest
on debt. If we are not permitted to make these payments, we may
experience adverse consequences under our agreements with the
holders of our debt. 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
voted in the first quarter of 2010 to suspend the payment of our
quarterly cash dividend. This may continue to adversely affect
the market price of our common stock.
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 Banks cash and
liquidity as well as dividends to
25
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,
the Banks MOU requires the Bank to obtain regulatory
approval prior to paying any cash dividends to us.
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.
Consequently, the inability to receive dividends from the Bank
could adversely affect our financial condition, results of
operations, cash flows and prospects.
The
holders of our subordinated debentures have rights that are
senior to those of our shareholders.
We have issued $34.3 million of subordinated debentures,
which are senior to our shares of common stock. As a result, we
must make payments on the subordinated debentures (and the trust
preferred securities related to a portion of the subordinated
debentures) 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
prospectus and is subject to the same market forces that affect
the price of common stock in any company. As a result, our
shareholders may lose some or all of their investment in our
common stock.
26
UNAUDITED
PRO FORMA FINANCIAL INFORMATION
Basis of
Presentation
The unaudited pro forma consolidated balance sheet table for
September 30, 2010, and the pro forma income statements and
earnings per share tables for the fiscal year ended
December 31, 2009 and the nine months ended
September 30, 2010 presented below have been prepared by
management to illustrate the impact of:
|
|
|
|
|
the shareholder approval of an increase in the number of shares
of common stock authorized to be issued from
50,000,000 shares to 300,000,000 shares;
|
|
|
|
the issuance of approximately 71.0 million shares of common
stock to NAFH pursuant to the Investment Agreement at $2.55 per
share;
|
|
|
|
the TARP Repurchase; and
|
|
|
|
the rights offering required by the Investment Agreement whereby
shareholders of the Company are entitled to purchase up to
5,000,000 shares of common stock at a subscription price of
$2.55 per share.
|
27
Consolidated
Balance Sheets
(Unaudited)
The following table presents the Companys unaudited pro
forma consolidated balance sheet adjusted for the pro forma
impacts of the shareholder approval of an increase in the number
of shares of common stock authorized to be issued from
50,000,000 shares to 300,000,000 shares, the issuance
of common stock to NAFH in accordance with the Investment
Agreement, the TARP Repurchase and a fully subscribed rights
offering for the periods shown. The pro forma consolidated
balance sheet as of September 30, 2010 assumes that the
foregoing transactions occurred on September 30, 2010.
In Staff Accounting Bulletin Topic No. 5.J, Push
Down Basis of Accounting Required in Certain Limited
Circumstances, the SEC staff indicated that it believes
push-down accounting is required in purchase transactions that
result in an entity becoming substantially wholly owned. In
determining whether a company has become substantially wholly
owned, the SEC staff has stated that push-down accounting would
be required if 95% or more of the company has been acquired,
permitted if 80% to 95% has been acquired, and prohibited if
less than 80% of the company is acquired. The Company has
elected to use push-down accounting, and as such, will apply the
acquisition method of accounting due to NAFHs acquisition
of 85% of the Companys outstanding common stock.
The September 30, 2010 pro forma balance sheet includes
significant adjustments related to the application of the
acquisition method of accounting . While the Company believes
that this analysis provide a reasonable basis for estimating
fair values at that date, the actual fair value adjustments and
purchase price allocation will be estimated and recorded on the
balance sheet as of the Investment date. Such adjustments
recorded as of the Investment date may differ significantly from
estimates used herein for purposes of the pro forma balance
sheet as of September 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
for Investment
|
|
|
September 30,
|
|
|
Adjustments
|
|
|
September 30,
|
|
|
|
2010
|
|
|
and TARP
|
|
|
2010
|
|
|
for Rights
|
|
|
2010
|
|
|
|
(As Reported)
|
|
|
Repurchase(1)
|
|
|
(As Adjusted)
|
|
|
Offering
|
|
|
(Pro Forma)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
68,069
|
|
|
$
|
137,616
|
(2)
|
|
$
|
205,685
|
|
|
$
|
12,500
|
(3)
|
|
$
|
218,185
|
|
Investment securities
|
|
|
196,046
|
|
|
|
|
|
|
|
196,046
|
|
|
|
|
|
|
|
196,046
|
|
Mortgage loans held for sale
|
|
|
8,528
|
|
|
|
|
|
|
|
8,528
|
|
|
|
|
|
|
|
8,528
|
|
Net loans
|
|
|
1,288,683
|
|
|
|
(86,751
|
)
|
|
|
1,201,932
|
|
|
|
|
|
|
|
1,201,932
|
|
Other real estate
|
|
|
17,865
|
|
|
|
(2,000
|
)
|
|
|
15,865
|
|
|
|
|
|
|
|
15,865
|
|
Premises and equipment, net
|
|
|
24,855
|
|
|
|
|
|
|
|
24,855
|
|
|
|
|
|
|
|
24,855
|
|
Bank-owned life insurance
|
|
|
6,895
|
|
|
|
|
|
|
|
6,895
|
|
|
|
|
|
|
|
6,895
|
|
Goodwill
|
|
|
|
|
|
|
43,481
|
|
|
|
43,481
|
|
|
|
|
|
|
|
43,481
|
|
Core deposit intangible, net
|
|
|
2,006
|
|
|
|
2,994
|
|
|
|
5,000
|
|
|
|
|
|
|
|
5,000
|
|
Deferred income tax
|
|
|
15,152
|
|
|
|
18,848
|
|
|
|
34,000
|
|
|
|
|
|
|
|
34,000
|
|
Other assets
|
|
|
21,600
|
|
|
|
|
|
|
|
21,600
|
|
|
|
|
|
|
|
21,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,649,699
|
|
|
$
|
114,188
|
|
|
$
|
1,763,887
|
|
|
$
|
12,500
|
|
|
$
|
1,776,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
for Investment
|
|
|
September 30,
|
|
|
Adjustments
|
|
|
September 30,
|
|
|
|
2010
|
|
|
and TARP
|
|
|
2010
|
|
|
for Rights
|
|
|
2010
|
|
|
|
(As Reported)
|
|
|
Repurchase(1)
|
|
|
(As Adjusted)
|
|
|
Offering
|
|
|
(Pro Forma)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
LIABILITIES
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, non-interest checking
|
|
$
|
125,438
|
|
|
$
|
|
|
|
$
|
125,438
|
|
|
$
|
|
|
|
$
|
125,438
|
|
NOW accounts
|
|
|
183,014
|
|
|
|
|
|
|
|
183,014
|
|
|
|
|
|
|
|
183,014
|
|
Money market accounts
|
|
|
139,772
|
|
|
|
|
|
|
|
139,772
|
|
|
|
|
|
|
|
139,772
|
|
Savings accounts
|
|
|
31,177
|
|
|
|
|
|
|
|
31,177
|
|
|
|
|
|
|
|
31,177
|
|
Time deposits
|
|
|
880,010
|
|
|
|
8,061
|
|
|
|
888,071
|
|
|
|
|
|
|
|
888,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,359,411
|
|
|
|
8,061
|
|
|
|
1,367,472
|
|
|
|
|
|
|
|
1,367,472
|
|
Borrowings
|
|
|
129,000
|
|
|
|
8,540
|
|
|
|
137,540
|
|
|
|
|
|
|
|
137,540
|
|
Subordinated debentures
|
|
|
34,323
|
|
|
|
(9,000
|
)
|
|
|
25,323
|
|
|
|
|
|
|
|
25,323
|
|
Other liabilities
|
|
|
10,862
|
|
|
|
|
|
|
|
10,862
|
|
|
|
|
|
|
|
10,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,533,596
|
|
|
|
7,601
|
|
|
|
1,541,197
|
|
|
|
|
|
|
|
1,541,197
|
|
|
SHAREHOLDERS EQUITY
|
Preferred stock, $1,000 par value
|
|
|
40,345
|
|
|
|
(40,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, no par value
|
|
|
145,461
|
|
|
|
77,229
|
|
|
|
222,690
|
|
|
|
12,500
|
(3)
|
|
|
235,190
|
|
Accumulated deficit
|
|
|
(73,955
|
)
|
|
|
73,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
4,252
|
|
|
|
(4,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
116,103
|
|
|
|
106,587
|
|
|
|
222,690
|
|
|
|
12,500
|
|
|
|
235,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,649,699
|
|
|
$
|
114,188
|
|
|
$
|
1,763,887
|
|
|
$
|
12,500
|
|
|
$
|
1,776,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Adjustments in this column reflect the accounting for cash
proceeds from the Investment, the repurchase of TARP preferred
stock, and estimated fair value adjustments and purchase price
allocation as of September 30, 2010. The Company is
currently in the process of performing its valuation of the
balance sheet as of the Investment date, including the use of a
third party valuation estimate, and expects to finalize the
valuation and complete the purchase price allocation as soon as
practicable but no later than one year from the Investment date.
Fair value adjustments that will be recorded as of the
Investment date may differ significantly from estimates used
herein for the pro forma balance sheet as of September 30,
2010. |
|
(2) |
|
Adjustments to cash for the Investment and TARP Repurchase were
calculated as follows: |
|
|
|
|
|
Proceeds from the Investment
|
|
$
|
181,050
|
|
TARP preferred stock repurchase
|
|
|
(41,279
|
)
|
Transaction costs associated with Investment
|
|
|
(2,155
|
)
|
|
|
|
|
|
|
|
$
|
137,616
|
|
|
|
|
(3) |
|
Adjustment reflects net cash proceeds received by the Company as
a result of the Rights Offering as follows: |
|
|
|
|
|
Proceeds from the Rights Offering
|
|
$
|
12,750
|
|
Estimated transaction costs from Rights Offering
|
|
|
(250
|
)
|
|
|
|
|
|
|
|
$
|
12,500
|
|
29
Pro Forma
Income Statements and Earnings Per Share
(Unaudited)
The following tables present the Companys unaudited pro
forma earnings per share adjusted for the pro forma impacts of
the shareholder approval of an increase in the number of shares
of common stock authorized to be issued from
50,000,000 shares to 300,000,000 shares, the issuance
of common stock to NAFH in accordance with the Investment
Agreement, the TARP Repurchase and a fully subscribed rights
offering for the periods shown. Pro forma earnings per share
assume that the Company completed the Investment, the TARP
Repurchase and the rights offering on January 1, 2009. The
pro forma information below also includes certain adjustments
associated with the hypothetical application of the acquisition
method of accounting due to the change in control caused by
NAFHs ownership of 85% of the outstanding common stock
following the Investment.
The pro forma income statement adjustments include significant
adjustments associated with the application of the acquisition
method of accounting due to the change in control caused by the
Investment. These are estimated adjustments to the income
statements for the year ended December 31, 2009 and for the
nine months ended September 30, 2010 made solely for the
purposes of these pro forma income statements. Future results of
operations may differ significantly.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Adjustments
|
|
|
for Change in
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
for Investment
|
|
|
Control
|
|
|
Adjustments
|
|
|
December 31,
|
|
|
|
2009
|
|
|
and TARP
|
|
|
(Purchase
|
|
|
for Rights
|
|
|
2009
|
|
|
|
(As Reported)
|
|
|
Repurchase
|
|
|
Accounting)
|
|
|
Offering
|
|
|
(Pro Forma)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loan fees
|
|
$
|
70,178
|
|
|
$
|
|
|
|
$
|
3,200
|
(1)
|
|
$
|
|
|
|
$
|
73,378
|
|
Investment securities
|
|
|
12,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,921
|
|
Federal funds and other interest income
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
83,141
|
|
|
|
|
|
|
|
3,200
|
|
|
|
|
|
|
|
86,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
28,037
|
|
|
|
|
|
|
|
(4,031
|
)(2)
|
|
|
|
|
|
|
24,006
|
|
Borrowings and repurchase agreements
|
|
|
6,226
|
|
|
|
|
|
|
|
(1,348
|
)(3)
|
|
|
|
|
|
|
4,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
34,263
|
|
|
|
|
|
|
|
(5,379
|
)
|
|
|
|
|
|
|
28,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
48,878
|
|
|
|
|
|
|
|
8,579
|
|
|
|
|
|
|
|
57,457
|
|
Provision for loan losses
|
|
|
23,064
|
|
|
|
|
|
|
|
(23,064
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
25,814
|
|
|
|
|
|
|
|
31,643
|
|
|
|
|
|
|
|
57,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
|
3,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,883
|
|
Bank card services
|
|
|
1,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,539
|
|
Mortgage origination and other loan fees
|
|
|
1,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,935
|
|
Brokerage fees
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
Bank-owned life insurance
|
|
|
1,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,830
|
|
Net gain on sale of investment securities
|
|
|
173
|
|
|
|
|
|
|
|
(560
|
)(5)
|
|
|
|
|
|
|
(387
|
)
|
Total
other-than-temporary
impairment losses
|
|
|
(1,082
|
)
|
|
|
|
|
|
|
1,082
|
|
|
|
|
|
|
|
|
|
Portion of impairment losses recognized in other comprehensive
income
|
|
|
584
|
|
|
|
|
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses recognized in earnings
|
|
|
(498
|
)
|
|
|
|
|
|
|
498
|
(6)
|
|
|
|
|
|
|
|
|
Other
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
10,167
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
10,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
22,112
|
|
|
|
|
|
|
|
(159
|
)(7)
|
|
|
|
|
|
|
21,953
|
|
Occupancy
|
|
|
5,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,630
|
|
Furniture and equipment
|
|
|
3,155
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,155
|
|
Data processing and telecommunications
|
|
|
2,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,317
|
|
Advertising and public relations
|
|
|
1,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,610
|
|
Office expenses
|
|
|
1,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,383
|
|
Professional fees
|
|
|
1,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,488
|
|
Business development and travel
|
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,244
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Adjustments
|
|
|
for Change in
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
for Investment
|
|
|
Control
|
|
|
Adjustments
|
|
|
December 31,
|
|
|
|
2009
|
|
|
and TARP
|
|
|
(Purchase
|
|
|
for Rights
|
|
|
2009
|
|
|
|
(As Reported)
|
|
|
Repurchase
|
|
|
Accounting)
|
|
|
Offering
|
|
|
(Pro Forma)
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Amortization of core deposit intangible
|
|
|
1,146
|
|
|
|
|
|
|
|
|
(8)
|
|
|
|
|
|
|
1,146
|
|
Other real estate losses and miscellaneous loan costs
|
|
|
1,646
|
|
|
|
|
|
|
|
(217
|
)(9)
|
|
|
|
|
|
|
1,429
|
|
Directors fees
|
|
|
1,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,418
|
|
FDIC deposit insurance
|
|
|
2,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,721
|
|
Other
|
|
|
3,940
|
|
|
|
|
|
|
|
(1,882
|
)(10)
|
|
|
|
|
|
|
2,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
49,810
|
|
|
|
|
|
|
|
(2,258
|
)
|
|
|
|
|
|
|
47,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes
|
|
|
(13,829
|
)
|
|
|
|
|
|
|
33,839
|
|
|
|
|
|
|
|
20,010
|
|
Income tax expense (benefit)
|
|
|
(7,013
|
)
|
|
|
|
|
|
|
13,045
|
(11)
|
|
|
|
|
|
|
6,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(6,816
|
)
|
|
$
|
|
|
|
$
|
20,794
|
|
|
$
|
|
|
|
$
|
13,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and accretion on preferred stock
|
|
|
2,352
|
|
|
|
(2,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
(9,168
|
)
|
|
$
|
2,352
|
|
|
$
|
20,794
|
|
|
$
|
|
|
|
$
|
13,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
|
(0.80
|
)
|
|
|
0.72
|
|
|
|
0.25
|
|
|
|
(0.01
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted
|
|
|
(0.80
|
)
|
|
|
0.72
|
|
|
|
0.25
|
|
|
|
(0.01
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
11,470,314
|
|
|
|
71,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
87,470,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted
|
|
|
11,470,314
|
|
|
|
71,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
87,470,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Adjustment reflects the estimated impact of accretion of
interest related to a $16,000 fair value discount adjustment
(excluding credit adjustment) to loans as of September 30,
2010. Accretion was calculated over a five-year period. |
|
(2) |
|
Adjustment reflects the estimated impact of amortization of
interest related to a $8,061 fair value premium adjustment to
time deposits as of September 30, 2010. Amortization was
calculated over a
two-year
period. |
|
(3) |
|
Adjustment reflects the estimated impact of amortization of
interest related to a $8,540 fair value premium adjustment to
borrowings net of accretion of interest related to a $9,000 fair
value discount adjustment to subordinated debt as of
September 30, 2010. Premium amortization on borrowings was
calculated over a five-year period while discount accretion of
interest on subordinated debt was calculated over a
25-year
period. |
|
(4) |
|
Adjustment reflects the estimated impact of fair value credit
adjustments required by purchase accounting and the proper
accounting for acquired loans with evidence of credit
deterioration. |
|
(5) |
|
Adjustment reflects the impact of purchase accounting relating
to the elimination of unrealized gains existing as of
January 1, 2009 due to the change in control. Accordingly,
realized gains recorded during 2009 were decreased by the amount
of gross unrealized gains as of December 31, 2008 on
individual securities that were sold in 2009. |
|
(6) |
|
Adjustment reflects the reversal of an other-than-temporary
impairment charge in 2009 that would have been included in
purchase accounting adjustments upon change in control. |
|
(7) |
|
Adjustment reflects the impact of a reversal of compensation
expense of $50 associated with stock options and $109 associated
with restricted stock awards granted prior to January 1,
2009, which for purposes of this pro forma income statement are
assumed to have vested upon the change of control. |
|
(8) |
|
Estimated impact of amortization on core deposit intangible
recorded in purchase accounting as of September 30, 2010 is
not materially different from actual amortization recorded in
2009. |
|
(9) |
|
Adjustment reflects the reversal of other real estate write
downs recorded during 2009. These write downs were assumed to
have been reflected in the acquisition method fair value
estimate as the |
31
|
|
|
|
|
one-year
measurement period would have improved the underlying
assumptions used in valuing these assets reflecting
significantly longer holding periods and more significant
declines in market values than were originally projected. |
|
(10) |
|
Adjustment reflects the reversal of direct legal, investment
banking, and accounting fees related to the withdrawn public
offering in 2009. |
|
(11) |
|
Adjustment reflects recognition of tax expense associated with
the adjusted pro forma net income before taxes assuming an
effective rate equal to the Companys blended federal and
state statutory rate of 38.5%. |
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Adjustments
|
|
|
for Change in
|
|
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
for Investment
|
|
|
Control
|
|
|
Adjustments
|
|
|
September 30,
|
|
|
|
2010
|
|
|
and TARP
|
|
|
(Purchase
|
|
|
for Rights
|
|
|
2010
|
|
|
|
(As Reported)
|
|
|
Repurchase
|
|
|
Accounting)
|
|
|
Offering
|
|
|
(Pro Forma)
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loan fees
|
|
$
|
52,080
|
|
|
$
|
|
|
|
$
|
2,400
|
(1)
|
|
$
|
|
|
|
$
|
54,480
|
|
Investment securities
|
|
|
7,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,278
|
|
Federal funds and other interest income
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
59,395
|
|
|
|
|
|
|
|
2,400
|
|
|
|
|
|
|
|
61,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
16,438
|
|
|
|
|
|
|
|
(3,023
|
)(2)
|
|
|
|
|
|
|
13,415
|
|
Borrowings and repurchase agreements
|
|
|
4,281
|
|
|
|
|
|
|
|
(1,011
|
)(3)
|
|
|
|
|
|
|
3,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
20,719
|
|
|
|
|
|
|
|
(4,034
|
)
|
|
|
|
|
|
|
16,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
38,676
|
|
|
|
|
|
|
|
6,434
|
|
|
|
|
|
|
|
45,110
|
|
Provision for loan losses
|
|
|
38,534
|
|
|
|
|
|
|
|
(38,534
|
)(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
142
|
|
|
|
|
|
|
|
44,968
|
|
|
|
|
|
|
|
45,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
|
2,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,468
|
|
Bank card services
|
|
|
1,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,479
|
|
Mortgage origination and other loan fees
|
|
|
1,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,108
|
|
Brokerage fees
|
|
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
743
|
|
Bank-owned life insurance
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
632
|
|
Net gain on sale of investment securities
|
|
|
511
|
|
|
|
|
|
|
|
2,965
|
(5)
|
|
|
|
|
|
|
3,476
|
|
Other
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
7,545
|
|
|
|
|
|
|
|
2,965
|
|
|
|
|
|
|
|
10,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
16,637
|
|
|
|
|
|
|
|
(129
|
)(6)
|
|
|
|
|
|
|
16,508
|
|
Occupancy
|
|
|
4,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,418
|
|
Furniture and equipment
|
|
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,312
|
|
Data processing and telecommunications
|
|
|
1,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,530
|
|
Advertising and public relations
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,464
|
|
Office expenses
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
940
|
|
Professional fees
|
|
|
1,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,785
|
|
Business development and travel
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
937
|
|
Amortization of core deposit intangible
|
|
|
705
|
|
|
|
|
|
|
|
|
(7)
|
|
|
|
|
|
|
705
|
|
33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Nine Months
|
|
|
|
Ended
|
|
|
Adjustments
|
|
|
for Change in
|
|
|
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
for Investment
|
|
|
Control
|
|
|
Adjustments
|
|
|
September 30,
|
|
|
|
2010
|
|
|
and TARP
|
|
|
(Purchase
|
|
|
for Rights
|
|
|
2010
|
|
|
|
(As Reported)
|
|
|
Repurchase
|
|
|
Accounting)
|
|
|
Offering
|
|
|
(Pro Forma)
|
|
|
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
Other real estate losses and
miscellaneous loan costs
|
|
|
3,858
|
|
|
|
|
|
|
|
(1,682
|
)(8)
|
|
|
|
|
|
|
2,176
|
|
Directors fees
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
828
|
|
FDIC deposit insurance
|
|
|
2,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,028
|
|
Other
|
|
|
1,738
|
|
|
|
|
|
|
|
(397
|
)(9)
|
|
|
|
|
|
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
39,180
|
|
|
|
|
|
|
|
(2,208
|
)
|
|
|
|
|
|
|
36,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes
|
|
|
(31,493
|
)
|
|
|
|
|
|
|
50,141
|
|
|
|
|
|
|
|
18,648
|
|
Income tax expense (benefit)
|
|
|
(3,510
|
)
|
|
|
|
|
|
|
10,567
|
(10)
|
|
|
|
|
|
|
7,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(27,983
|
)
|
|
$
|
|
|
|
$
|
39,574
|
|
|
$
|
|
|
|
$
|
11,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and accretion on preferred stock
|
|
|
1,766
|
|
|
|
(1,766
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
(29,749
|
)
|
|
$
|
1,766
|
|
|
$
|
39,574
|
|
|
$
|
|
|
|
$
|
11,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
|
(2.34
|
)
|
|
|
2.01
|
|
|
|
0.47
|
|
|
|
(0.01
|
)
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted
|
|
|
(2.34
|
)
|
|
|
2.01
|
|
|
|
0.47
|
|
|
|
(0.01
|
)
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
12,702,625
|
|
|
|
71,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
88,702,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully diluted
|
|
|
12,702,625
|
|
|
|
71,000,000
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
88,702,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
(1) |
|
Adjustment reflects the estimated impact of accretion of
interest related to a $16,000 fair value discount adjustment
(excluding credit adjustment) to loans as of September 30,
2010. Accretion was calculated over a five-year period. |
|
(2) |
|
Adjustment reflects the estimated impact of amortization of
interest related to a $8,061 fair value premium adjustment to
time deposits as of September 30, 2010. Amortization was
calculated over a
two-year
period. |
|
(3) |
|
Adjustment reflects the estimated impact of amortization of
interest related to a $8,540 fair value premium adjustment to
borrowings net of accretion of interest related to a $9,000 fair
value discount adjustment to subordinated debt as of
September 30, 2010. Premium amortization on borrowings was
calculated over a five-year period while discount accretion of
interest on subordinated debt was calculated over a
25-year
period. |
|
(4) |
|
Adjustment reflects the estimated impact of fair value credit
adjustments required by purchase accounting and the proper
accounting for acquired loans with evidence of credit
deterioration. |
|
(5) |
|
Adjustment reflects the impact of purchase accounting relating
to the elimination of unrealized losses existing as of
January 1, 2009 due to the change in control. Accordingly,
realized gains recorded during 2010 were increased by the amount
of gross unrealized losses as of December 31, 2008 on
individual securities that were sold in 2010. |
|
(6) |
|
Adjustment reflects the impact of a reversal of compensation
expense of $37 associated with stock options and $92 associated
with restricted stock awards granted prior to January 1,
2009, which for purposes of this pro forma income statement are
assumed to have vested upon the change of control. |
34
|
|
|
(7) |
|
Estimated impact of amortization on core deposit intangible
recorded in purchase accounting as of September 30, 2010 is
not materially different from actual amortization recorded in
the nine months ended September 30, 2010. |
|
(8) |
|
Adjustment reflects the reversal of other real estate write
downs recorded during 2010. These write downs were assumed to
have been reflected in the acquisition method fair value
estimate as the one-year measurement period would have improved
the underlying assumptions used in valuing these assets
reflecting significantly longer holding periods and more
significant declines in market values than were originally
projected. |
|
(9) |
|
Adjustment reflects the reversal of direct legal, investment
banking, and accounting fees related to the withdrawn public
offering in 2010. |
|
(10) |
|
Adjustment reflects the reversal of the $8,762 valuation
allowance recorded against deferred tax assets in the nine
months ended September 30, 2010 as well as recognition of
tax expense associated with the adjusted pro forma net income
before taxes assuming an effective rate equal to the
Companys blended federal and state statutory rate of 38.5%. |
35
USE OF
PROCEEDS
The total proceeds to us from the rights offering will depend on
the number of subscription rights that are exercised. If we
issue all 5,000,000 shares available in the rights
offering, the total proceeds to us, before expenses, will be
$12.75 million. We estimate that the expenses of the rights
offering will be approximately $250,000, resulting in estimated
net proceeds to us, assuming that all of the shares available in
the rights offering are sold, of approximately
$12.5 million. We intend to use the net proceeds from the
rights offering for general corporate purposes, which may
include investment in the Bank.
Because there is no minimum number of shares that must be sold
in the rights offering, we can provide no assurance regarding
the amount of capital we will actually raise in the rights
offering.
36
CAPITALIZATION
The following table sets forth our capitalization at
September 30, 2010 and as adjusted to reflect (1) the
completion of the Investment and TARP Repurchase and
(2) the sale of an assumed 5,000,000 shares of our
common stock at the subscription price of $2.55 per share and
the receipt of the net proceeds from the rights offering after
deducting estimated offering expenses in the amount of $250,000.
The table does not reflect the use of proceeds from the
Investment or the rights offering. The information presented in
the table below should be read in conjunction with the
consolidated financial statements and notes thereto contained in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Adjusted
|
|
|
|
|
|
|
|
|
|
for
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
|
|
|
|
|
|
|
and TARP
|
|
|
As Further
|
|
|
|
|
|
|
Repurchase
|
|
|
Adjusted
|
|
|
|
|
|
|
(Includes Fair
|
|
|
for Rights
|
|
|
|
Actual
|
|
|
Value Adjustments)
|
|
|
Offering
|
|
|
Subordinated debentures
|
|
$
|
34,323
|
|
|
$
|
25,323
|
|
|
$
|
25,323
|
|
SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $1,000 par value; 100,000 shares
authorized; 41,279, zero and zero shares issued and outstanding,
respectively (liquidation preference of $41,279, $0 and $0,
respectively)
|
|
|
40,345
|
|
|
|
|
|
|
|
|
|
Common stock, no par value; 50,000,000 (actual) and
300,000,000 shares (as adjusted) authorized; 12,880,954
(actual), 83,880,954 (as adjusted for Investment and TARP
Repurchase) and 88,880,954 (as further adjusted for the rights
offering) shares issued and outstanding
|
|
|
145,461
|
|
|
|
222,690
|
|
|
|
235,190
|
|
Accumulated deficit
|
|
|
(73,955
|
)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
4,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
116,103
|
|
|
|
222,690
|
|
|
|
235,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,649,699
|
|
|
$
|
1,763,887
|
|
|
$
|
1,776,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value per share
|
|
$
|
5.81
|
|
|
$
|
2.65
|
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
PRICE
RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is listed and traded on the NASDAQ Global
Select Market under the symbol CBKN. The following
table sets forth, for the quarters shown, the range of high and
low sales prices of our common stock on the NASDAQ Global Select
Market and the cash dividends declared on the common stock. As
of February 9, 2011, we had approximately
83,877,846 shares of common stock outstanding, held of
record by approximately 2,217 shareholders. The last
reported sales price of our common stock on the NASDAQ Global
Select Market on February 9, 2011, was $3.11 per share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
Quarter Ended
|
|
High
|
|
Low
|
|
Per Share
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
3.09
|
|
|
$
|
1.50
|
|
|
$
|
|
|
September 30
|
|
|
3.53
|
|
|
|
1.60
|
|
|
|
|
|
June 30
|
|
$
|
6.95
|
|
|
$
|
3.01
|
|
|
$
|
|
|
March 31
|
|
|
4.70
|
|
|
|
3.00
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
$
|
5.74
|
|
|
$
|
3.80
|
|
|
$
|
0.08
|
|
September 30
|
|
|
6.90
|
|
|
|
4.59
|
|
|
|
0.08
|
|
June 30
|
|
|
6.39
|
|
|
|
4.13
|
|
|
|
0.08
|
|
March 31
|
|
|
7.00
|
|
|
|
4.00
|
|
|
|
0.08
|
|
Our shareholders are entitled to receive such dividends or
distributions as our Board of Directors authorizes in its
discretion. Our ability to pay dividends is subject to the
restrictions of the North Carolina Business Corporation Act, the
guidelines of the Federal Reserve regarding capital adequacy and
dividends, and our organizational documents, including our
Articles of Incorporation. There are also various statutory
limitations on the ability of the Bank to pay dividends to us.
The Banks MOU requires the Bank to obtain regulatory
approval prior to paying any cash dividends to us, and the
Company consults with the Federal Reserve Bank of Richmond prior
to payment of any dividends or interest on debt.
Subject to the legal availability of funds to pay dividends,
during 2009 we declared and paid dividends totaling $0.32 per
share (see chart above for declared quarterly dividends). We
have currently suspended payment of our quarterly cash dividend.
Our Board of Directors will continue to evaluate the payment of
cash dividends quarterly and determine whether such cash
dividends are in our best interest in the business judgment of
our Board of Directors and are consistent with maintaining our
status as a well capitalized institution under
applicable banking laws and regulations. Our 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 continue to be paid
to shareholders, and if so, the appropriate amount. Actual
declaration of any future dividends and the establishment of the
record dates related thereto remains subject to further action
by our Board of Directors as well as the limitations discussed
above.
38
BUSINESS
General
Capital Bank Corporation is a bank holding company incorporated
under the laws of North Carolina on August 10, 1998. The
Companys primary wholly-owned subsidiary is Capital Bank,
a state-chartered banking corporation that was incorporated
under the laws of the State of North Carolina on May 30,
1997 and commenced operations on June 20, 1997. The Company
also serves as the holding company for CB Trustee, LLC and 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. CB
Trustee, LLC was established to facilitate the administration of
deeds of trust relating to real property used as collateral to
secure loans made by the Bank and 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.
Capital Bank is a community bank engaged in the general
commercial banking business, primarily in markets in central and
western North Carolina. As of December 31, 2010, the
Company had assets of approximately $1.6 billion,
$1.3 billion in loans, $1.3 billion in deposits, and
$76.9 million in shareholders equity. The
Companys corporate office is located at 333 Fayetteville
Street, Suite 700, Raleigh, North Carolina 27601, and its
telephone number is
(919) 645-6400.
The Bank operates 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.
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;
travelers 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
Banks 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 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 Companys
obligation under the subordinated debentures constitutes a full
and unconditional guarantee by the Company of the Trusts
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.
Transaction
with North American Financial Holdings, Inc.
On January 28, 2011, the Company completed the issuance and
sale to NAFH of 71,000,000 shares of common stock for
$181,050,000 in cash. The Companys shareholders approved
the issuance of such shares to NAFH, and an amendment to the
Companys articles of incorporation to increase the
authorized shares of common stock to 300,000,000 shares
from 50,000,000 shares, at a special meeting of
shareholders held on December 16, 2010. In connection with
the Investment, each existing Company shareholder received one
contingent value right per share that entitles the holder to
receive up to $0.75 in cash per CVR at the end of a five-year
period based on the credit performance of the Banks
existing loan portfolio. Also in connection with the Investment,
pursuant to an agreement among NAFH, the Treasury, and the
Company, the Companys Series A Preferred Stock and
warrant to purchase shares of common stock issued by the Company
to the Treasury in connection with TARP were repurchased.
Following the TARP Repurchase, the Series A Preferred Stock
and warrant are no longer outstanding, and accordingly the
Company no longer expects to be subject to
39
the restrictions imposed upon us by the terms of our
Series A Preferred Stock, or certain regulatory provisions
of EESA and ARRA that are imposed on TARP recipients.
As a result of the Investment, NAFH currently owns approximately
84.6% of the Companys common stock.
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 Bank are influenced by the
significant industries within the regions. Consistent with the
Companys emphasis on being a community-oriented financial
institution, most of its lending activity is with customers
located in and around counties in which it has banking offices.
The ultimate collectability of the Banks 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 its 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 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 Banks commercial real
estate concentrations by market region on a regular basis in an
attempt to prevent over-exposure to any one type of commercial
real estate loan and incorporates third party real estate and
market analysis to monitor market conditions.
The Company believes that early detection of potential credit
problems through regular contact with the Banks 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 Bank employs a loan review department
that audits a minimum of 25% of commercial loan commitments
annually, concentrating on potentially high risk portions of the
portfolio, a sample of each consumer loan officers 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. The Bank has recently
enhanced its loan review function to include an annual review of
all loans in excess of $500,000. Another part of the
Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial real estate
|
|
$
|
806,184
|
|
|
|
64
|
%
|
|
$
|
892,523
|
|
|
|
64
|
%
|
|
$
|
803,634
|
|
|
|
64
|
%
|
|
$
|
708,768
|
|
|
|
65
|
%
|
|
$
|
638,492
|
|
|
|
64
|
%
|
Consumer real estate
|
|
|
262,955
|
|
|
|
21
|
|
|
|
262,503
|
|
|
|
19
|
|
|
|
235,688
|
|
|
|
19
|
|
|
|
196,706
|
|
|
|
18
|
|
|
|
195,853
|
|
|
|
19
|
|
Commercial and industrial
|
|
|
145,435
|
|
|
|
12
|
|
|
|
183,733
|
|
|
|
13
|
|
|
|
186,474
|
|
|
|
15
|
|
|
|
169,389
|
|
|
|
15
|
|
|
|
155,673
|
|
|
|
15
|
|
Consumer
|
|
|
6,163
|
|
|
|
1
|
|
|
|
9,692
|
|
|
|
1
|
|
|
|
11,215
|
|
|
|
1
|
|
|
|
13,540
|
|
|
|
1
|
|
|
|
12,246
|
|
|
|
1
|
|
Other loans
|
|
|
33,742
|
|
|
|
2
|
|
|
|
41,851
|
|
|
|
3
|
|
|
|
17,357
|
|
|
|
1
|
|
|
|
6,704
|
|
|
|
1
|
|
|
|
5,788
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,254,479
|
|
|
|
100
|
%
|
|
$
|
1,390,302
|
|
|
|
100
|
%
|
|
$
|
1,254,368
|
|
|
|
100
|
%
|
|
$
|
1,095,107
|
|
|
|
100
|
%
|
|
$
|
1,008,052
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Investing
Activities
Investment securities represent a significant portion of the
Companys assets. The Bank invests in securities as
allowable under bank regulations. These securities include
obligations of the U.S. Treasury, U.S. government
agencies, U.S. government-sponsored entities, including
mortgage-backed securities, bank eligible obligations of any
state or political subdivision, privately-issued mortgage-backed
securities, bank eligible corporate obligations, mutual funds
and limited types of equity securities.
The Banks investment activities are governed internally by
a written, Board-approved policy. The investment policy is
carried out by the Companys Risk Committee, which meets
regularly to review the economic environment and establish
investment strategies. The Risk Committee also has much broader
responsibilities, which are discussed under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Market
Risk contained elsewhere in this prospectus.
Investment strategies are reviewed by the Risk Committee based
on the interest rate environment, balance sheet mix, actual and
anticipated loan demand, funding opportunities and the overall
interest rate sensitivity of the Company. In general, the
investment portfolio is managed in a manner appropriate to the
attainment of the following goals: (i) to provide a
sufficient margin of liquid assets to meet unanticipated deposit
and loan fluctuations and overall funds management objectives;
(ii) to provide eligible securities to secure public funds
and other borrowings; and (iii) to earn the maximum return
on funds invested that is commensurate with meeting the
requirements of (i) and (ii).
Funding
Activities
Deposits are the primary source of funds for lending and
investing activities, and their cost is the largest category of
interest expense. Scheduled payments, as well as prepayments,
and maturities from portfolios of loans and investment
securities also provide a stable source of funds. The
Companys funding activities are monitored and governed
through the Companys overall asset/liability management
process, which is further discussed under
Managements Discussion and Analysis of Financial
Condition and Results of Operations Market
Risk contained elsewhere in this prospectus. The Company
conducts its funding activities in compliance with all
applicable laws and regulations.
Deposits are attracted principally from clients within the
Banks branch network through the offering of a broad
selection of deposit instruments to individuals and businesses,
including noninterest-bearing checking accounts,
interest-bearing checking accounts, savings accounts, money
market deposit accounts, certificates of deposit and individual
retirement accounts. Deposit account terms vary with respect to
the minimum balance required, the time period the funds must
remain on deposit and service charge schedules. Interest rates
paid on specific deposit types are determined based on
(i) the interest rates offered by competitors,
(ii) the anticipated amount and timing of funding needs,
(iii) the availability and cost of alternative sources of
funding, and (iv) the anticipated future economic
conditions and interest rates. Client deposits are attractive
sources of funding because of their stability and relative cost.
Deposits are regarded as an important part of the overall client
relationship and provide opportunities to cross-sell other
services. In addition, the Bank gathers a portion of its deposit
base through brokered deposits. At December 31, 2010,
brokered deposits represented approximately 8% of the
Companys total deposits compared to 5% at
December 31, 2009.
The types and mix of depository accounts for the past five years
ended December 31 are shown on the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Demand, noninterest checking
|
|
$
|
116,113
|
|
|
|
9
|
%
|
|
$
|
141,069
|
|
|
|
10
|
%
|
|
$
|
125,281
|
|
|
|
10
|
%
|
|
$
|
114,780
|
|
|
|
10
|
%
|
|
$
|
120,945
|
|
|
|
11
|
%
|
NOW accounts
|
|
|
185,782
|
|
|
|
14
|
|
|
|
175,084
|
|
|
|
13
|
|
|
|
144,985
|
|
|
|
11
|
|
|
|
119,299
|
|
|
|
11
|
|
|
|
109,692
|
|
|
|
11
|
|
Money market accounts
|
|
|
137,422
|
|
|
|
10
|
|
|
|
184,146
|
|
|
|
13
|
|
|
|
212,780
|
|
|
|
16
|
|
|
|
229,560
|
|
|
|
21
|
|
|
|
221,502
|
|
|
|
21
|
|
Savings accounts
|
|
|
30,639
|
|
|
|
2
|
|
|
|
28,958
|
|
|
|
2
|
|
|
|
28,726
|
|
|
|
2
|
|
|
|
32,399
|
|
|
|
3
|
|
|
|
35,049
|
|
|
|
3
|
|
Time deposits
|
|
|
873,330
|
|
|
|
65
|
|
|
|
848,708
|
|
|
|
62
|
|
|
|
803,542
|
|
|
|
61
|
|
|
|
602,660
|
|
|
|
55
|
|
|
|
568,021
|
|
|
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,343,286
|
|
|
|
100
|
%
|
|
$
|
1,377,965
|
|
|
|
100
|
%
|
|
$
|
1,315,314
|
|
|
|
100
|
%
|
|
$
|
1,098,698
|
|
|
|
100
|
%
|
|
$
|
1,055,209
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41
The Companys 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
Companys long-term borrowings include long-term FHLB
advances, structured repurchase agreements and subordinated debt.
Market
Area and Competition
Capital Banks primary markets are in central and western
North Carolina. The Banks Triangle market includes
operations in Wake, Johnston and Granville counties. The
Triangle, which includes Raleigh, North Carolinas capital,
as well as Chapel Hill, Durham and Research Triangle Park, has a
well-diversified economic base with a mixture of businesses,
universities, and large medical institutions. The Banks
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 Armys active forces. Fayetteville and the
surrounding Sandhills market have in recent years experienced
significant growth due to the 2005 Base Realignment and Closure
process (BRAC). Lee and Chatham counties are also
significant centers for various industries, including
agriculture, manufacturing, lumber and tobacco. The Banks
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 Banks 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.
Local economic conditions in the markets that the Bank serves
affect the Banks results of operations and, as a result,
the Companys results of operations. The following tables
present certain important economic indicators at the latest date
available for regions in which the Bank has branches:
Unemployment
Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent Change
|
|
Percent Change
|
Region
|
|
2008
|
|
2009
|
|
2010
|
|
2008-2010
|
|
2009-2010
|
|
United States
|
|
|
6.5
|
%
|
|
|
9.4
|
%
|
|
|
9.3
|
%
|
|
|
43.1
|
%
|
|
|
(1.1
|
)%
|
North Carolina
|
|
|
7.4
|
%
|
|
|
10.6
|
%
|
|
|
9.9
|
%
|
|
|
33.8
|
%
|
|
|
(6.6
|
)%
|
Triangle:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raleigh/Cary MSA
|
|
|
5.8
|
%
|
|
|
8.8
|
%
|
|
|
8.1
|
%
|
|
|
39.7
|
%
|
|
|
(8.0
|
)%
|
Sandhills:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fayetteville MSA
|
|
|
6.8
|
%
|
|
|
9.2
|
%
|
|
|
9.2
|
%
|
|
|
35.3
|
%
|
|
|
0.0
|
%
|
Triad:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burlington MSA
|
|
|
7.9
|
%
|
|
|
12.1
|
%
|
|
|
10.4
|
%
|
|
|
31.6
|
%
|
|
|
(14.0
|
)%
|
Western:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asheville MSA
|
|
|
5.8
|
%
|
|
|
8.8
|
%
|
|
|
8.1
|
%
|
|
|
39.7
|
%
|
|
|
(8.0
|
)%
|
Hickory/Lenoir/Morganton MSA
|
|
|
9.5
|
%
|
|
|
14.5
|
%
|
|
|
12.6
|
%
|
|
|
32.6
|
%
|
|
|
(13.1
|
)%
|
Source: North Carolina Employment Security Commission (NC ESC).
Data each year is for the month of November.
Median
Household Income:
|
|
|
|
|
Region
|
|
2009
|
|
United States(1)
|
|
$
|
49,777
|
|
North Carolina(2)
|
|
$
|
60,434
|
|
42
|
|
|
|
|
Region
|
|
2009
|
|
Triangle:
|
|
|
|
|
Granville County(2)
|
|
$
|
50,698
|
|
Johnston County(2)
|
|
$
|
54,089
|
|
Wake County(2)
|
|
$
|
75,682
|
|
Sandhills:
|
|
|
|
|
Chatham County(2)
|
|
$
|
54,654
|
|
Cumberland County(2)
|
|
$
|
50,583
|
|
Lee County(2)
|
|
$
|
49,375
|
|
Triad:
|
|
|
|
|
Alamance County(2)
|
|
$
|
50,579
|
|
Western:
|
|
|
|
|
Buncombe County(2)
|
|
$
|
47,450
|
|
Catawba County(2)
|
|
$
|
51,200
|
|
Bankruptcy
Filings(3)(4) (Business and Individual):
|
|
|
|
|
|
|
|
|
|
|
|
|
Region
|
|
2009
|
|
2010
|
|
Percent Change
|
|
United States
|
|
|
1,402,816
|
|
|
|
1,596,355
|
|
|
|
13.8
|
%
|
North Carolina
|
|
|
26,917
|
|
|
|
27,358
|
|
|
|
1.6
|
%
|
North Carolina Eastern District
|
|
|
11,326
|
|
|
|
11,176
|
|
|
|
(1.3
|
)%
|
North Carolina Middle District
|
|
|
7,432
|
|
|
|
7,397
|
|
|
|
(0.5
|
)%
|
North Carolina Western District
|
|
|
8,159
|
|
|
|
8,785
|
|
|
|
7.7
|
%
|
|
|
|
(1) |
|
Source: Report, Income, Poverty, and Health Insurance
Coverage in the United States: 2009. Released by the US
Census Bureau/US Dept. of Commerce-Economics and Statistics
Administration, September 2010. |
|
(2) |
|
Source: NC Dept. of Commerce, Economic Development Intelligence
System (EDIS). |
|
(3) |
|
Source: United States Courts. |
|
(4) |
|
Bankruptcy data is for the
12-month
period ended September 30, 2010 and 2009. |
Commercial banking in North Carolina is extremely competitive.
The Company competes in its market areas 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 Companys 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 areas, 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.
43
Employees
As of December 31, 2010, the Company employed
406 persons, of which 389 were full-time and 17 were
part-time. None of the Companys 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 Companys or the Banks
business. Supervision, regulation and examination of the Company
and the Bank by bank regulatory agencies is intended primarily
for the protection of the Banks depositors rather than
holders of the Companys common stock.
On October 28, 2010, the Bank entered into an informal
Memorandum of Understanding with the FDIC and the NC
Commissioner. In accordance with the terms of the MOU, the Bank
has agreed to, among other things, (i) increase regulatory
capital to achieve and maintain a minimum Tier 1 leverage
capital ratio of at least 8% and a total risk-based capital
ratio of at least 12%, (ii) monitor and reduce its
commercial real estate concentration, (iii) timely identify
and reduce its overall level of problem loans,
(iv) establish and maintain an adequate allowance for loan
losses, and (v) ensure adherence to loan policy guidelines.
In addition, the Bank must obtain regulatory approval prior to
paying any dividends to the Company. The MOU will remain in
effect until modified, terminated, lifted, suspended or set
aside by the regulatory authorities.
In addition, the Company consults with the Federal Reserve Bank
of Richmond prior to payment of any dividends or interest on
debt.
The Company is also regulated by the SEC as a result of its
publicly traded common stock. The regulatory compliance burden
of being a publicly traded company has increased significantly
over the last decade.
Holding
Company Regulation
General
The Company is a bank 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.
44
The Federal Reserve has the power to order a bank 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.
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.
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 institutions risk profile. Furthermore, the guidelines
indicate that the Federal Reserve 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, 2010, the Company had Tier 1
risk-adjusted, total regulatory capital and leverage capital of
approximately 8.08%, 9.60% and 6.39%, respectively. Those same
ratios as of December 31, 2009 were 10.16%, 11.41% and
8.94%, 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
45
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 was enacted on
October 3, 2008. EESA authorized the Treasury to purchase
or guarantee up to $700 billion in troubled assets from
financial institutions under the Troubled Asset Relief Program.
Pursuant to authority granted under EESA, the Treasury created
the TARP Capital Purchase Program under which the Treasury 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 were 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. Following the TARP Repurchase, we do not expect
these additional standards to be applicable to the Company.
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 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. Following the TARP Repurchase, we do not
expect these additional standards to be applicable to the
Company.
Dodd-Frank
Wall Street Reform and Consumer Protection Act
On July 21, 2010, President Obama signed into law the
Dodd-Frank Act, which was intended primarily to overhaul the
financial regulatory framework following the global financial
crisis and will impact all financial institutions including the
Company and the Bank. The Dodd-Frank Act contains provisions
that will, among other things, establish a Bureau of Consumer
Financial Protection, establish a systemic risk regulator,
consolidate certain federal bank regulators and impose increased
corporate governance and executive compensation requirements.
The Dodd-Frank Act requires various federal agencies to adopt a
broad range of new implementing rules and regulations and to
prepare numerous studies and reports for the U.S. Congress.
The federal agencies are given significant discretion in
drafting the implementing rules and regulations, and
consequently, many of the details and much of the impact of the
Dodd-Frank Act are not yet known.
46
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 NC Commissioner and the
FDIC. The FDIC and the NC 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 NC 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 Community Reinvestment Act of 1977 (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 temporarily increased from $100,000 to $250,000.
The Dodd-Frank Act permanently increased the maximum amount of
deposit insurance for banks, savings institutions and credit
unions to $250,000 per depositor, retroactive to January 1,
2009. The Dodd-Frank Act also provides unlimited deposit
insurance for non-interest bearing transaction accounts through
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 institutions 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 institutions modified third quarter
2009 assessment rate. The Companys prepaid assessment was
$7.3 million. Under the Dodd-Frank Act, the minimum
designated reserve ratio of the DIF increased from
1.15 percent to 1.35 percent of estimated insured
deposits. Additionally, the Dodd-Frank Act revised the
assessment base against which an insured depository
institutions deposit insurance premiums paid to the DIF
will be calculated. Under the FDICs proposed rules, the
assessment base will change from adjusted domestic deposits to
average consolidated total assets minus average tangible equity.
47
Dividends
and Capital Requirements
Under North Carolina corporation laws, the Company may not pay a
dividend or distribution, if after giving it effect, the Company
would not be able to pay its debts as they become due in the
usual course of business or the Companys total assets
would be less than its liabilities. In general, the
Companys 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 Banks 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, 2010, the Bank had Tier 1 risk-adjusted,
total regulatory capital and leverage capital of approximately
7.97%, 9.50% and 6.37%, respectively. Those same ratios as of
December 31, 2009 were 7.42%, 8.68% and 6.52%,
respectively. The Banks regulatory capital ratios as of
December 31, 2009 were revised after its Call Reports were
restated and amended in 2010 to reflect an adjustment to the
regulatory capital treatment of the injection of proceeds from
the sale of Series A Preferred Stock from the Company into
the Bank in 2008.
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 of 1977
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 banks 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 agencys assessment of the banks 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
48
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 Gramm-Leach-Bliley Modernization Act of 1999s
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, 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
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.
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 65,330 square
feet, of which 47,785 square feet is for the Companys
principal offices and for the branch office. The remaining
leased square footage is currently being subleased to various
other entities. The Company owns 14 properties throughout North
Carolina that are used as branch offices, which are located in
Burlington (3), Clayton, Fayetteville (3), Graham, Hickory,
Mebane, Raleigh, Sanford, Siler City, and Zebulon. The
Companys operations center is located in one of the
Burlington offices. The Company leases 17 other properties
throughout North Carolina that are used as branch offices and
which are located in Asheville (4), Cary (2), Fayetteville,
Holly Springs, Morrisville, Oxford, Pittsboro, Raleigh (3),
Sanford (2), and Wake Forest. Additionally, the Company signed
an agreement in 2010 to lease a building under construction to
accommodate the Companys planned relocation of an existing
branch in Sanford. 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 arms
length bargaining.
Legal
Proceedings
There are no material pending legal proceedings to which the
Company or its subsidiaries is a party or to which any of the
Companys or its subsidiaries 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 Companys business, operating results
or condition.
49
MANAGEMENTS
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 of and for the three and nine months ended
September 30, 2010 and September 30, 2009, as of and
for the years ended December 31, 2009 and 2008, and for the
year ended December 31, 2007. This discussion is designed
to provide more comprehensive information about the major
components of the Companys 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 Companys consolidated
financial statements, including the related notes thereto,
presented elsewhere in this prospectus.
Overview
Capital Bank Corporation is a bank holding company incorporated
under the laws of North Carolina on August 10, 1998. The
Companys primary wholly-owned subsidiary is Capital Bank,
a state-chartered banking corporation. The Bank was incorporated
under the laws of the State of North Carolina on May 30,
1997 and commenced operations on June 20, 1997. As of
September 30, 2010, the Company conducted no business other
than holding stock in the Bank and in three trusts, Capital Bank
Statutory Trust I, II, and III.
Capital Bank is a community bank engaged in the general
commercial banking business and operates through four North
Carolina regions: Triangle, Sandhills, Triad and Western. As of
September 30, 2010, the Bank had assets of approximately
$1.6 billion, with gross loans and deposits outstanding of
approximately $1.3 billion and $1.4 billion,
respectively. The Bank operates 32 branch offices in North
Carolina: five 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, Pittsboro, Siler City, Wake Forest
and Zebulon.
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;
travelers 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
Banks 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 FDIC.
The Banks 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
Banks 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 Banks 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, debit card transaction 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 (BOLI).
Operating expenses primarily consist of employee compensation
and benefits, occupancy related expenses, depreciation and
maintenance expenses on furniture and equipment, data processing
and telecommunications, advertising and public relations,
professional fees, other real estate and loan-related losses,
FDIC deposit insurance and other noninterest expenses.
50
The Banks operations are influenced significantly by local
economic conditions and by policies of financial institution
regulatory authorities. The Banks 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.
As a bank holding company, the Company is subject to the
supervision of the Federal Reserve. The Company is required to
file with the Federal Reserve reports and other information
regarding its business operations and the business operations of
its subsidiaries. As a North Carolina chartered bank, the Bank
is subject to primary supervision, periodic examination and
regulation by the NC Commissioner and by the FDIC, as its
primary federal regulator.
Critical
Accounting Policies and Estimates
The following discussion and analysis of the Companys
financial condition and results of operations are based on the
Companys 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 Companys significant accounting policies are discussed
below and in the notes to our consolidated financial statements
included elsewhere in this prospectus. Management believes that
the following accounting policies are the most critical to aid
in fully understanding and evaluating the Companys
reported financial results, and they require managements
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 managements estimate of probable credit
losses that are inherent in the existing loan portfolio.
Managements 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 managements 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 Banks 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 managements estimate of future cash flows and
recoverability of the investment and is recorded in
|
51
|
|
|
|
|
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 ORE
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.
|
Analysis
of Results of Operations and Financial Condition as of
September 30, 2010
Executive
Summary
The following is a summary of the Companys significant
results of operations and changes in financial position for the
three and nine months ended September 30, 2010:
|
|
|
|
|
Regulatory capital ratios remained in excess of well
capitalized levels as of September 30, 2010.
|
|
|
|
Net loss attributable to common shareholders was
$9.7 million, or $0.74 per share, in the third quarter of
2010 compared with net income available to common shareholders
of $3.0 million, or $0.26 per share, in the third quarter
of 2009. For the year-to-date period, net loss attributable to
common shareholders was $29.7 million, or $2.34 per share,
in the first nine months of 2010 compared with net loss
attributable to common shareholders of $1.3 million, or
$0.12 per share, in the first nine months of 2009.
|
|
|
|
Net interest margin improved to 3.48% in the third quarter of
2010 from 3.25% in the second quarter of 2010 and 3.41% in the
third quarter of 2009. For the year-to-date period, net interest
margin improved to 3.30% in the first nine months of 2010 from
3.11% in the first nine months of 2009.
|
|
|
|
Nonperforming assets, including restructured loans, were 5.69%
of total assets as of September 30, 2010 compared with
5.76% as of June 30, 2010 and 4.87% as of December 31,
2009.
|
|
|
|
Allowance for loan losses increased to 2.74% of total loans as
of September 30, 2010 from 2.65% as of June 30, 2010
and 1.88% as of December 31, 2009.
|
|
|
|
Provision for loan losses fell to $6.8 million in the third
quarter of 2010 from $20.0 million in the second quarter of
2010 but increased from $3.6 million in the third quarter
of 2009. For the year-to-date period, provision for loan losses
increased to $38.5 million in the first nine months of 2010
from $11.2 million in the first nine months of 2009.
|
|
|
|
The valuation allowance recorded against deferred tax assets
increased to $8.8 million as of September 30, 2010
from $3.3 million as of June 30, 2010.
|
Results
of Operations
Quarter
ended September 30, 2010 compared to quarter ended
September 30, 2009
Net loss attributable to common shareholders was
$9.7 million, or $0.74 per share, in the third quarter of
2010 compared with net income available to common shareholders
of $3.0 million, or $0.26 per share, in the
52
third quarter of 2009. Results of operations in the third
quarter of 2010 compared with the same quarter in the previous
year primarily reflect an increase in provision for loan losses,
an increase in noninterest expense and higher tax expense.
Net
Interest Income
Net interest income decreased from $13.6 million for the
quarter ended September 30, 2009 to $13.4 million for
the quarter ended September 30, 2010. Average
interest-earning assets declined from $1.63 billion for the
quarter ended September 30, 2009 to $1.58 billion for
the quarter ended September 30, 2010, a decrease of 3.3%.
Average interest-bearing liabilities declined from
$1.41 billion for the quarter ended September 30, 2009
to $1.40 billion for the quarter ended September 30,
2010, a decrease of 0.9%. On a fully tax equivalent basis, net
interest spread was 3.28% and 3.10% for the quarters ended
September 30, 2010 and 2009, respectively. Net interest
margin on a tax equivalent basis increased to 3.48% for the
quarter ended September 30, 2010 from 3.41% for the quarter
ended September 30, 2009. The yield on average
interest-earning assets was 5.04% and 5.43% for the quarters
ended September 30, 2010 and 2009, respectively, while the
interest rate paid on average interest-bearing liabilities for
those periods was 1.76% and 2.33%, respectively.
The increase in the net interest margin was primarily due to the
significant decline in funding costs through disciplined pricing
controls and a declining interest rate environment. Partially
offsetting declining funding costs was a significant increase in
nonaccrual loans over the past year and the expiration of an
interest rate swap on prime-indexed commercial loans.
The following two tables set forth certain information regarding
the Companys 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
Companys 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.
|
53
CAPITAL
BANK CORPORATION
Average Balances, Interest Earned or Paid, and Interest
Yields/Rates
For the Three Months Ended September 30, 2010,
June 30, 2010 and September 30, 2009
Tax Equivalent Basis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
June 30, 2010
|
|
|
September 30, 2009
|
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Loans(2)
|
|
$
|
1,342,835
|
|
|
$
|
17,512
|
|
|
|
5.23
|
%
|
|
$
|
1,373,613
|
|
|
$
|
17,465
|
|
|
|
5.10
|
%
|
|
$
|
1,330,199
|
|
|
$
|
18,809
|
|
|
|
5.61
|
%
|
Investment securities(3)
|
|
|
211,547
|
|
|
|
2,309
|
|
|
|
4.37
|
|
|
|
224,366
|
|
|
|
2,722
|
|
|
|
4.85
|
|
|
|
263,513
|
|
|
|
3,512
|
|
|
|
5.33
|
|
Interest-bearing deposits
|
|
|
23,859
|
|
|
|
17
|
|
|
|
0.29
|
|
|
|
25,300
|
|
|
|
10
|
|
|
|
0.16
|
|
|
|
38,995
|
|
|
|
18
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,578,241
|
|
|
$
|
19,838
|
|
|
|
5.04
|
%
|
|
|
1,623,279
|
|
|
$
|
20,197
|
|
|
|
4.99
|
%
|
|
|
1,632,707
|
|
|
$
|
22,339
|
|
|
|
5.43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
17,285
|
|
|
|
|
|
|
|
|
|
|
|
17,819
|
|
|
|
|
|
|
|
|
|
|
|
8,256
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
108,461
|
|
|
|
|
|
|
|
|
|
|
|
111,383
|
|
|
|
|
|
|
|
|
|
|
|
83,589
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(38,012
|
)
|
|
|
|
|
|
|
|
|
|
|
(33,241
|
)
|
|
|
|
|
|
|
|
|
|
|
(19,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,665,975
|
|
|
|
|
|
|
|
|
|
|
$
|
1,719,240
|
|
|
|
|
|
|
|
|
|
|
$
|
1,705,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Savings accounts
|
|
$
|
31,594
|
|
|
$
|
10
|
|
|
|
0.13
|
%
|
|
$
|
30,721
|
|
|
$
|
10
|
|
|
|
0.13
|
%
|
|
$
|
29,267
|
|
|
$
|
11
|
|
|
|
0.15
|
%
|
Interest-bearing demand deposits
|
|
|
323,242
|
|
|
|
634
|
|
|
|
0.79
|
|
|
|
326,706
|
|
|
|
648
|
|
|
|
0.80
|
|
|
|
366,632
|
|
|
|
1,095
|
|
|
|
1.18
|
|
Time deposits
|
|
|
859,968
|
|
|
|
4,039
|
|
|
|
1.88
|
|
|
|
891,645
|
|
|
|
4,946
|
|
|
|
2.22
|
|
|
|
845,311
|
|
|
|
5,691
|
|
|
|
2.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,214,804
|
|
|
|
4,683
|
|
|
|
1.55
|
|
|
|
1,249,072
|
|
|
|
5,604
|
|
|
|
1.80
|
|
|
|
1,241,210
|
|
|
|
6,797
|
|
|
|
2.17
|
|
Borrowed funds
|
|
|
150,478
|
|
|
|
1,156
|
|
|
|
3.08
|
|
|
|
153,264
|
|
|
|
1,146
|
|
|
|
3.00
|
|
|
|
130,098
|
|
|
|
1,260
|
|
|
|
3.84
|
|
Subordinated debt
|
|
|
34,323
|
|
|
|
314
|
|
|
|
3.67
|
|
|
|
34,323
|
|
|
|
298
|
|
|
|
3.48
|
|
|
|
30,930
|
|
|
|
240
|
|
|
|
3.08
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,590
|
|
|
|
2
|
|
|
|
0.50
|
|
|
|
10,646
|
|
|
|
6
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,399,605
|
|
|
$
|
6,153
|
|
|
|
1.76
|
%
|
|
|
1,438,249
|
|
|
$
|
7,050
|
|
|
|
1.97
|
%
|
|
|
1,412,884
|
|
|
$
|
8,303
|
|
|
|
2.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
130,758
|
|
|
|
|
|
|
|
|
|
|
|
133,455
|
|
|
|
|
|
|
|
|
|
|
|
134,721
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
10,509
|
|
|
|
|
|
|
|
|
|
|
|
10,587
|
|
|
|
|
|
|
|
|
|
|
|
12,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,540,872
|
|
|
|
|
|
|
|
|
|
|
|
1,582,291
|
|
|
|
|
|
|
|
|
|
|
|
1,559,803
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
125,103
|
|
|
|
|
|
|
|
|
|
|
|
136,949
|
|
|
|
|
|
|
|
|
|
|
|
145,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,665,975
|
|
|
|
|
|
|
|
|
|
|
$
|
1,719,240
|
|
|
|
|
|
|
|
|
|
|
$
|
1,705,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread(4)
|
|
|
|
|
|
|
|
|
|
|
3.28
|
%
|
|
|
|
|
|
|
|
|
|
|
3.02
|
%
|
|
|
|
|
|
|
|
|
|
|
3.10
|
%
|
Tax equivalent adjustment
|
|
|
|
|
|
$
|
303
|
|
|
|
|
|
|
|
|
|
|
$
|
403
|
|
|
|
|
|
|
|
|
|
|
$
|
481
|
|
|
|
|
|
Net interest income and net interest margin(5)
|
|
|
|
|
|
$
|
13,685
|
|
|
|
3.48
|
%
|
|
|
|
|
|
$
|
13,147
|
|
|
|
3.25
|
%
|
|
|
|
|
|
$
|
14,036
|
|
|
|
3.41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The tax equivalent basis is computed using a federal tax rate of
34%. |
|
(2) |
|
Loans include mortgage loans held for sale in addition to
nonaccrual loans for which accrual of interest has not been
recorded. |
|
(3) |
|
The average balance for investment securities excludes the
effect of their mark-to-market adjustment, if any. |
54
|
|
|
(4) |
|
Net interest spread represents the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. |
|
(5) |
|
Net interest margin represents net interest income divided by
average interest-earning assets. |
Rate and
Volume Variance Analysis
Tax Equivalent Basis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30, 2010 vs. 2009
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
Variance
|
|
|
Variance
|
|
|
Variance
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(1,208
|
)
|
|
$
|
(89
|
)
|
|
$
|
(1,297
|
)
|
Investment securities
|
|
|
(636
|
)
|
|
|
(567
|
)
|
|
|
(1,203
|
)
|
Federal funds sold
|
|
|
10
|
|
|
|
(11
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(1,834
|
)
|
|
|
(667
|
)
|
|
|
(2,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest-bearing demand deposits and other
|
|
|
(366
|
)
|
|
|
(96
|
)
|
|
|
(462
|
)
|
Time deposits
|
|
|
(1,659
|
)
|
|
|
7
|
|
|
|
(1,652
|
)
|
Borrowed funds
|
|
|
(247
|
)
|
|
|
143
|
|
|
|
(104
|
)
|
Subordinated debt
|
|
|
46
|
|
|
|
28
|
|
|
|
74
|
|
Repurchase agreements and federal funds purchased
|
|
|
(6
|
)
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(2,232
|
)
|
|
|
82
|
|
|
|
(2,150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net interest income
|
|
$
|
398
|
|
|
$
|
(749
|
)
|
|
$
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The tax equivalent basis is computed using a federal tax rate of
34%. |
Interest income on loans decreased from $18.7 million for
the quarter ended September 30, 2009 to $17.4 million
for the quarter ended September 30, 2010, a decrease of
7.3%. This decrease was primarily due to lower loan yields,
partially offset by growth in the loan portfolio. Average loan
balances, which yielded 5.23% and 5.61% for the quarters ended
September 30, 2010 and 2009, respectively, increased from
$1.33 billion in the third quarter of 2009 to
$1.34 billion in the third quarter of 2010. The
Companys interest rate swap on prime-indexed commercial
loans, which expired in October 2009, increased loan interest
income by $1.1 million in the third quarter of 2009,
representing a benefit to net interest margin of 0.27% in that
quarter. The Company received no such benefit in the third
quarter of 2010.
Interest income on investment securities decreased from
$3.1 million for the quarter ended September 30, 2009
to $2.2 million for the quarter ended September 30,
2010, a decline of 30.7%. This decrease was due to a decline in
the size of the investment portfolio coupled with lower fixed
income investment yields. Average investment balances, at book
value, decreased from $263.5 million for the quarter ended
September 30, 2009 to $211.5 million for the quarter
ended September 30, 2010, and the tax equivalent yield on
investment securities decreased from 5.33% to 4.37% over the
same period. The decrease in average investment balances
partially reflects managements efforts to reduce the
duration of the portfolio to mitigate exposure to a potential
future rising interest rate environment. Additionally, yields
have fallen as prepayments on higher yielding mortgage-backed
securities and sales of certain long-dated municipal bonds have
been re-invested generally at lower rates in shorter-dated
U.S. government agency debt and other high quality bonds.
Interest expense on deposits decreased from $6.8 million
for the quarter ended September 30, 2009 to
$4.7 million for the quarter ended September 30, 2010,
a decline of 31.1%. The decline is partially due to falling
interest-bearing deposit rates from 2.17% for the quarter ended
September 30, 2009 to 1.55% for the quarter ended
September 30, 2010. For time deposits, which represented
70.8% and 68.1% of total average
55
interest-bearing deposits for the quarters ended
September 30, 2010 and 2009, respectively, the average rate
decreased from 2.67% for the quarter ended September 30,
2009 to 1.88% for the quarter ended September 30, 2010,
reflecting disciplined pricing controls and re-pricing of
maturing time deposits in a low interest rate environment.
Interest expense on borrowings remained relatively flat,
totaling $1.5 million in both quarters ended
September 30, 2010 and 2009. The average rate paid on
average borrowings, including subordinated debt and repurchase
agreements, decreased from 3.48% for the quarter ended
September 30, 2009 to 3.19% for the quarter ended
September 30, 2010.
Provision
for Loan Losses
Provision for loan losses for the quarter ended
September 30, 2010 totaled $6.8 million, an increase
from $3.6 million for the quarter ended September 30,
2009 and a decrease from $20.0 million for the quarter
ended June 30, 2010. The loan loss provision remains
elevated compared to the same quarter in the previous year due
to significantly higher levels of nonperforming assets as well
as increased charge-off rates as the Company continued making
progress resolving problem loans. On a linked-quarter basis,
however, the loan loss provision declined as charge-offs were
reduced and nonperforming assets fell.
Net charge-offs totaled $6.3 million, or 1.87% of average
loans, in the third quarter of 2010, an increase from
$2.7 million, or 0.80% of average loans, in the third
quarter of 2009 and a decrease from $13.4 million, or 3.91%
of average loans, in the second quarter of 2010. Nonperforming
assets, which include nonperforming loans and other real estate,
totaled 5.32% of total assets as of September 30, 2010, a
decrease from 5.37% as of June 30, 2010 and an increase
from 2.90% as of December 31, 2009. Nonperforming assets,
including restructured loans, totaled 5.69% of total assets as
of September 30, 2010, a decrease from 5.76% as of
June 30, 2010 and an increase from 4.87% as of
December 31, 2009. Further, loans past due more than
30 days, excluding nonperforming loans, increased to 1.00%
of total loans as of September 30, 2010 compared to 0.72%
of total loans as of June 30, 2010 and 0.67% as of
December 31, 2009.
The elevated provision for loan losses, net charge-offs and
nonperforming assets reflect the economic climate in the
Companys primary markets and consistent application of the
Companys 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 the remainder of 2010 and early 2011 as the
Company continues working to resolve problem loans in these
challenging market conditions.
Noninterest
Income
Noninterest income remained relatively flat on a quarterly
basis, totaling $2.5 million in both quarters ended
September 30, 2010 and 2009. The following table presents
the detail of noninterest income and related changes for the
quarters ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
$
|
746
|
|
|
$
|
990
|
|
|
$
|
(244
|
)
|
|
|
(24.6
|
)%
|
Bank card services
|
|
|
521
|
|
|
|
409
|
|
|
|
112
|
|
|
|
27.4
|
|
Mortgage origination and other loan fees
|
|
|
442
|
|
|
|
410
|
|
|
|
32
|
|
|
|
7.8
|
|
Brokerage fees
|
|
|
271
|
|
|
|
155
|
|
|
|
116
|
|
|
|
74.8
|
|
Bank-owned life insurance
|
|
|
138
|
|
|
|
240
|
|
|
|
(102
|
)
|
|
|
(42.5
|
)
|
Net gain on investment securities
|
|
|
244
|
|
|
|
148
|
|
|
|
96
|
|
|
|
64.9
|
|
Other
|
|
|
138
|
|
|
|
155
|
|
|
|
(17
|
)
|
|
|
(11.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
2,500
|
|
|
$
|
2,507
|
|
|
$
|
(7
|
)
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Bank card services income increased by $112 thousand from a
higher volume of debit card transactions. Brokerage fees
increased by $116 thousand as a result of improved sales
efforts. Further, net gains on investment securities, including
sales of debt securities as well as appreciation in fair market
value of an equity investment, increased by $96 thousand.
Mortgage origination and other loan fees increased primarily due
to increased residential mortgage refinancing activity in the
third quarter of 2010 compared to the same quarter in the
previous year.
Offsetting these increases in noninterest income, service
charges and other fees declined by $244 thousand due to a
reduction in the volume of overdrawn accounts and non-sufficient
funds transactions. Additionally, BOLI income fell by $102
thousand after the Company surrendered certain BOLI contracts in
the third quarter of 2010. Other income decreased primarily due
to lower sublease income.
Noninterest
Expense
Noninterest expense increased from $11.1 million for the
quarter ended September 30, 2009 to $14.2 million for
the quarter ended September 30, 2010, an increase of 28.0%.
The following table presents the detail of noninterest expense
and related changes for the quarters ended September 30,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
5,918
|
|
|
$
|
5,128
|
|
|
$
|
790
|
|
|
|
15.4
|
%
|
Occupancy
|
|
|
1,460
|
|
|
|
1,471
|
|
|
|
(11
|
)
|
|
|
(0.7
|
)
|
Furniture and equipment
|
|
|
867
|
|
|
|
771
|
|
|
|
96
|
|
|
|
12.5
|
|
Data processing and telecommunications
|
|
|
488
|
|
|
|
555
|
|
|
|
(67
|
)
|
|
|
(12.1
|
)
|
Advertising and public relations
|
|
|
435
|
|
|
|
394
|
|
|
|
41
|
|
|
|
10.4
|
|
Office expenses
|
|
|
320
|
|
|
|
386
|
|
|
|
(66
|
)
|
|
|
(17.1
|
)
|
Professional fees
|
|
|
626
|
|
|
|
358
|
|
|
|
268
|
|
|
|
74.9
|
|
Business development and travel
|
|
|
363
|
|
|
|
268
|
|
|
|
95
|
|
|
|
35.4
|
|
Amortization of core deposit intangible
|
|
|
235
|
|
|
|
287
|
|
|
|
(52
|
)
|
|
|
(18.1
|
)
|
Other real estate and other loan-related losses
|
|
|
1,833
|
|
|
|
370
|
|
|
|
1,463
|
|
|
|
395.4
|
|
Directors fees
|
|
|
236
|
|
|
|
295
|
|
|
|
(59
|
)
|
|
|
(20.0
|
)
|
FDIC deposit insurance
|
|
|
712
|
|
|
|
474
|
|
|
|
238
|
|
|
|
50.2
|
|
Other
|
|
|
717
|
|
|
|
341
|
|
|
|
376
|
|
|
|
110.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
14,210
|
|
|
$
|
11,098
|
|
|
$
|
3,112
|
|
|
|
28.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in noninterest expense was primarily due to a
$1.5 million increase in other real estate and loan-related
costs, of which $1.0 million was related to valuation
adjustments to and losses on the sale of other real estate with
the remaining increase representing higher loan workout,
appraisal and foreclosure costs to resolve problem assets.
Additionally, salaries and employee benefits expense increased
by $790 thousand due to lower deferred loan costs, which
decrease expense, and increased employee health insurance
expense.
Further, furniture and equipment expense increased by $96
thousand due to higher depreciation charges and equipment
maintenance expense. Advertising and public relations expense
increased by $41 thousand due in part from radio and television
ads promoting the Companys special financing program for
home buyers. Professional fees increased by $268 thousand due to
higher legal and audit expense. Business development and travel
expenses increased primarily due to employee travel costs
associated with the Companys recently withdrawn public
stock offering. FDIC deposit insurance expense increased by $238
thousand with higher deposit insurance assessment rates and
growth in insured deposit accounts. Other noninterest expense
increased by $376 thousand primarily due to legal fees and other
professional fees associated with the Companys recent
public stock offering and withdrawn registration statement.
57
Partially offsetting the increases in noninterest expense, data
processing and telecommunications costs fell by $67 thousand as
the Company realized cost savings through renegotiation of
certain vendor contracts. In addition, office expenses decreased
by $66 thousand primarily due to cost savings initiatives within
the Companys branch network and operations areas, which
particularly lowered printing costs. Core deposit intangible
amortization decreased by $52 thousand as intangible assets
acquired in previous acquisitions are amortized on an
accelerated method over the expected benefit of the core deposit
premium. Directors fees decreased by $59 thousand due in
part to the board reduction and reorganization in late 2009.
Lastly, occupancy expense remained relatively consistent in the
period under comparison.
Income
Taxes
Income taxes recorded in the three months ended
September 30, 2010 were primarily impacted by net losses
before income taxes, which created tax benefits, offset by
valuation allowances recorded against deferred tax assets. The
valuation allowance recorded against deferred tax assets
increased by $5.5 million in the third quarter of 2010,
from $3.3 million as of June 30, 2010 to
$8.8 million as of September 30, 2010. There was no
valuation allowance recorded against deferred tax assets in the
third quarter of 2009.
Deferred tax assets represent timing differences in the
recognition of certain tax benefits for accounting and income
tax purposes, including the expected value of future tax savings
that will be available to the Company to offset future taxable
income through the carry forward of net operating losses. 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 future periods, the Company may be able to reduce
some or all of the valuation allowance upon a determination that
it will be able to realize such tax savings.
Nine
months ended September 30, 2010 compared to nine months
ended September 30, 2009
Net loss attributable to common shareholders was
$29.7 million, or $2.34 per share, for the nine months
ended September 30, 2010 compared with net loss
attributable to common shareholders of $1.3 million, or
$0.12 per share, for the nine months ended September 30,
2009. Results of operations for the nine months ended
September 30, 2010 compared with the same period in the
previous year primarily reflect a significant increase in
provision for loan losses and an increase in noninterest
expense, partially offset by improved net interest income.
Net
Interest Income
Net interest income increased from $35.9 million for the
nine months ended September 30, 2009 to $38.7 million
for the nine months ended September 30, 2010. Average
interest-earning assets rose from $1.60 billion for the
nine months ended September 30, 2009 to $1.61 billion
for the nine months ended September 30, 2010, an increase
of 0.9%. Average interest-bearing liabilities rose from
$1.39 billion for the nine months ended September 30,
2009 to $1.43 billion for the nine months ended
September 30, 2010, an increase of 2.9%. On a fully tax
equivalent basis, net interest spread was 3.08% and 2.77% for
the nine months ended September 30, 2010 and 2009,
respectively. Net interest margin on a tax equivalent basis
increased to 3.30% for the nine months ended September 30,
2010 from 3.11% for the nine months ended September 30,
2009. The yield on average interest-earning assets was 5.02% and
5.31% for the nine months ended September 30, 2010 and
2009, respectively, while the interest rate paid on average
interest-bearing liabilities for those periods was 1.94% and
2.54%, respectively.
The increase in the net interest margin was primarily due to the
significant decline in funding costs through disciplined pricing
controls and a declining interest rate environment. Partially
offsetting declining funding costs was a significant increase in
nonaccrual loans over the prior year and the expiration of an
interest rate swap on prime-indexed commercial loans. The
following two tables set forth certain information regarding the
Companys yield on interest-earning assets and cost of
interest-bearing liabilities and the component changes in net
interest income:
58
CAPITAL
BANK CORPORATION
Average Balances, Interest Earned or Paid, and Interest
Yields/Rates
For the Nine Months Ended September 30, 2010 and 2009
Tax Equivalent Basis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
|
September 30, 2009
|
|
Average
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
|
|
Balance
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
ASSETS
|
Loans(2)
|
|
$
|
1,369,688
|
|
|
$
|
52,539
|
|
|
|
5.13
|
%
|
|
$
|
1,293,974
|
|
|
$
|
52,313
|
|
|
|
5.41
|
%
|
Investment securities(3)
|
|
|
220,525
|
|
|
|
7,987
|
|
|
|
4.83
|
|
|
|
276,649
|
|
|
|
11,200
|
|
|
|
5.40
|
|
Interest-bearing deposits
|
|
|
23,142
|
|
|
|
37
|
|
|
|
0.21
|
|
|
|
28,001
|
|
|
|
34
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earnings assets
|
|
|
1,613,355
|
|
|
$
|
60,563
|
|
|
|
5.02
|
%
|
|
|
1,598,624
|
|
|
$
|
63,547
|
|
|
|
5.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
18,177
|
|
|
|
|
|
|
|
|
|
|
|
15,171
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
107,411
|
|
|
|
|
|
|
|
|
|
|
|
80,917
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(33,136
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,705,807
|
|
|
|
|
|
|
|
|
|
|
$
|
1,676,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Savings accounts
|
|
$
|
30,445
|
|
|
$
|
30
|
|
|
|
0.13
|
%
|
|
$
|
29,225
|
|
|
$
|
37
|
|
|
|
0.17
|
%
|
Interest-bearing demand deposits
|
|
|
330,596
|
|
|
|
2,168
|
|
|
|
0.88
|
|
|
|
362,724
|
|
|
|
3,449
|
|
|
|
1.27
|
|
Time deposits
|
|
|
874,331
|
|
|
|
14,240
|
|
|
|
2.18
|
|
|
|
814,328
|
|
|
|
18,110
|
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,235,372
|
|
|
|
16,438
|
|
|
|
1.78
|
|
|
|
1,206,277
|
|
|
|
21,596
|
|
|
|
2.39
|
|
Borrowed funds
|
|
|
158,158
|
|
|
|
3,446
|
|
|
|
2.91
|
|
|
|
138,945
|
|
|
|
3,923
|
|
|
|
3.77
|
|
Subordinated debt
|
|
|
33,304
|
|
|
|
830
|
|
|
|
3.33
|
|
|
|
30,930
|
|
|
|
839
|
|
|
|
3.63
|
|
Repurchase agreements
|
|
|
2,068
|
|
|
|
5
|
|
|
|
0.32
|
|
|
|
12,156
|
|
|
|
20
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,428,902
|
|
|
$
|
20,719
|
|
|
|
1.94
|
%
|
|
|
1,388,308
|
|
|
$
|
26,378
|
|
|
|
2.54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits
|
|
|
132,058
|
|
|
|
|
|
|
|
|
|
|
|
130,061
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
10,585
|
|
|
|
|
|
|
|
|
|
|
|
11,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,571,545
|
|
|
|
|
|
|
|
|
|
|
|
1,530,332
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
134,262
|
|
|
|
|
|
|
|
|
|
|
|
146,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,705,807
|
|
|
|
|
|
|
|
|
|
|
$
|
1,676,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest spread(4)
|
|
|
|
|
|
|
|
|
|
|
3.08
|
%
|
|
|
|
|
|
|
|
|
|
|
2.77
|
%
|
Tax equivalent adjustment
|
|
|
|
|
|
$
|
1,168
|
|
|
|
|
|
|
|
|
|
|
$
|
1,269
|
|
|
|
|
|
Net interest income and net interest margin(5)
|
|
|
|
|
|
$
|
39,844
|
|
|
|
3.30
|
%
|
|
|
|
|
|
$
|
37,169
|
|
|
|
3.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The tax equivalent basis is computed using a federal tax rate of
34%. |
|
(2) |
|
Loans include mortgage loans held for sale and nonaccrual loans
for which accrual of interest has not been recorded. |
|
(3) |
|
The average balance for investment securities excludes the
effect of their mark-to-market adjustment, if any. |
|
(4) |
|
Net interest spread represents the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities. |
|
(5) |
|
Net interest margin represents net interest income divided by
average interest-earning assets. |
59
Rate and
Volume Variance Analysis
Tax Equivalent Basis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2010 vs. 2009
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
Variance
|
|
|
Variance
|
|
|
Variance
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
(2,607
|
)
|
|
$
|
2,833
|
|
|
$
|
226
|
|
Investment securities
|
|
|
(1,180
|
)
|
|
|
(2,033
|
)
|
|
|
(3,213
|
)
|
Federal funds sold
|
|
|
11
|
|
|
|
(8
|
)
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
(3,776
|
)
|
|
|
792
|
|
|
|
(2,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings and interest-bearing demand deposits and other
|
|
|
(1,078
|
)
|
|
|
(210
|
)
|
|
|
(1,288
|
)
|
Time deposits
|
|
|
(4,847
|
)
|
|
|
977
|
|
|
|
(3,870
|
)
|
Borrowed funds
|
|
|
(896
|
)
|
|
|
419
|
|
|
|
(477
|
)
|
Subordinated debt
|
|
|
(68
|
)
|
|
|
59
|
|
|
|
(9
|
)
|
Repurchase agreements and federal funds purchased
|
|
|
9
|
|
|
|
(24
|
)
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(6,880
|
)
|
|
|
1,221
|
|
|
|
(5,659
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in net interest income
|
|
$
|
3,104
|
|
|
$
|
(429
|
)
|
|
$
|
2,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The tax equivalent basis is computed using a federal tax rate of
34%. |
Interest income on loans decreased from $52.2 million for
the nine months ended September 30, 2009 to
$52.1 million for the nine months ended September 30,
2010, a decrease of 0.3%. This decrease was primarily due to
lower loan yields, partially offset by growth in the loan
portfolio. Average loan balances, which yielded 5.13% and 5.41%
in the nine months ended September 30, 2010 and 2009,
respectively, increased from $1.29 billion in the nine
months ended September 30, 2009 to $1.37 billion in
the nine months ended September 30, 2010. The
Companys interest rate swap on prime-indexed commercial
loans, which expired in October 2009, increased loan interest
income by $3.4 million in the nine months ended
September 30, 2009, representing a benefit to net interest
margin of 0.28% during the period. The Company received no such
benefit in the nine months ended September 30, 2010. A
significant increase in loans placed on nonaccrual status during
the nine months ended September 30, 2010 also negatively
affected loan interest income during the period when compared
with the same period one year prior. When loans are placed on
nonaccrual status, any accrued but unpaid interest is
immediately reversed and has a direct impact on net interest
income and net interest margin.
Interest income on investment securities decreased from
$10.0 million for the nine months ended September 30,
2009 to $7.3 million for the nine months ended
September 30, 2010, a decline of 27.4%. This decrease was
due to a decline in the size of the investment portfolio coupled
with lower fixed income investment yields. Average investment
balances, at book value, decreased from $276.6 million for
the nine months ended September 30, 2009 to
$220.5 million for the nine months ended September 30,
2010, and the tax equivalent yield on investment securities
decreased from 5.40% to 4.83% over the same period. The decrease
in average investment balances partially reflects
managements efforts to reduce the duration of the
portfolio to mitigate exposure to a potential future rising
interest rate environment. Additionally, yields have fallen as
prepayments on higher yielding mortgage-backed securities and
sales of certain long-dated municipal bonds have been
re-invested at lower rates in shorter-dated U.S. government
agency debt and other high quality bonds.
Interest expense on deposits decreased from $21.6 million
for the nine months ended September 30, 2009 to
$16.4 million for the nine months ended September 30,
2010, a decline of 23.9%. The decline is partially due to
falling interest-bearing deposit rates from 2.39% for the nine
months ended September 30, 2009 to
60
1.78% for the nine months ended September 30, 2010. For
time deposits, which represented 70.8% and 67.5% of total
average interest-bearing deposits for the nine months ended
September 30, 2010 and 2009, respectively, the average rate
decreased from 2.97% for the nine months ended
September 30, 2009 to 2.18% for the nine months ended
September 30, 2010, reflecting disciplined pricing controls
and re-pricing of maturing time deposits in a low interest rate
environment. Interest expense on borrowings decreased from
$4.8 million for the nine months ended September 30, 2009
to $4.3 million for the nine months ended
September 30, 2010, a decline of 10.5%. The average rate
paid on average borrowings, including subordinated debt and
repurchase agreements, decreased from 3.51% for the nine months
ended September 30, 2009 to 2.96% for the nine months ended
September 30, 2010.
Provision
for Loan Losses
Provision for loan losses for the nine months ended
September 30, 2010 totaled $38.5 million, an increase
from $11.2 million for the nine months ended
September 30, 2009. The loan loss provision has increased
compared to the same period in the previous year due to
significantly higher levels of nonperforming assets as well as
increased charge-off rates as the Company continued making
progress resolving problem loans.
Net charge-offs increased from $6.5 million, or 0.67% of
average loans, in the first nine months of 2009 to
$28.4 million, or 2.76% of average loans, in the first nine
months of 2010. Nonperforming assets, which include
nonperforming loans and other real estate, increased to 5.32% of
total assets as of September 30, 2010 from 2.90% as of
December 31, 2009 and from 1.55% as of September 30,
2009. Nonperforming assets, including restructured loans,
increased to 5.69% of total assets as of September 30, 2010
from 4.87% as of December 31, 2009 and from 3.23% as of
September 30, 2009. Loans past due more than 30 days,
excluding nonperforming loans, totaled 1.00% of total loans as
of September 30, 2010, an increase from 0.67% as of
December 31, 2009 and a decrease from 1.20% as of
September 30, 2009.
Noninterest
Income
Noninterest income decreased from $8.3 million for the nine
months ended September 30, 2009 to $7.5 million for
the nine months ended September 30, 2010, a decline of
9.5%. The following table presents the detail of noninterest
income and related changes for the nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
$
|
2,468
|
|
|
$
|
2,901
|
|
|
$
|
(433
|
)
|
|
|
(14.9
|
)%
|
Bank card services
|
|
|
1,479
|
|
|
|
1,133
|
|
|
|
346
|
|
|
|
30.5
|
|
Mortgage origination and other loan fees
|
|
|
1,108
|
|
|
|
1,520
|
|
|
|
(412
|
)
|
|
|
(27.1
|
)
|
Brokerage fees
|
|
|
743
|
|
|
|
468
|
|
|
|
275
|
|
|
|
58.8
|
|
Bank-owned life insurance
|
|
|
632
|
|
|
|
1,663
|
|
|
|
(1,031
|
)
|
|
|
(62.0
|
)
|
Net gain on investment securities
|
|
|
641
|
|
|
|
164
|
|
|
|
477
|
|
|
|
290.9
|
|
Other
|
|
|
474
|
|
|
|
488
|
|
|
|
(14
|
)
|
|
|
(2.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
$
|
7,545
|
|
|
$
|
8,337
|
|
|
$
|
(792
|
)
|
|
|
(9.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
This decrease in noninterest income was primarily related to a
nonrecurring BOLI gain of $913 thousand in the nine months ended
September 30, 2009. In addition, service charges and other
fees declined by $433 thousand due to a reduction in the volume
of overdrawn accounts and non-sufficient funds transactions.
Mortgage origination and other loan fees declined by $412
thousand primarily due to fewer prepayment penalties recognized
on commercial loans in the nine months ended September 30,
2010, partially offset by increased residential mortgage
refinancing activity. Other noninterest income remained
relatively unchanged in the period under comparison.
61
Partially offsetting the decline in noninterest income was an
increase of $477 thousand in net gains on investment securities,
including sales of debt securities as well as appreciation in
fair market value of an equity investment. Additionally, bank
card services increased by $346 thousand from a higher volume of
debit card transactions. Brokerage fees increased by $275
thousand as a result of improved sales efforts.
Noninterest
Expense
Noninterest expense increased from $35.1 million for the
nine months ended September 30, 2009 to $39.2 million
for the nine months ended September 30, 2010, an increase
of 11.5%. The following table presents the detail of noninterest
expense and related changes for the nine months ended
September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
$
|
16,637
|
|
|
$
|
16,945
|
|
|
$
|
(308
|
)
|
|
|
(1.8
|
)%
|
Occupancy
|
|
|
4,418
|
|
|
|
4,192
|
|
|
|
226
|
|
|
|
5.4
|
|
Furniture and equipment
|
|
|
2,312
|
|
|
|
2,340
|
|
|
|
(28
|
)
|
|
|
(1.2
|
)
|
Data processing and telecommunications
|
|
|
1,530
|
|
|
|
1,759
|
|
|
|
(229
|
)
|
|
|
(13.0
|
)
|
Advertising and public relations
|
|
|
1,464
|
|
|
|
940
|
|
|
|
524
|
|
|
|
55.7
|
|
Office expenses
|
|
|
940
|
|
|
|
1,043
|
|
|
|
(103
|
)
|
|
|
(9.9
|
)
|
Professional fees
|
|
|
1,785
|
|
|
|
1,171
|
|
|
|
614
|
|
|
|
52.4
|
|
Business development and travel
|
|
|
937
|
|
|
|
843
|
|
|
|
94
|
|
|
|
11.2
|
|
Amortization of core deposit intangible
|
|
|
705
|
|
|
|
862
|
|
|
|
(157
|
)
|
|
|
(18.2
|
)
|
Other real estate and other loan-related losses
|
|
|
3,858
|
|
|
|
938
|
|
|
|
2,920
|
|
|
|
311.3
|
|
Directors fees
|
|
|
828
|
|
|
|
1,131
|
|
|
|
(303
|
)
|
|
|
(26.8
|
)
|
FDIC deposit insurance
|
|
|
2,028
|
|
|
|
1,882
|
|
|
|
146
|
|
|
|
7.8
|
|
Other
|
|
|
1,738
|
|
|
|
1,081
|
|
|
|
657
|
|
|
|
60.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
$
|
39,180
|
|
|
$
|
35,127
|
|
|
$
|
4,053
|
|
|
|
11.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in noninterest expense was primarily due to a
$2.9 million increase in other real estate and loan-related
costs, of which $1.9 million was related to valuation
adjustments to and losses on the sale of other real estate with
the remaining increase representing higher loan workout,
appraisal and foreclosure costs to resolve problem assets.
Occupancy expense increased by $226 thousand primarily due to
additional overhead costs incurred as new branches were opened
in the Triangle region during the third quarter of 2009.
Further, advertising and public relations expense increased by
$524 thousand due in part from radio and television ads
promoting the Companys special financing program for home
buyers. Professional fees increased by $614 thousand due to
higher legal and audit expense. Business development and travel
expenses increased primarily due to marketing efforts associated
with the Companys recently withdrawn public stock
offering. FDIC deposit insurance expense rose by $146 thousand
with higher deposit insurance assessment rates and growth in
insured deposit accounts partially offset by the FDICs
special assessment on all insured depository institutions in the
second quarter of 2009. Other noninterest expense increased by
$657 thousand primarily due to legal fees and other professional
fees associated with the Companys recent public stock
offering and withdrawn registration statement.
Partially offsetting the increases in noninterest expense,
salaries and employee benefits expense decreased by $308
thousand partially due to the suspension of the Companys
401(k) employer matching contributions in 2009 and partially due
to higher levels of deferred loan costs, which decrease expense.
Data processing and telecommunications costs dropped by $229
thousand as the Company realized cost savings through
renegotiation of certain vendor contracts. Office expense
decreased by $103 thousand primarily due to cost savings
62
initiatives within the Companys branch network and
operations areas. Core deposit intangible amortization decreased
by $157 thousand as intangible assets acquired in previous
acquisitions are amortized on an accelerated method over the
expected benefit of the core deposit premium. Directors
fees decreased by $303 thousand due to acceleration of benefit
payments on a retirement plan upon the death of a former
director in 2009 and in part due to the board reduction and
reorganization in late 2009. Lastly, furniture and equipment
expense remained relatively consistent in the period under
comparison.
Income
Taxes
Income taxes recorded in the nine months ended
September 30, 2010 were primarily impacted by net losses
before income taxes, which created income tax benefits, offset
by valuation allowances recorded against deferred tax assets.
The valuation allowance recorded against deferred tax assets
totaled $8.8 million in the first nine months of 2010 while
there was no valuation allowance recorded against deferred tax
assets in the first nine months of 2009.
Financial
Condition
Overview
The Companys financial condition is measured in terms of
its asset and liability composition as well as asset quality.
The fluctuation and composition of the balance sheet during the
nine months ended September 30, 2010 reflects a decline in
the loan portfolio as the Company focused on resolving problem
loans and capital preservation.
Total assets as of September 30, 2010 were
$1.65 billion, a decrease of $85.0 million from
$1.73 billion as of December 31, 2009. Earning assets,
which represented 95.7% and 94.6% of total assets as of
September 30, 2010 and December 31, 2009,
respectively, decreased from $1.64 billion as of
December 31, 2009 to $1.58 billion as of
September 30, 2010. Loans declined from $1.39 billion
as of December 31, 2009 to $1.32 billion as of
September 30, 2010, a decrease of 4.7%. The declining loan
portfolio reflects an effort by the Company to de-leverage its
balance sheet to preserve capital and reduce its exposure to
certain sectors of the commercial real estate market. Allowance
for loan losses was $36.2 million as of September 30,
2010 compared to $26.1 million as of December 31,
2009, representing approximately 2.74% and 1.88%, respectively,
of total loans.
Total investment securities decreased by $49.4 million in
the first nine months of 2010 as management continued to sell
certain municipal bonds to reduce the duration of its fixed
income portfolio and to mitigate its exposure to a potential
future rising interest rate environment. The Companys
portfolio also experienced relatively high levels of paydowns on
U.S. government sponsored mortgage-backed securities. The
cash surrender value of BOLI policies decreased by
$15.9 million in the first nine months of 2010 after the
Company surrendered certain BOLI contracts on former employees
and directors in the third quarter of 2010 for the purpose of
repositioning the BOLI portfolio for capital, liquidity and tax
planning purposes.
Total deposits declined from $1.38 billion as of
December 31, 2009 to $1.36 billion as of
September 30, 2010, a decrease of 1.4%. Savings accounts
and time deposits increased by $2.2 million and
$31.3 million, respectively, during the nine months ended
September 30, 2010 while checking accounts and money market
accounts decreased by $7.7 million and $44.4 million,
respectively, in the same period. Time deposits represented
64.7% of total deposits at September 30, 2010 compared to
61.6% at December 31, 2009. Borrowings and repurchase
agreements decreased by $44.5 million in the first nine
months of 2010 as the Company paid off certain short-term
borrowings with increased liquidity from paydowns on loans and
investment securities as well as the surrender of certain BOLI
contracts. Subordinated debt increased from $30.9 million
as of December 31, 2009 to $34.3 million as of
September 30, 2010 from the private placement offering in
the first quarter of 2010.
Total shareholders equity decreased from
$139.8 million as of December 31, 2009 to
$116.1 million as of September 30, 2010. The
Companys accumulated deficit increased by
$29.8 million in the first nine months of 2010, reflecting
a $28.0 million net loss and dividends and accretion on
preferred stock of
63
$1.8 million. Common stock increased primarily due to
$5.1 million of proceeds from the issuance of shares of the
Companys common stock as part of the private placement
offering. Accumulated other comprehensive income, which includes
unrealized gains and losses on available-for-sale investment
securities, net of tax, increased from $4.0 million as of
December 31, 2009 to $4.3 million as of
September 30, 2010.
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 September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Nonperforming assets:
|
|
|
|
|
|
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
54,770
|
|
|
$
|
25,593
|
|
Consumer real estate
|
|
|
4,824
|
|
|
|
3,330
|
|
Commercial owner occupied
|
|
|
5,194
|
|
|
|
6,607
|
|
Commercial and industrial
|
|
|
3,164
|
|
|
|
3,974
|
|
Consumer
|
|
|
24
|
|
|
|
8
|
|
Other loans
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
68,757
|
|
|
|
39,512
|
|
Accruing loans greater than 90 days past due
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
69,926
|
|
|
|
39,512
|
|
|
|
|
|
|
|
|
|
|
Other real estate:
|
|
|
|
|
|
|
|
|
Construction, land development, and other land
|
|
|
10,313
|
|
|
|
2,863
|
|
1-4 family residential properties
|
|
|
2,764
|
|
|
|
2,060
|
|
1-4 family residential properties sold with 100% financing
|
|
|
1,749
|
|
|
|
3,314
|
|
Commercial properties
|
|
|
2,121
|
|
|
|
1,199
|
|
Closed branch office
|
|
|
918
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
Total other real estate
|
|
|
17,865
|
|
|
|
10,732
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
|
87,791
|
|
|
|
50,244
|
|
Performing restructured loans
|
|
|
6,066
|
|
|
|
34,177
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets and restructured loans
|
|
$
|
93,857
|
|
|
$
|
84,421
|
|
|
|
|
|
|
|
|
|
|
Selected asset quality ratios:
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
5.28
|
%
|
|
|
2.84
|
%
|
Nonperforming assets to total assets
|
|
|
5.32
|
%
|
|
|
2.90
|
%
|
Nonperforming assets and restructured loans to total assets
|
|
|
5.69
|
%
|
|
|
4.87
|
%
|
Allowance for loan losses to total loans
|
|
|
2.74
|
%
|
|
|
1.88
|
%
|
Allowance to nonperforming loans
|
|
|
0.52
|
X
|
|
|
0.66
|
X
|
Allowance to nonperforming loans, net of loans charged down to
fair value
|
|
|
4.01
|
X
|
|
|
1.15
|
X
|
Other real estate, which includes foreclosed assets and other
real property held for sale, increased to $17.9 million as
of September 30, 2010 from $10.7 million as of
December 31, 2009. As of September 30,
64
2010, other real estate included $0.9 million of real
estate from a closed branch office held for sale and included
$1.7 million of residential properties sold to individuals
prior to September 30, 2010 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, at which time the property will be
moved out of other real estate and into the performing mortgage
loan portfolio.
The increase in other real estate was primarily due to the
repossession of commercial and residential construction and land
development properties in the first nine months of 2010. 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 2
fair value estimates since values are established based on
recent independent appraisals.
Impaired loans primarily consist of nonperforming loans and TDRs
but can include other loans identified by management as being
impaired. Impaired loans totaled $74.9 million and
$77.3 million as of September 30, 2010 and
December 31, 2009, respectively. The increase in impaired
loans is primarily due to weakness experienced in the local
economy and real estate markets from the recent economic
recession.
The following table summarizes the Companys impaired loans
and TDRs as of September 30, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
Impaired loans with related allowance for loan losses
|
|
$
|
14,043
|
|
|
$
|
60,490
|
|
Impaired loans for which the full loss has been charged off
|
|
|
60,882
|
|
|
|
16,775
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
|
74,925
|
|
|
|
77,265
|
|
Allowance for loan losses related to impaired loans
|
|
|
(3,065
|
)
|
|
|
(6,112
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying value of impaired loans
|
|
$
|
71,860
|
|
|
$
|
71,153
|
|
|
|
|
|
|
|
|
|
|
Performing TDRs:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
$
|
1,045
|
|
|
$
|
27,532
|
|
Consumer real estate
|
|
|
199
|
|
|
|
598
|
|
Commercial owner occupied
|
|
|
4,359
|
|
|
|
4,633
|
|
Commercial and industrial
|
|
|
285
|
|
|
|
1,288
|
|
Consumer
|
|
|
178
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Total performing TDRs
|
|
$
|
6,066
|
|
|
$
|
34,177
|
|
|
|
|
|
|
|
|
|
|
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 extension 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
65
combined with a reduction of the stated interest rate in certain
cases. Success in restructuring loan terms has been mixed but it
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 Companys 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 Companys 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. Through September 30, 2010,
the Company had 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 September 30,
2010, allowance for loan losses allocated to performing TDRs
totaled $1.5 million. Outstanding nonperforming TDRs and
their related allowance for loan losses totaled
$19.9 million and $0.9 million, respectively, as of
September 30, 2010.
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
lenders 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 Companys
Board of Directors.
The allowance for loan losses represents managements 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
borrowers 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 Companys
historical default and charge-off experience in each pool and
managements 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.
66
Impaired loans on borrower relationships over $750 thousand
totaled $62.0 million and $69.4 million as of
September 30, 2010 and December 31, 2009,
respectively, with specific reserves of $1.9 million and
$5.7 million, respectively. Specific reserves represented
3.1% and 8.2% of impaired loan balances as of September 30,
2010 and December 31, 2009, respectively. Specific reserves
represented 24.3% and 10.6% of impaired loan balances, net of
impaired loans charged down to estimated market value, as of
September 30, 2010 and December 31, 2009,
respectively. These loans were evaluated for impairment and
valued individually. Given the Companys 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.
For impaired loans on borrower relationships less than $750
thousand where legal action has been taken to foreclose,
impairment is evaluated on an individual basis and the loan is
charged down to estimated fair value. Impaired loans on
relationships less than $750 thousand charged down to estimated
fair value totaled $6.6 million and $3.1 million as of
September 30, 2010 and December 31, 2009,
respectively. For impaired loans on borrower relationships less
than $750 thousand classified as TDRs, impairment is evaluated
on an individual basis and a specific reserve is established for
each relationship. Impaired loans less than $750 thousand
classified as a TDR totaled $2.4 million as of
September 30, 2010, with associated reserves of
$0.5 million.
For most impaired loans evaluated individually, the fair value
of underlying collateral is generally estimated based on a
current independent appraised value, adjusted for estimated
holding and selling costs. These are considered Level 2
fair value estimates. 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. These are considered Level 3 fair value
estimates. In other situations, management will use broker price
opinions, internal valuations or other valuation sources. These
are also considered Level 3 fair value estimates. Of the
$71.9 million in estimated fair value of impaired loans
evaluated and valued on an individual basis as of
September 30, 2010, $67.5 million were valued based on
current independent appraisals and $4.4 million were valued
based on a combination of internal valuations and other
valuation sources. Internal valuations are used primarily 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. 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.
Impaired loans on borrower relationships less than $750 thousand
not evaluated individually for impairment totaled
$3.9 million and $4.8 million as of September 30,
2010 and December 31, 2009, respectively, with associated
reserves of $0.7 million and $0.4 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
Companys historical default and charge-off experience in
each pool and managements consideration of environmental
factors. As of September 30, 2010, the Company used two
years of charge-off history for purposes of calculating general
reserve rates. 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.
67
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
three and nine month periods ended September 30, 2010 and
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for loan losses, beginning of period
|
|
$
|
35,762
|
|
|
$
|
18,602
|
|
|
$
|
26,081
|
|
|
$
|
14,795
|
|
Net charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
2,244
|
|
|
|
978
|
|
|
|
17,568
|
|
|
|
3,217
|
|
Consumer real estate
|
|
|
236
|
|
|
|
137
|
|
|
|
2,522
|
|
|
|
1,345
|
|
Commercial owner occupied
|
|
|
287
|
|
|
|
495
|
|
|
|
2,173
|
|
|
|
668
|
|
Commercial and industrial
|
|
|
4,078
|
|
|
|
920
|
|
|
|
6,420
|
|
|
|
1,202
|
|
Consumer
|
|
|
18
|
|
|
|
145
|
|
|
|
212
|
|
|
|
222
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
6,863
|
|
|
|
2,675
|
|
|
|
29,104
|
|
|
|
6,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries of loans previously charged off:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
|
503
|
|
|
|
1
|
|
|
|
598
|
|
|
|
11
|
|
Consumer real estate
|
|
|
22
|
|
|
|
|
|
|
|
50
|
|
|
|
14
|
|
Commercial owner occupied
|
|
|
10
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
Commercial and industrial
|
|
|
44
|
|
|
|
1
|
|
|
|
61
|
|
|
|
62
|
|
Consumer
|
|
|
8
|
|
|
|
18
|
|
|
|
19
|
|
|
|
41
|
|
Other loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
587
|
|
|
|
20
|
|
|
|
738
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net charge-offs
|
|
|
6,276
|
|
|
|
2,655
|
|
|
|
28,366
|
|
|
|
6,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
6,763
|
|
|
|
3,564
|
|
|
|
38,534
|
|
|
|
11,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses, end of period
|
|
$
|
36,249
|
|
|
$
|
19,511
|
|
|
$
|
36,249
|
|
|
$
|
19,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans (annualized)
|
|
|
1.87
|
%
|
|
|
0.80
|
%
|
|
|
2.76
|
%
|
|
|
0.67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
Companys 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.
68
Supplemental
Commercial Real Estate Analysis
Residential
Acquisition, Development and Construction Loan Analysis
by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
|
Land /
|
|
Residential
|
|
|
|
|
Development
|
|
Construction
|
|
Total
|
|
|
(Dollars in thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
$
|
122,147
|
|
|
$
|
86,529
|
|
|
$
|
208,676
|
|
Nonaccrual loans
|
|
|
38,179
|
|
|
|
2,259
|
|
|
|
40,438
|
|
Allowance for loan losses
|
|
|
4,594
|
|
|
|
3,640
|
|
|
|
8,234
|
|
YTD net charge-offs
|
|
|
12,221
|
|
|
|
2,902
|
|
|
|
15,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding to total loans
|
|
|
9.22
|
%
|
|
|
6.53
|
%
|
|
|
15.75
|
%
|
Nonaccrual loans to loans in category
|
|
|
31.26
|
|
|
|
2.61
|
|
|
|
19.38
|
|
Allowance to loans in category
|
|
|
3.76
|
|
|
|
4.21
|
|
|
|
3.95
|
|
YTD net charge-offs to average loans in category (annualized)
|
|
|
11.44
|
|
|
|
4.13
|
|
|
|
8.54
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
$
|
162,733
|
|
|
$
|
100,724
|
|
|
$
|
263,457
|
|
Nonaccrual loans
|
|
|
16,935
|
|
|
|
7,102
|
|
|
|
24,037
|
|
Allowance for loan losses
|
|
|
7,569
|
|
|
|
1,707
|
|
|
|
9,276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding to total loans
|
|
|
11.70
|
%
|
|
|
7.24
|
%
|
|
|
18.95
|
%
|
Nonaccrual loans to loans in category
|
|
|
10.41
|
|
|
|
7.05
|
|
|
|
9.12
|
|
Allowance to loans in category
|
|
|
4.65
|
|
|
|
1.69
|
|
|
|
3.52
|
|
Residential
Acquisition, Development and Construction Loan
Analysis
by Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Loans
|
|
|
Allowance
|
|
|
Allowance
|
|
|
|
Loans
|
|
|
Total Loans
|
|
|
Nonaccrual
|
|
|
to Loans
|
|
|
for Loan
|
|
|
to Loans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Loans
|
|
|
Outstanding
|
|
|
Losses
|
|
|
Outstanding
|
|
|
|
(Dollars in thousands)
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triangle
|
|
$
|
156,527
|
|
|
|
75.01
|
%
|
|
$
|
34,410
|
|
|
|
21.98
|
%
|
|
$
|
6,176
|
|
|
|
3.95
|
%
|
Sandhills
|
|
|
24,907
|
|
|
|
11.94
|
|
|
|
977
|
|
|
|
3.92
|
|
|
|
870
|
|
|
|
3.49
|
|
Triad
|
|
|
4,676
|
|
|
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
217
|
|
|
|
4.64
|
|
Western
|
|
|
22,566
|
|
|
|
10.81
|
|
|
|
5,051
|
|
|
|
22.38
|
|
|
|
971
|
|
|
|
4.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
208,676
|
|
|
|
100.00
|
%
|
|
$
|
40,438
|
|
|
|
19.38
|
%
|
|
$
|
8,234
|
|
|
|
3.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Other
Commercial Real Estate Loan Analysis
by Type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
Land /
|
|
Commercial
|
|
|
|
Other Non-
|
|
|
|
|
Development
|
|
Construction
|
|
Multifamily
|
|
Residential CRE
|
|
Total
|
|
|
(Dollars in thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
$
|
121,996
|
|
|
$
|
61,077
|
|
|
$
|
40,545
|
|
|
$
|
234,090
|
|
|
$
|
457,708
|
|
Nonaccrual loans
|
|
|
9,761
|
|
|
|
|
|
|
|
|
|
|
|
4,571
|
|
|
|
14,332
|
|
Allowance for loan losses
|
|
|
3,420
|
|
|
|
1,439
|
|
|
|
581
|
|
|
|
4,808
|
|
|
|
10,248
|
|
YTD net charge-offs
|
|
|
1,537
|
|
|
|
(1
|
)
|
|
|
10
|
|
|
|
301
|
|
|
|
1,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding to total loans
|
|
|
9.21
|
%
|
|
|
4.61
|
%
|
|
|
3.06
|
%
|
|
|
17.67
|
%
|
|
|
34.55
|
%
|
Nonaccrual loans to loans in category
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
1.95
|
|
|
|
3.13
|
|
Allowance to loans in category
|
|
|
2.80
|
|
|
|
2.36
|
|
|
|
1.43
|
|
|
|
2.05
|
|
|
|
2.24
|
|
YTD net charge-offs to average loans in category (annualized)
|
|
|
1.63
|
|
|
|
0.00
|
|
|
|
0.03
|
|
|
|
0.18
|
|
|
|
0.83
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding
|
|
$
|
128,745
|
|
|
$
|
59,918
|
|
|
$
|
43,379
|
|
|
$
|
202,295
|
|
|
$
|
434,337
|
|
Nonaccrual loans
|
|
|
529
|
|
|
|
|
|
|
|
325
|
|
|
|
702
|
|
|
|
1,556
|
|
Allowance for loan losses
|
|
|
1,732
|
|
|
|
462
|
|
|
|
474
|
|
|
|
3,043
|
|
|
|
5,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding to total loans
|
|
|
9.26
|
%
|
|
|
4.31
|
%
|
|
|
3.12
|
%
|
|
|
14.55
|
%
|
|
|
31.24
|
%
|
Nonaccrual loans to loans in category
|
|
|
0.41
|
|
|
|
|
|
|
|
0.75
|
|
|
|
0.35
|
|
|
|
0.36
|
|
Allowance to loans in category
|
|
|
1.35
|
|
|
|
0.77
|
|
|
|
1.09
|
|
|
|
1.50
|
|
|
|
1.31
|
|
Other
Commercial Real Estate Loan Analysis
by Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Loans
|
|
|
Allowance
|
|
|
Allowance
|
|
|
|
Loans
|
|
|
Total Loans
|
|
|
Nonaccrual
|
|
|
to Loans
|
|
|
for Loan
|
|
|
to Loans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Loans
|
|
|
Outstanding
|
|
|
Losses
|
|
|
Outstanding
|
|
|
|
(Dollars in thousands)
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Triangle
|
|
$
|
293,894
|
|
|
|
64.21
|
%
|
|
$
|
13,633
|
|
|
|
4.64
|
%
|
|
$
|
6,597
|
|
|
|
2.24
|
%
|
Sandhills
|
|
|
66,326
|
|
|
|
14.49
|
|
|
|
610
|
|
|
|
0.92
|
|
|
|
1,843
|
|
|
|
2.78
|
|
Triad
|
|
|
40,623
|
|
|
|
8.88
|
|
|
|
|
|
|
|
|
|
|
|
854
|
|
|
|
2.10
|
|
Western
|
|
|
56,865
|
|
|
|
12.42
|
|
|
|
89
|
|
|
|
0.16
|
|
|
|
954
|
|
|
|
1.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
457,708
|
|
|
|
100.00
|
%
|
|
$
|
14,332
|
|
|
|
3.13
|
%
|
|
$
|
10,248
|
|
|
|
2.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. For the lender, an interest reserve may
provide an effective means for addressing the cash flow
characteristics of a properly underwritten
70
acquisition, development and construction loan. Similarly, for
the borrower, interest reserves may 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,
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 borrowers
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, a lender 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, a lender may end up with a matured loan where the
interest reserve has been fully advanced, and the
borrowers 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 the lender
to increasing credit losses.
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. LTV limits have been established
based on regulatory guidelines for each loan type, and any loan
with an LTV (using an updated independent appraisal) exceeding
those limits are immediately placed on nonaccrual status.
As of September 30, 2010, the Company had a total of 28
loans funded by an interest reserve with total outstanding
balances of $63.4 million, representing approximately 5% of
total outstanding loans. Total commitments on these loans
equaled $74.6 million with total remaining interest
reserves of $2.0 million, representing a weighted average
term of approximately eight months of remaining interest
coverage. The following table summarizes the Companys
residential and commercial acquisition, development and
construction (ADC) loans with active interest
reserves 1 as of September 30, 2010 and December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Committed
|
|
|
Number
|
|
|
Remaining
|
|
|
|
Balance
|
|
|
Balance
|
|
|
of Loans
|
|
|
Reserves
|
|
|
|
(Dollars in thousands)
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
28,138
|
|
|
$
|
29,102
|
|
|
|
14
|
|
|
$
|
584
|
|
Commercial
|
|
|
35,281
|
|
|
|
45,487
|
|
|
|
14
|
|
|
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,419
|
|
|
$
|
74,589
|
|
|
|
28
|
|
|
$
|
2,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
|
|
$
|
69,698
|
|
|
$
|
75,068
|
|
|
|
31
|
|
|
$
|
1,449
|
|
Commercial
|
|
|
72,565
|
|
|
|
103,734
|
|
|
|
19
|
|
|
|
3,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
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. |
Capital
Resources
Management of equity is a critical aspect of capital management
in any business. The determination of the appropriate amount of
equity is affected by a wide number of factors. The primary
factor for a regulated financial institution is the amount of
capital needed to meet regulatory requirements, although other
factors, such as the risk equity the business
requires and balance sheet leverage, also affect the
determination.
71
To be categorized as well capitalized, the Company and the Bank
each must maintain minimum capital amounts and ratios. The
Companys and the Banks actual capital amounts and
ratios as of September 30, 2010 and the minimum
requirements to be well capitalized are presented in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Requirements
|
|
|
Actual
|
|
To be Well Capitalized
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
Capital Bank Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
145,645
|
|
|
|
10.50
|
%
|
|
$
|
138,647
|
|
|
|
10.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
|
124,678
|
|
|
|
8.99
|
|
|
|
83,188
|
|
|
|
6.00
|
|
Tier I capital (to average assets)
|
|
|
124,678
|
|
|
|
7.56
|
|
|
|
82,435
|
|
|
|
5.00
|
|
Capital Bank:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
$
|
143,973
|
|
|
|
10.40
|
%
|
|
$
|
138,481
|
|
|
|
10.00
|
%
|
Tier I capital (to risk-weighted assets)
|
|
|
123,026
|
|
|
|
8.88
|
|
|
|
83,088
|
|
|
|
6.00
|
|
Tier I capital (to average assets)
|
|
|
123,026
|
|
|
|
7.47
|
|
|
|
82,388
|
|
|
|
5.00
|
|
Total shareholders equity decreased from
$139.8 million as of December 31, 2009 to
$116.1 million as of September 30, 2010. The
Companys accumulated deficit increased by
$29.8 million in the first nine months of 2010, reflecting
a $28.0 million net loss and dividends and accretion on
preferred stock of $1.8 million. Common stock increased
primarily due to $5.1 million of proceeds from the issuance
of shares of the Companys common stock as part of the
private placement offering. Accumulated other comprehensive
income, which includes unrealized gains and losses on
available-for-sale investment securities, net of tax, increased
from $4.0 million as of December 31, 2009 to
$4.3 million as of September 30, 2010.
As of September 30, 2010, the Company had a leverage ratio
of 7.56%, a Tier 1 capital ratio of 8.99%, and a total
risk-based capital ratio of 10.50%. These ratios exceed the
federal regulatory minimum requirements for a well
capitalized bank. The Companys tangible equity to
tangible assets ratio decreased from 7.91% as of
December 31, 2009 to 6.92% as of September 30, 2010,
and its tangible common equity to tangible assets ratio declined
from 5.53% as of December 31, 2009 to 4.42% as of
September 30, 2010.
Recent
Items Impacting Capital Resources
On December 12, 2008, the Company entered into a Letter
Agreement and Securities Purchase Agreement Standard
Terms (the 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 the Companys
Series A Preferred Stock and warrants to purchase up to
749,619 shares of common stock of the Company. The
Series A Preferred Stock ranked senior to the
Companys 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 was prohibited from paying any
dividend with respect to shares of common stock or repurchasing
or redeeming any shares of the Companys common shares
unless all accrued and unpaid dividends were paid on the
Series A Preferred Stock for all past dividend periods
(including the latest completed dividend period). The
Series A Preferred Stock was non-voting, other than class
voting rights on matters that could adversely affect the
Series A Preferred Stock. The Series A Preferred Stock
was callable at par after three years. The Treasury was also
permitted to transfer the Series A Preferred Stock to a
third party at any time.
On February 1, 2010, the Company announced that its Board
of Directors voted to suspend payment of the Companys
quarterly cash dividend to its common shareholders.
On March 18, 2010, the Company sold 849 investment units
(the Units) for gross proceeds of $8.5 million.
Each Unit was priced at $10,000 and consisted of a $3,996.90
subordinated promissory note and a number of shares of the
Companys common stock valued at $6,003.10. The offering
and sale of the Units was limited to accredited investors. As a
result of the sale of the Units, the Company sold
$3.4 million in aggregate principal amount of subordinated
promissory notes due March 18, 2020 (the Notes)
and
72
1,468,770 shares of the Companys common stock valued
at $5.1 million. The Company is obligated to pay interest
on the Notes at 10% per annum payable in quarterly installments
commencing on the third month anniversary of the date of
issuance of the Notes. The Company may prepay the Notes at any
time after March 18, 2015 subject to approval by the
Federal Reserve and compliance with applicable law.
On July 30, 2010, the Company announced its intention to
commence a public offering of 34.5 million shares of its
common stock. On September 30, 2010, the Company announced
that the public offering and the related registration statement
had been withdrawn in order to pursue certain other alternatives.
On October 28, 2010, the Bank entered into an informal
Memorandum of Understanding with the FDIC and the NC
Commissioner. In accordance with the terms of the MOU, the Bank
has agreed to, among other things, (i) increase regulatory
capital to achieve and maintain a minimum Tier 1 leverage
capital ratio of at least 8% and a total risk-based capital
ratio of at least 12%, (ii) monitor and reduce its
commercial real estate concentration, (iii) timely identify
and reduce its overall level of problem loans,
(iv) establish and maintain an adequate allowance for loan
losses, and (v) ensure adherence to loan policy guidelines.
In addition, the Bank must obtain regulatory approval prior to
paying any dividends to the Company. The MOU will remain in
effect until modified, terminated, lifted, suspended or set
aside by the regulatory authorities.
In 2009, we began pursuing capital raising opportunities
including the withdrawn public offerings and private placements
summarized above in an attempt to inject additional capital into
the Bank and to maintain compliance with required regulatory
capital ratios. On November 4, 2010, the Company announced
its entry into an Investment Agreement whereby NAFH has agreed
to purchase 71.0 million shares of the Companys
common stock for a purchase price of $2.55 per share, for a
total investment of approximately $181 million. NAFH also
agreed to issue a non-transferable contingent value right for
each share of the Companys common stock outstanding as of
a specified record date, which has since been agreed to be
January 27, 2011, that will provide then-existing
shareholders with the opportunity to receive up to $0.75 per
share five years from the closing date of the Investment,
depending on the level of loan charge-offs during that five-year
period. As a result of the Investment, NAFH owns approximately
85% of the Companys outstanding shares of common stock.
Further, NAFH has the right to conduct a tender offer at any
time to purchase up to 5.25 million shares of the
Companys common stock at a price not less than $2.55 per
share.
Also in connection with the Investment, pursuant to an agreement
among NAFH, the Treasury, and the Company, the Companys
Series A Preferred Stock and warrant to purchase shares of
common stock issued by the Company to the Treasury in connection
with TARP were repurchased. Following the TARP Repurchase, the
Series A Preferred Stock and warrant are no longer
outstanding, and accordingly the Company no longer expects to be
subject to the restrictions imposed upon us by the terms of our
Series A Preferred Stock, or certain regulatory provisions
of EESA and ARRA that are imposed on TARP recipients.
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
Federal Reserve. The Company must submit weekly reports to the
Federal Reserve to ensure compliance with those requirements. As
of September 30, 2010, the Company met all of its
regulatory liquidity requirements.
The Company had $68.1 million in its most liquid assets,
cash and cash equivalents, as of September 30, 2010. The
Companys principal sources of funds are loan repayments,
deposits, short-term borrowings, capital and, to a lesser
extent, investment repayments. Core deposits (total deposits
less certificates of deposits in the amount of $100 thousand or
more), one of the most stable sources of liquidity, together
with equity capital funded $1.15 billion, or 69.8%, of
total assets as of September 30, 2010 compared to
$1.18 billion, or 67.8%, of total assets as of
December 31, 2009.
73
Additional sources of liquidity are available to the Company
through the FRB and through membership in the FHLB system. As of
September 30, 2010, the Company had a maximum and available
borrowing capacity of $105.2 million and $6.5 million,
respectively, through the FHLB. These funds can be made
available with various maturities and interest rate structures.
Borrowings with the FHLB are collateralized by a blanket lien on
certain qualifying assets. The Company also maintains a credit
line at the FRBs discount window that is used for
short-term funding needs and as an additional source of
available liquidity. As of September 30, 2010, the Company
had a maximum and available borrowing capacity of
$96.2 million 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.
Analysis
of Results of Operations and Financial Condition as of
December 31, 2009
Executive
Summary
The following is a brief summary of our significant results for
the year ended December 31, 2009.
|
|
|
|
|
The Companys 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
Companys 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
Companys 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
Companys primary markets and consistent application of the
Companys 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 Companys 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
|
74
|
|
|
|
|
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 Companys 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
Companys 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 Companys 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 Federal Open
Market Committee (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
Companys 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 Companys 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 Companys net interest margin
which persisted throughout 2009. The resolution of liquidity
concerns during 2009 allowed retail and wholesale
75
funding costs to decline significantly during the year, and
management believes that its prudent deposit pricing controls
coupled with continued re-pricing of the Companys time
deposit portfolio will continue to benefit net interest margin.
The following two tables set forth certain information regarding
the Companys 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
Companys 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
|
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
Average
|
|
|
Amount
|
|
|
Average
|
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
Balance
|
|
|
Earned
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
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. |
77
Rate and
Volume Variance Analysis
Tax Equivalent Basis(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 vs. 2008
|
|
|
December 31, 2008 vs. 2007
|
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
Rate
|
|
|
Volume
|
|
|
Total
|
|
|
|
Variance
|
|
|
Variance
|
|
|
Variance
|
|
|
Variance
|
|
|
Variance
|
|
|
Variance
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
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 Companys 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 FRB, 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.
78
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
Companys 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 $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 Companys primary markets and consistent
application of the Companys 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.
79
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 Companys
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.
80
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 Companys 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.
81
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 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 Companys 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
Companys tax professionals of previously filed federal and
state tax returns. The Companys 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 Companys effective tax rate in 2008.
Year
ended December 31, 2008 compared with year ended
December 31, 2007
The Companys 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 Companys 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 Companys
interest-bearing liabilities.
82
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 Companys 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 FRB, 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
Companys 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.
83
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.
84
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 Companys 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 Companys 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 401(k) 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 managements 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
Companys 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
85
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 Companys 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 Companys 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.
Financial
Condition
Overview
The Companys financial condition is measured in terms of
its asset and liability composition, including asset quality.
The growth and composition of the Companys balance sheet
from 2008 to 2009 reflect organic growth generated during the
year by the Companys 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 Companys 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
Companys 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
86
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
Companys 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 managements
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
Companys 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
Companys 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
As of December 31, 2009, the Companys 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 Companys 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
Companys 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.
88
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
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Carrying
|
|
|
Average
|
|
|
Carrying
|
|
|
Average
|
|
|
|
Value
|
|
|
Yield
|
|
|
Value
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
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. |
89
As of December 31, 2009, the projected weighted average
life of the Companys 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
Companys 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
Companys 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 Companys 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
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
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
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Yield
|
|
|
Amount
|
|
|
Yield
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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 borrowers 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 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.
91
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 Companys residential and commercial
acquisition, development and construction loans with active
interest reserves as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Outstanding
|
|
|
Committed
|
|
|
of
|
|
|
Remaining
|
|
|
|
Balance
|
|
|
Balance
|
|
|
Loans
|
|
|
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
|
%
|
92
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 was 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 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 Companys 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
93
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 Companys 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 Companys 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
lenders 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 Companys
Board of Directors.
The allowance for loan losses represents managements 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
borrowers 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 Companys
historical default and charge-off experience in each pool and
managements 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.
94
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
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
Allowance
|
|
|
Amount
|
|
|
Allowance
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
% of
|
|
|
|
Amount
|
|
|
Total Allowance
|
|
|
Loans
|
|
|
Amount
|
|
|
Total Allowance
|
|
|
Loans
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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.
95
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
Companys 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
Companys historical default and charge-off experience in
each pool and managements 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.
96
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
Companys 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.
97
Supplemental
Commercial Real Estate Analysis
Residential Acquisition, Development and Construction Loan
Analysis by Type and Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
Residential Land /
|
|
Residential
|
|
|
|
|
Development
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Loans to
|
|
|
|
|
|
ALLL to
|
|
|
|
Loans
|
|
|
Total Loans
|
|
|
Nonaccrual
|
|
|
Loans
|
|
|
Allowance for
|
|
|
Loans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Loans
|
|
|
Outstanding
|
|
|
Loan Losses
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial Real Estate Loan Analysis
by Type and Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
Commercial
|
|
|
|
|
|
Non-Residential,
|
|
|
|
|
Land /
|
|
Commercial
|
|
|
|
Non-Owner
|
|
|
|
|
Development
|
|
Construction
|
|
Multifamily
|
|
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
|
%
|
Other Commercial Real Estate Loan Analysis
by Type and Region:
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
Loans to
|
|
|
Allowance
|
|
|
ALLL to
|
|
|
|
Loans
|
|
|
Total Loans
|
|
|
Nonaccrual
|
|
|
Loans
|
|
|
for
|
|
|
Loans
|
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Loans
|
|
|
Outstanding
|
|
|
Loan Losses
|
|
|
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 Companys 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
|
|
|
Time Deposits
|
|
|
|
$100,000 or Greater
|
|
|
Less than $100,000
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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
Companys 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 FRBs 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
Companys 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
99
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
Companys 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 the notes to our consolidated
financial statements contained elsewhere in this prospectus, for
additional information on regulatory capital requirements). The
Companys 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 Preferred Stock and warrants to purchase up to
749,619 shares of common stock of the Company. The
Series A Preferred Stock ranked senior to the
Companys common shares and paid 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 was prohibited from paying any
dividend with respect to shares of common stock or repurchasing
or redeeming any shares of the Companys common shares
unless all accrued and unpaid dividends were paid on the
Series A Preferred Stock for all past dividend periods
(including the latest completed dividend period). The
Series A Preferred Stock was non-voting, other than class
voting rights on matters that could adversely affect the
Series A Preferred Stock. The Series A Preferred Stock
was callable at par after three years. The Treasury was also
permitted to transfer the Series A Preferred Stock to a
third party at any time.
The Companys Board of Directors has authorized the
repurchase of up to 1 million shares of the Companys
common stock through public or private transactions. As a
condition under the CPP, the Companys 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 was effective
until December 2011 or until the Treasury no longer owned 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 Companys 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
100
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
Companys 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 Companys 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 FRBs 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 the notes to our consolidated
financial statements contained elsewhere in this prospectus for
a discussion of the Companys off-balance sheet
arrangements.
101
The following table reflects maturities of contractual
obligations as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
Total
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Committed
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
Total
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Committed
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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 Companys results
of operations; however, the effect of inflation on interest
rates may in the future materially impact the Companys
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.
Management
of Market Risk
The Company intends to reach its strategic financial objectives
through the effective management of market risk. Like many
financial institutions, the Companys most significant
market risk exposure is interest rate risk. The Companys
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 Companys portfolios of assets and
liabilities that will produce consistent net interest income
during periods of changing interest rates. The Companys
Management Risk Committee and Board Risk Committee (referred to
collectively as the 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 Companys 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.
102
When necessary, the Company utilizes derivative financial
instruments to manage interest rate risk, to facilitate
asset/liability management strategies, and to manage other risk
exposures. As of December 31, 2010, the only derivative
instruments maintained by the Company were interest rate lock
commitments and forward loan sale commitments related to
mortgage lending activities.
As a financial institution, most of the Companys 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
Federal Reserve to regulate the availability and cost of credit
have a greater effect on a financial institutions
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 Companys
performance under different interest rate scenarios. Analyses
are prepared monthly, which evaluate the Companys
performance in a base strategy that reflects the Companys
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, 2010 indicated that the Companys
interest rate risk exposure and equity at risk exposure over a
twelve-month time horizon were within the guidelines established
by the Companys Board of Directors.
The table below measures the impact on net interest income
(NII) and economic value of equity (EVE)
of immediate +/- 1.00% and +/- 2.00% changes in interest rates,
assuming the interest rate changes occurred on December 31,
2010. Actual results could differ from these estimates.
|
|
|
|
|
|
|
|
|
|
|
Estimated % Change
|
|
Estimated % Change
|
|
|
in NII
|
|
in EVE
|
|
|
(over 12 months
|
|
(immediately
|
|
|
following change)
|
|
following change)
|
|
Changes in rates:
|
|
|
|
|
|
|
|
|
+ 2.00%
|
|
|
12.6
|
%
|
|
|
0.4
|
%
|
+ 1.00%
|
|
|
2.4
|
%
|
|
|
(2.5
|
)%
|
No rate change
|
|
|
|
|
|
|
|
|
- 1.00%
|
|
|
(1.8
|
)%
|
|
|
4.2
|
%
|
- 2.00%
|
|
|
(5.5
|
)%
|
|
|
24.1
|
%
|
As a secondary measure of interest rate sensitivity, the Company
also reviews its ratio of cumulative rate sensitive assets to
rate sensitive liabilities (Gap Ratio). This ratio
measures an entitys 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.
The table below presents the Companys Gap Ratio as of
December 31, 2010.
|
|
|
|
|
|
|
Cumulative Gap Ratio
|
|
1 year
|
|
|
1.89
|
|
2 years
|
|
|
1.23
|
|
3 years
|
|
|
0.98
|
|
4 years
|
|
|
1.02
|
|
5 years
|
|
|
0.98
|
|
Overall
|
|
|
1.09
|
|
The Company is asset sensitive through the one-year and two-year
cumulative time periods. Many variable rate loans in the
portfolio, while technically subject to immediate repricing in
response to changing interest rates, have interest rate floors
embedded in the terms of the note agreements. Given the current
low prime rate, many of the Companys variable rate loans
will earn interest at the respective floor rates and will
function similar to fixed rate loans until the prime rate is
increased by a significant amount. The Risk Committee regularly
monitors its interest rate sensitivity and reviews additional
analysis incorporating the impact of floor rates on its Gap
Ratio.
103
MANAGEMENT
Directors
and Executive Officers
Set forth below is information concerning our directors and
executive officers. The members of our Board of Directors are
elected by the shareholders, and NAFH holds approximately 84.6%
of the voting power for election of directors. So long as our
Board of Directors consists of less than nine members, it will
not be divided into separate classes and each member will be
elected by our shareholders annually for a one-year term. Each
director and executive officer will hold office until his death,
resignation, retirement, removal, disqualification, or until his
successor is elected (or appointed) and qualified. All ages
below are as of January 28, 2011.
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Name
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Position
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R. Eugene Taylor
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President, Chief Executive Officer and Chairman of the Board
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Christopher G. Marshall
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Executive Vice President, Chief Financial Officer and Director
|
R. Bruce Singletary
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Executive Vice President, Chief Risk Officer and Director
|
Charles F. Atkins
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Director
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Peter N. Foss
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Director
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William A. Hodges
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Director
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Oscar A. Keller III
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Director
|
R. Eugene Taylor. Mr. Taylor, who is 63, is the
Chairman and Chief Executive Officer of NAFH. Mr. Taylor
assumed the title of Chief Executive Officer of Capital Bank
Corporation and Capital Bank and was appointed Chairman of the
Board of Directors of Capital Bank Corporation and Capital Bank
on January 28, 2011 upon NAFHs designation pursuant
to the Investment Agreement. Prior to founding NAFH in 2009,
Mr. Taylor served as an advisor to Fortress Investment
Group, a global investment management firm. Prior to his role at
Fortress, Mr. Taylor worked at Bank of America where he
served in leadership positions across the United States. In
2001, he was named President of Bank of America
Consumer & Commercial Banking, and in 2005, he became
President of Global Corporate & Investment Banking and
was named Vice Chairman of the corporation. He also served on
Bank of Americas Risk & Capital and Management
Operating Committees. Mr. Taylor is the Chairman of the
board of directors of TIB Financial Corp., a bank holding
company in which NAFH has a majority interest. Mr. Taylor
is a Florida native and received his Bachelor of Science in
Finance from Florida State University.
Mr. Taylor is expected to bring to our Board of Directors
valuable and extensive experience from managing and overseeing a
broad range of operations during his tenure at Bank of America.
His experience in leadership roles and activities in the
Southeast qualify him to serve as the Chairman of our Board of
Directors.
Christopher G. Marshall. Mr. Marshall, who is 51, is
the Chief Financial Officer of NAFH. Mr. Marshall was
appointed as a director on our Board of Directors and the board
of directors of Capital Bank and as our Chief Financial Officer
on January 28, 2011 upon NAFHs designation pursuant
to the Investment Agreement. Mr. Marshall served as a
Senior Advisor to the Chief Executive Officer and Chief
Restructuring Officer of GMAC (Ally Bank) and as an advisor to
the Blackstone Group, an investment and advisory firm. From 2006
through 2008, Mr. Marshall served as the CFO of Fifth Third
Bancorp. Mr. Marshall served as Chief Operations Executive
of Bank of Americas Global Consumer and Small Business
Bank from 2004 to 2006 after holding various positions
throughout Bank of America beginning in 2001. Prior to joining
Bank of America, Mr. Marshall served as CFO and COO of
Honeywell Global Business Services from 1999 to 2001. From 1995
to 1999, he served as CFO of AlliedSignal Technical Services
Corporation. Prior to that, he held several managerial positions
at TRW, Inc. from 1987 to 1995. Mr. Marshall is a director
of TIB Financial Corp., a bank holding company in which NAFH has
a majority interest. Mr. Marshall earned a Bachelor of
Science degree in Business Administration from the University of
Florida and obtained a Master of Business Administration degree
from Pepperdine University.
104
Mr. Marshall is expected to bring to our Board of Directors
extensive experience from service in leadership positions,
including his tenure as Chief Financial Officer of Fifth Third
Bancorp, and in other operating roles at both financial and
non-financial companies.
R. Bruce Singletary. Mr. Singletary, who is 60,
is the Chief Risk Officer of NAFH. Mr. Singletary was
appointed as a director on our Board of Directors and the board
of directors of Capital Bank, and as Chief Risk Officer of both
the Company and of Capital Bank on January 28, 2011 upon
NAFHs designation pursuant to the Investment Agreement.
Prior to joining NAFH, he spent 31 years at Bank of America
and its predecessor companies with the last 19 years in
various credit risk roles. Mr. Singletary originally joined
C&S National Bank as a credit analyst in Atlanta, Georgia.
In 1991, Mr. Singletary was named Senior Credit Policy
Executive of C&S Sovran, which was renamed NationsBank in
January 1992, for the geographic areas of Maryland, Virginia and
the District of Columbia. Mr. Singletary led the credit
function of NationsBank from 1990 to 1998. In 1998,
Mr. Singletary relocated to Florida to establish a
centralized underwriting function to serve middle market
commercial clients in the Southeast. In 2000,
Mr. Singletary assumed credit responsibility for Bank of
Americas middle market leveraged finance portfolio for the
eastern half of the United States. In 2004, Mr. Singletary
served as Senior Risk Manager for commercial banking for Bank of
Americas Florida Bank. Mr. Singletary is a director
of TIB Financial Corp., a bank holding company in which NAFH has
a majority interest. Mr. Singletary earned a Bachelor of
Science degree in Industrial Management from Clemson University
and obtained a Masters of Business Administration degree from
Georgia State University.
Mr. Singletary has substantial experience in the banking
sector and brings a perspective reflecting many years of
overseeing credit analysis at complex financial institutions,
which qualify him to serve as a director.
Charles F. Atkins. Mr. Atkins, who is 61, has served
as a director of Capital Bank since its inception in 1997 and
was elected to serve as a director of the Company in 2003. He is
currently, and has been for the past 21 years, President of
Cam-L Properties, Inc., a commercial real estate development
company located in Sanford, North Carolina.
Mr. Atkins has substantial experience with community
banking, as he was an organizer of Capital Bank, and in his
position with a real estate development company has developed an
extensive understanding of certain real estate markets in which
the Bank makes loans. During his tenure with the Company, he has
obtained knowledge of the Companys business, history and
organization, which has enhanced his ability to serve as
director.
Peter N. Foss. Mr. Foss, who is 67, serves on the
Board of Directors of NAFH. Mr. Foss was appointed as a
director on our Board of Directors on January 28, 2011 upon
NAFHs designation pursuant to the Investment Agreement.
Peter Foss has been President of the General Electric Olympic
Sponsorship and Corporate Accounts since 2003. In addition,
Mr. Foss has served as General Manager for Enterprise
Selling, with additional responsibilities for Sales Force
Effectiveness and Corporate Sales Programs. He has been with GE
for 29 years, and prior to this assignment, served for six
years as the President of GE Polymerland, a commercial
organization representing GE Plastics in the global marketplace.
Prior to Polymerland, Mr. Foss served in various commercial
roles in the company, including introducing
LEXAN®
film in the 1970s and was the Market Development Manager
on the
ULTEM®
introduction team in 1982. He has also served as the Regional
General Manager for four of the GE Plastics regions including
leading the GE Plastics effort in Mexico in the mid 1990s.
Mr. Foss is a director of TIB Financial Corp., a bank
holding company in which NAFH has a majority interest.
Mr. Foss earned a Bachelor of Science degree in Chemistry
from Massachusetts College of Pharmacy, Boston.
Mr. Foss has gained extensive experience in managing and
executing complex projects and has overseen large-scale sales
efforts in his prior positions, as set forth above. This
background gives him valuable perspective on operating concerns
relevant to our business.
William A. Hodges. Mr. Hodges, who is 62, is a
member of the Board of Directors of NAFH. Mr. Hodges was
appointed as a director on our Board of Directors on
January 28, 2011 upon NAFHs designation pursuant to
the Investment Agreement. Mr. Hodges has been President and
Owner of LKW Development LLC, a Charlotte-based residential land
developer and homebuilder, since 2005. Prior to that,
Mr. Hodges worked for
105
ten years in various functions at Bank of America. From 2004 to
2005, he served as Chairman of Bank of Americas Capital
Commitment Committee. Mr. Hodges served as Managing
Director and Head of Debt Capital Markets from 1998 to 2004 and
as Managing Director and Head of the Real Estate Finance Group
from 1996 to 1998. Prior to the Bank of America acquisition, he
served as Market President and Head of Mid-Atlantic Commercial
Banking for NationsBank from 1992 to 1996. Mr. Hodges began
his career at North Carolina National Bank (NCNB), where he
worked for twenty years in various roles, including Chief Credit
Officer of Florida operations and as a manager in the Real
Estate Banking and Special Assets Groups. Mr. Hodges is a
director of TIB Financial Corp., a bank holding company in which
NAFH has a majority interest. Mr. Hodges earned a
bachelors degree in history from the University of North
Carolina at Chapel Hill and a masters degree in finance
from Georgia State University.
Mr. Hodges substantial experience in the banking and
real estate sectors allows him to bring to the board a valuable
perspective on matters that are of key importance to the
discussions regarding the financial and other risks faced by the
Company.
Oscar A. Keller III. Mr. Keller, who is 66, has
served as a director of Capital Bank since its inception in 1997
and as a director of the Company since its inception, and as
Chairman of the Board of Directors of the Company from the
Companys inception through the closing of the Investment.
Mr. Keller was also a founding director of Triangle Bank
from 1988 to 1998, and served on its executive committee and
audit committee. Furthermore, he served as a director of
Triangle Leasing Corp. from 1989 to 1992. He is currently, and
has been for the past 15 years, Chief Executive Officer of
Earthtec of NC, Inc., an environmental treatment facility in
Sanford, North Carolina. He also serves as a director of Capital
Bank Foundation, Inc. Mr. Keller is also currently the
Chairman of the Sanford Lee County Regional Airport Authority
(Raleigh Executive Jet Port), Vice Chairman of Lee County
Economic Development Corp. and a member of Triangle Regional
Partnership Staying on Top 2 committee.
During his term as Chairman of the Board of Directors,
Mr. Keller has had the opportunity to develop extensive
knowledge of the Companys business, history and
organization which, along with his personal experience in
markets that the Bank serves, has supplemented his ability to
effectively contribute to the Board. Mr. Keller is a
founder of the Bank and a well regarded community leader in
Sanford, North Carolina.
Director
Independence
Because NAFH holds approximately 84.6% of the voting power of
the Company, under NASDAQ Listing Rules, the Company qualifies
as a controlled company and, accordingly, is exempt
from the requirement to have a majority of independent
directors, as well as certain other governance requirements.
However, as required under NASDAQ Listing Rules, the Audit
Committee of the Board of Directors is comprised entirely of
independent directors. Our Board of Directors has determined
that Messrs. Atkins, Foss, Hodges and Keller meet the
definition of independent director as that term is
defined in NASDAQ Listing Rules. In determining director
independence, the Board considers all relevant facts and
circumstances, and the Board considers the issue not merely from
the standpoint of a director, but also from that of persons or
organizations with which the director has an affiliation. As
members of management, Messrs. Taylor, Marshall and
Singletary would not be considered independent under current
NASDAQ Listing Rules.
106
EXECUTIVE
COMPENSATION
Summary Compensation Table
The table below summarizes the total compensation paid or earned
by each of the named executive officers for the years ended
December 31, 2010 and 2009.
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All Other
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Compensation
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|
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Name and Principal Position(1)
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Year
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|
Salary
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|
(2)
|
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Total
|
|
B. Grant Yarber
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|
|
2010
|
|
|
$
|
370,000
|
|
|
$
|
4,416
|
|
|
$
|
374,416
|
|
Former President and Chief
|
|
|
2009
|
|
|
|
370,000
|
|
|
|
14,690
|
|
|
|
384,690
|
|
Executive Officer and current
Market President for North
Carolina of Capital Bank
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|
|
|
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|
|
|
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|
|
|
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|
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David C. Morgan
|
|
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2010
|
|
|
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218,500
|
|
|
|
13,468
|
|
|
|
231,968
|
|
Former Executive Vice President
|
|
|
2009
|
|
|
|
218,500
|
|
|
|
19,759
|
|
|
|
238,259
|
|
and Chief Banking Officer and
current Executive Vice President
of Capital Bank
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|
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Mark J. Redmond
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|
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2010
|
|
|
|
195,000
|
|
|
|
11,604
|
|
|
|
206,604
|
|
Former Executive Vice President
|
|
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2009
|
|
|
|
195,000
|
|
|
|
17,439
|
|
|
|
212,439
|
|
and Chief Credit Officer and
current Executive Vice President
of Capital Bank
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|
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(1) |
|
During 2009 and 2010, Mr. Yarber served as President and
Chief Executive Officer of the Company and the Bank,
Mr. Morgan served as Executive Vice President and Chief
Banking Officer of the Company and the Bank and Mr. Redmond
served as Executive Vice President and Chief Credit Officer of
the Company and the Bank. Effective as of the closing of the
Investment, Mr. Yarber was appointed the Market President
for North Carolina of Capital Bank and Mr. Morgan and
Mr. Redmond each were appointed an Executive Vice President
of Capital Bank. |
|
(2) |
|
The Company provides the named executive officers with certain
group life, health, medical and other noncash benefits generally
available to all salaried employees that are not included in
this column pursuant to SEC rules. The amounts shown in this
column for 2010 consist of (i) automobile allowances to
certain executive officers; (ii) amounts for the personal
portion of club dues; and (iii) dividends on unvested
shares of restricted stock. |
Executive
Employment Agreements
The Company has entered into employment agreements with each of
the named executive officers. The employment agreements provide
named executive officers a base annual salary, which may be
reviewed and adjusted at the discretion of Capital Bank in
accordance with the Banks policies, procedures and
practices as they may exist from time to time. Pursuant to the
terms of the agreements, the named executive officers are
eligible for performance bonuses and other benefits available to
executives of the Company. Finally, the named executive officers
have agreed to standard nondisclosure provisions, and
Mr. Morgan and Mr. Redmond have also agreed to
standard noncompete and nonsolicitation provisions.
On January 14, 2011, the Company entered into amendments to
the employment agreements with each of the named executive
officers. These amendments primarily clarify the roles of each
officer after the closing of the Investment, change the term of
each employment agreement and limit the circumstances under
which the officers are entitled to compensation related to a
change in control. The amendments change the term of each
officers employment agreement to end on November 3,
2011, after which each officer will become an at-will employee
eligible to receive separation benefits under any severance plan
or policy applicable to similarly situated senior executives of
the Bank. Prior to the amendments, the employment agreements of
Mr. Morgan and Mr. Redmond had one-year terms that
automatically renewed for additional one-year periods unless
notice of non-renewal was provided 30 days before January
25 or September 17, respectively, during any renewal
107
period. Mr. Yarbers employment agreement previously
did not have a fixed term. Lastly, the amendments remove the car
allowance previously provided by the employment agreements of
Mr. Morgan and Mr. Redmond.
Under the terms of the executive employment agreements, as
amended, each named executive officer is entitled to severance
benefits upon the occurrence of specified events, including upon
termination both prior to or following a change in control of
the Company, as more fully described under
Change in Control Arrangements.
Participation
in the Treasurys CPP
Also in connection with the Investment, pursuant to an agreement
among NAFH, the Treasury, and the Company, the Companys
Series A Preferred Stock and warrant to purchase shares of
common stock issued by the Company to the Treasury in connection
with TARP were repurchased. Accordingly, as of January 28,
2011, the Company no longer participates in the Treasurys
CPP. During the time period in which the Company participated in
the CPP, including 2009 and 2010, the Company was subject to
certain executive compensation restrictions. Many of the
restrictions placed on the Company by its participation in the
CPP applied to what the Treasury refers to as the Companys
Senior Executive Officers (SEOs) and other
highly-compensated employees. Each of the Companys named
executive officers was an SEO during the period of the
Companys participation in the CPP. The restrictions that
applied to the Company during that period include:
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Review of Arrangements To Ensure No Unnecessary or Excessive
Risks: The Company was prohibited from providing
incentive compensation arrangements that encouraged its senior
executive officers to take unnecessary and excessive risks that
threaten the value of the Company. The Compensation/Human
Resources Committee was required to review senior executive
officer compensation arrangements with the Companys senior
risk officer semi-annually to ensure that the SEOs were not
encouraged to take unnecessary and excessive risks.
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Binding SEO Agreements: Before the Treasury
would enter into the purchase agreement for the preferred stock
and warrants, each SEO at that time executed an agreement to
waive certain compensation, severance and other benefits
possible under their employment agreements to the extent
necessary to comply with EESA requirements as well as waive
claims against the Treasury or the Company resulting from
changes to his compensation or benefits.
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Limit on Severance and Golden Parachute
Payments: The Company was prohibited from making
payments to the Companys five most highly-compensated
employees upon a change in control of the Company or upon
departure from the Company other than as a result of death or
disability, except payments for services performed or benefits
accrued and payments pursuant to qualified retirement plans or
that are required by applicable law.
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Prohibition on Cash Bonuses and Similar
Payments: ARRA generally prohibited the accrual
and payment of any bonus, retention award, or incentive
compensation, except for limited grants of restricted
stock subject to specified vesting terms and other limitations,
to the five most highly-compensated employees.
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Luxury Expenditures: The Company implemented a
company-wide policy regarding excessive or luxury expenditures,
including excessive expenditures on entertainment or events,
office and facility renovations, aviation or other
transportation services.
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Clawback: The Company is required to
clawback any bonus or incentive compensation
received by the SEOs and the next 20 most highly-compensated
employees based upon statements of earnings, revenues, gains or
other criteria that are later found to be materially inaccurate.
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Prohibition on Tax
Gross-ups: The
Company was prohibited from making tax
gross-ups or
other similar reimbursements for tax payments to our SEOs and
the next 20 most highly-compensated employees.
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108
Outstanding
Equity Incentive Plan Awards at Fiscal Year End
The following table provides information on all Equity Incentive
Plan awards held by the named executive officers as of
December 31, 2010. All outstanding stock option awards were
subject to service-based vesting and are for stock options
exercisable into shares of the Companys common stock.
Outstanding
Equity Awards at Fiscal Year End (2010)
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Number of
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Number of
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Securities
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Securities
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|
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Underlying
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Underlying
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|
|
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Unexercised
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Unexercised
|
|
|
|
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Options
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Options
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Option
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Option
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|
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Exercisable
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Unexercisable
|
|
Exercise
|
|
Expiration
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Name
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|
(1)
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|
(1)(2)
|
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Price
|
|
Date
|
|
B. Grant Yarber
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|
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10,000
|
|
|
|
|
|
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$
|
15.27
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9/15/13
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|
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|
10,000
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|
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|
|
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15.80
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|
|
|
12/12/13
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|
|
10,000
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|
|
|
|
|
|
|
18.18
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|
|
|
12/16/14
|
|
|
|
|
6,000
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|
|
|
9,000
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|
|
|
6.00
|
|
|
|
12/18/18
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|
David C. Morgan
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|
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5,000
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|
|
|
|
|
|
|
15.80
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|
|
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12/12/13
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|
|
|
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3,500
|
|
|
|
|
|
|
|
18.18
|
|
|
|
12/16/14
|
|
|
|
|
6,000
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|
|
|
9,000
|
|
|
|
6.00
|
|
|
|
12/18/18
|
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Mark J. Redmond
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|
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5,000
|
|
|
|
|
|
|
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17.31
|
|
|
|
5/03/15
|
|
|
|
|
6,000
|
|
|
|
9,000
|
|
|
|
6.00
|
|
|
|
12/18/18
|
|
|
|
|
(1) |
|
The options listed were granted under the Capital Bank
Corporation Equity Incentive Plan. Each option expires on the
earlier of the expiration date shown or 90 days after
termination of the recipients employment. Options may be
exercised to purchase vested shares only. Upon termination of
employment, options are forfeited with respect to any shares not
then vested. |
|
(2) |
|
These option awards were granted on December 18, 2008 and
had a vesting schedule of 20% on each of the first five
anniversaries of the grant date. On January 28, 2011, the
named executive officers waived the accelerated vesting of their
unvested stock options provided by the Equity Incentive Plan
upon the completion of the change of control. These unvested
stock options will remain outstanding after the closing of the
Investment. |
Supplemental
Executive Plan
Each of the named executive officers participated in the Capital
Bank Defined Benefit Supplemental Executive Retirement Plan (the
Supplemental Executive Plan), prior to its
termination at the time of the closing of the Investment. The
Supplemental Executive Plan was adopted on May 24, 2005 to
offer supplemental retirement benefits to key decision-making
members of the senior management team employed by the Company at
that time, whose deferral opportunities under the Capital Bank
401(k) Plan are capped, and to encourage long-term retention of
plan participants. The Company paid the entire cost of benefits
under the Supplemental Executive Plan, which are in addition to
the defined contribution type plans (e.g., the 401(k) Plan) that
encourage participants to set aside part of their current
earnings to provide for their retirement.
On January 28, 2011, the Supplemental Executive Plan was
amended to waive, with respect to unvested amounts only, any
entitlement to change in control benefits that would otherwise
be triggered by the Investment and to terminate the Supplemental
Executive Plan upon the distribution of all of the
participants vested and accrued benefits under the
Supplemental Executive Plan.
As of January 28, 2011, Mr. Yarber and Mr. Morgan
have accrued seven years of service and Mr. Redmond has
accrued six years of service. Thus, Mr. Yarber and
Mr. Morgan are 80% vested in their accrued benefits under
the Supplemental Executive Plan. Mr. Redmond is 60% vested
in his accrued benefits under the Supplemental Executive Plan.
In connection with the closing of the Investment, the Company
paid out the following benefits to the named executive officers
that were previously vested and accrued under the Supplemental
Executive Plan: B. Grant Yarber ($830,014); David C. Morgan
($200,119); and Mark J. Redmond ($88,953). In connection with
the
109
receipt of the vested and accrued benefits under the
Supplemental Executive Plan, the named executive officers waived
all rights with respect to the Supplemental Executive Plan.
Change in
Control Arrangements
The Company has entered into an employment agreement with each
of the named executive officers, which is intended to ensure the
continuity of executive leadership, clarify the roles and
responsibilities of executives and to make explicit the terms
and conditions of executive employment. These employment
agreements contain severance provisions, including in connection
with a change in control of the Company. On January 14,
2011, the Company entered into amendments to the employment
agreements with each of the named executive officers. For a
brief summary of these agreements and amendments, see
Executive Employment Agreements above.
Other than in the event of a change in control of the Company,
if the named executive officers are terminated without cause, or
the named executive officers terminate their agreement for good
reason (as amended), such officer would be entitled to:
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a gross amount equal to his or her then current base salary plus
the amount of the annual incentive award paid to the employee,
if any, in the prior annual performance bonus year, payable in
substantially equal amounts over the
12-month
period following such termination, except for Mr. Yarber,
who is entitled to payments for a period up to 24 months if
Mr. Yarber has not obtained new employment with a
comparable compensation package; and
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the continued participation in all (or comparable substitute
coverage for) life insurance, retirement, health, accidental
death and dismemberment, disability plans and other benefit
programs and other services paid by Capital Bank, in which the
executive participated immediately prior to termination for a
minimum of one year for the named executive officers, except
Mr. Yarber, who is entitled to continued participation for
a maximum of two years if Mr. Yarber has not obtained new
employment with a comparable benefits package.
|
The Company may terminate employment for cause, in which event
the Company would be required to pay only accrued compensation
due at termination.
In the event of termination due to death or disability,
Mr. Yarber is entitled to receive a gross amount equal to
his then current base salary plus the amount of annual incentive
award paid, if any, in the prior annual performance bonus year,
payable in a lump sum following the date of death or disability.
The employment agreements include change in control severance
provisions that require that there be both a change in control
and an involuntary termination without cause or a
voluntary termination for good reason prior to
triggering any payment obligation. The January 14, 2011
amendments to the employment agreements of the named executive
officers provide that the changes in the officers
positions following the closing of the Investment do not
constitute good reason under the employment agreements that
would entitle each officer to terminate his employment and
receive payments and benefits under such officers
employment agreement.
In the event of termination following a change in control,
subject to execution of a standard general release of claims,
the named executive officers are entitled to receive all accrued
compensation and any pro rata annual performance bonus to which
they are entitled and earned up to the date of termination, and
severance payments and benefits. Effective January 14,
2011, each named executive officers is only entitled to receive
severance payments after the occurrence of a change in control
and during the then remaining term (ending November 3,
2011) of such officers employment agreement. The
named executive officers previously were entitled to receive
severance payments for a period beginning 90 days before
the occurrence of a change in control and for three years
thereafter. Prior to January 14, 2011, if termination of
employment occurred:
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within twelve months after the occurrence of the change in
control, the named executive officers were each entitled to a
severance payment equal to 2.99 times the amount of the named
executive officers respective current annual base salary
plus the amount of annual incentive award paid to the named
executive officer, if any, in the prior annual performance bonus
year;
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110
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more than twelve months but not more than twenty-four months
after the occurrence of the change in control, the named
executive officers were each entitled to two times his
respective current annual base salary plus the amount of annual
incentive award paid to the named executive officer, if any, in
the prior annual performance bonus year; and
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|
more than twenty-four months but less than thirty-six months
after the occurrence of the change in control, the named
executive officers were each entitled to one times his
respective current annual base salary plus the amount of annual
incentive award paid to the named executive officer, if any, in
the prior annual performance bonus year.
|
As a result of the amendments to the employment agreements on
January 14, 2011, the second and third bulleted section
above are no longer relevant to the named executive officers.
No payments were due to the named executive officers if their
employment was terminated after more than thirty-six months
following the occurrence of the change in control.
Generally, pursuant to their agreements, a change in control is
deemed to occur:
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if any person acquires 50% or more of the Companys voting
securities;
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if a majority of the directors, as of the date of their
agreements, are replaced;
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if shareholders approve a reorganization, share exchange, merger
or consolidation related to the Company or the Bank, following
which the owners of the Companys voting securities
immediately prior to the closing of such transaction do not
beneficially own more than 50% of voting securities of the
Bank; or
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if the shareholders of the Bank approve a complete liquidation
or dissolution of the Bank, or a sale or other disposition of
all or substantially all of the capital stock or assets of the
Bank.
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The January 14, 2011 amendments to the employment
agreements of the named executive officers clarify that an event
or transaction will not constitute a change in control if the
holders of 50% or more of the equity interests of the
Parent immediately prior to such event or
transaction own, directly or indirectly, 50% or more of the
equity interests of the Company or its successor immediately
following such event or transaction. The amendments define
Parent as the ultimate person or group (each as such
term is used in Section 13(d)(3) of the Exchange Act) that
together with their affiliates, directly or indirectly, owns or
controls, by share ownership, contract or otherwise, a majority
of the equity interests of the Company and the Bank.
Upon a qualifying termination of employment following a change
in control, the named executive officers are also entitled to
continued participation in all life insurance, retirement,
health, accidental death and dismemberment, disability plans and
other benefit programs and other services paid by the Bank, in
which he or she participated in immediately prior to termination
for the time periods he or she receives severance benefits as a
result of a change in control.
New
Executive Officers
Effective as of the closing of the Investment on
January 28, 2011, the Companys new executive
officers, as described under Management in this
prospectus, are the following: R. Eugene Taylor, President and
Chief Executive Officer; Christopher G. Marshall, Executive Vice
President and Chief Financial Officer; and R. Bruce Singletary,
Executive Vice President and Chief Risk Officer. These
individuals have not entered into employment agreements with the
Company and are therefore at-will employees. None of the new
executive officers are entitled to benefits directly from the
Company and the Company does not maintain any plans, programs or
arrangements that provide change in control benefits to any of
Mr. Taylor, Mr. Marshall or Mr. Singletary. Mr.
Yarber serves as Market President for North Carolina and
Messrs. Morgan and Redmond serve as Executive Vice
Presidents.
Director
Compensation
Director Fees. Directors who are also
employees of the Company receive no compensation in their
capacities as directors. However, outside directors receive an
annual retainer fee of $10,000 ($30,000 in the
111
case of the Chairman of the Board), as long as they attend at
least 75% of the meetings of the Board. Directors are also paid
$750 ($2,000 in the case of the Chairman of the Board) for each
Board meeting they attend and $500 ($750 in the case of the
Chairman of the committee, and $1,000 in the case of the
Chairman of the Audit Committee) for each committee meeting the
director attends.
Deferred Compensation Plan. Directors of the
Company who are not also employees of the Company are eligible,
pursuant to the Companys Deferred Compensation Plan for
Outside Directors (as Amended and Restated Effective
November 20, 2008) (the Directors Plan),
to defer receipt of any compensation paid to them for their
services as a director, including retainer payments, if any, and
amounts paid for attendance at meetings. Amounts deferred are
credited to an account in the directors name and converted
to stock units quarterly on the date that they would
otherwise have been paid in cash. Each stock unit is deemed to
be equivalent to one share of common stock, and the number of
stock units credited to a directors account is determined
by dividing 125% of the cash amounts credited during the quarter
by the closing price of the Common Stock on the date they would
otherwise have been paid in cash. Each participants
account will similarly be credited in stock units for dividends
paid on the common stock during the year, which amounts will be
included in the cash amounts converted to stock units. A
director is always 100% vested in all amounts credited to his or
her account under the Directors Plan. Stock units credited
under the Directors Plan do not provide any participant
voting rights or any other rights or privileges enjoyed by
shareholders of the Company.
During 2010, all of the Companys directors participated in
the Directors Plan and elected to defer all compensation
paid to them for their services as a director. The number of
stock units credited to the accounts of the directors as of
December 31, 2010, is as follows: 24,031 stock units for
Mr. Atkins; 17,249 stock units for Mr. Grimes; 21,532
stock units for Mr. Jones; 67,361 stock units for
Mr. O. A. Keller, III; 10,878 stock units for
Mr. W. Carter Keller, 16,776 for Mr. Koury; 18,655
stock units for Mr. Perkins; 18,162 stock units for
Mr. Perry; 28,025 stock units for Mr. Ricker; and
30,399 stock units for Mr. Wornom.
Stock units deferred and credited to a directors account
for years beginning before January 1, 2005 automatically
become payable upon the directors death, disability or
retirement as a director. Stock units deferred for years
beginning on or after January 1, 2005 become payable upon
the first to occur of the directors death, disability,
retirement, or the specified date the director has elected to
receive a distribution under the deferral election pursuant to
which the stock units were deferred. All stock units also become
payable upon a change in control of the Company, as such term is
defined in the Directors Plan. For the year ended
December 31, 2010, the Company recognized $565,298 of
expense related to the Directors Plan.
On January 28, 2011, 411,369 stock units became payable in
connection with the closing of the Investment, which was deemed
a change in control under the Directors Plan. No directors
of the Company are currently participating in the
Directors Plan, and it is not anticipated at this time
that any current or future directors will be permitted to
participate in the Directors Plan.
Supplemental Retirement Plan for Directors. In
May 2005, the Company established a Supplemental Retirement Plan
for Directors, which was amended and restated effective
December 18, 2008 to bring it into compliance with Internal
Revenue Code Section 409A (the Supplemental Director
Plan) for certain of the Companys directors who were
serving as directors at that time. The Supplemental Director
Plan was intended to compensate Company directors for the
additional time spent on Company activities over the several
years prior to 2005 without any corresponding increases in the
director fees. The Supplemental Director Plan provided for a
fixed annual retirement benefit to be paid to a director for a
number of years equal to the directors total years of
Board service, up to a maximum of ten years, with the Company
and any company acquired by the Company prior to the effective
date of the Supplemental Director Plan that did not have a
separate director retirement plan. As of December 31, 2010,
all participants had ten years of service. As of
January 28, 2011, the total maximum payment under the
Supplemental Director Plan was approximately $4.0 million,
and the total remaining payment to the participants was
approximately $3.15 million. All directors as of
December 31, 2010, except W. Carter Keller, Ernest A.
Koury, Jr. and B. Grant Yarber, were eligible to
participate in the Supplemental Director Plan. For the year
ended December 31, 2010, the Company recognized $237,800 of
expense related to the Supplemental Director Plan.
112
In the event of a change in control (as defined in the
Supplemental Director Plan) prior to a directors
termination of service on the Board, in lieu of the annual
retirement benefits described above, the director was entitled
to receive a lump sum payment equal to the present value of the
total annual retirement benefit payments due had the director
retired with ten years of service on the change in control date.
As a result of the closing of the Investment being deemed a
change in control under the Supplemental Director Plan, the
Companys directors received the following approximate lump
sum payments in accordance with the terms of the Supplemental
Director Plan: Charles F. Atkins $129,696; John F.
Grimes $126,454; Robert L. Jones
$152,333; O. A. Keller, III $864,641; George R.
Perkins $126,454; Don W. Perry $215,624;
Carl H. Ricker, Jr. $259,124; and Samuel J.
Wornom, III $238,321. All of the participants
in the Supplemental Director Plan at the time of closing of the
Investment were fully vested and had earned the maximum possible
years of service under the plan. No directors of the Company are
currently participating in the Supplemental Director Plan, and
it is not anticipated at this time that any current or future
directors will be permitted to participate in the plan.
Equity Compensation. The Company did not grant
any option awards to its nonemployee directors during 2010. As
of December 31, 2010, all options to purchase common stock
held by the Companys nonemployee directors were fully
vested.
Other. Each of our current and former
directors is also covered by director and officer liability
insurance and each of our current directors is entitled to
reimbursement for reasonable
out-of-pocket
expenses in connection with meeting attendance.
2011 Compensation. In 2011, Mr. Atkins
and Mr. Keller will continue to receive an annual retainer
fee of $10,000, as long as they attend at least 75% of the
meetings of the Board. Directors are also paid $750 for each
Board meeting they attend and $500 ($750 in the case of the
Chairman of the committee, and $1,000 in the case of the
Chairman of the Audit Committee) for each committee meeting the
director attends. Mr. Atkins and Mr. Keller will no
longer be eligible to participate in the Directors Plan or
the Supplemental Director Plan following the closing of the
Investment. The remaining five members of the Board following
the closing of the Investment will not receive compensation in
2011.
The following table provides information related to the
compensation of the Companys nonemployee directors for the
year ended December 31, 2010.
Director
Compensation Table (2010)
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Name
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Stock Awards(1)
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Total
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Current Directors(2)
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Charles F. Atkins(3)
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$
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65,423
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$
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65,423
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O. A. Keller, III(3)
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125,770
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125,770
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Former Directors(2)
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John F. Grimes, III(3)
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35,299
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35,299
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Robert L. Jones(3)
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61,866
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61,866
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W. Carter Keller
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37,813
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37,813
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Ernest A Koury, Jr.
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36,446
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36,446
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George R. Perkins, III(3)
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43,400
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43,400
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Don W. Perry(3)
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38,124
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38,124
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Carl H. Ricker, Jr.(3)
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66,896
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66,896
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Samuel J. Wornom, III(3)
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49,823
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49,823
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(1) |
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During 2010, all of the Companys directors participated in
the Directors Plan and elected to defer all compensation
paid to them for their services as a director. Amounts represent
the compensation cost recognized in 2010 in accordance with
Topic 718 of the FASB Accounting Standards Codification for fees
deferred under the Directors Plan, which are converted to
stock units quarterly using the closing price of the common
stock on the date they would otherwise be paid in cash. For a
further discussion of these |
113
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awards, see Note 12 to the Companys consolidated
financial statements for the years ended December 31, 2009,
2008 and 2007 included in this prospectus and Deferred
Compensation Plan above. |
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(2) |
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Effective as of the closing of the Investment, R. Eugene Taylor
(Chairman), Christopher G. Marshall, Peter N. Foss, William A.
Hodges, and R. Bruce Singletary were appointed to the Board of
Directors. O. A. Keller, III and Charles F. Atkins,
existing members of the Board of Directors, remained as such
following the closing. All other members of the Board of
Directors of the Company resigned effective January 28,
2011. |
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(3) |
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Compensation does not include stock options that are currently
exercisable. As of December 31, 2010, nonemployee directors
held stock options as follows: 7,000 stock options for
Mr. Atkins; 2,000 stock options for Mr. Grimes; 8,500
stock options for Mr. Jones; 12,800 stock options for
Mr. Keller, III; 7,000 stock options for
Mr. Perkins; 7,500 stock options for Mr. Perry; 4,002
stock options for Mr. Ricker; and 9,750 stock options for
Mr. Wornom. |
114
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of
February 9, 2011 regarding shares of common stock of the
Company owned of record or known by the Company to be owned
beneficially by (i) each director, (ii) each executive
officer named in the Summary Compensation Table in this
prospectus, (iii) all those known by the Company to
beneficially own more than 5% of the common stock, and
(iv) all current directors and executive officers as a
group. The persons listed below have sole voting and investment
power with respect to all shares of common stock owned by them,
except to the extent that such power may be shared with a spouse
or as otherwise set forth in the footnotes. The mailing address
of Mr. Atkins and Mr. Keller and each of the named
executive officers is in care of the Companys address,
which is 333 Fayetteville Street, Suite 700, Raleigh, NC
27601. The mailing address of the remaining directors is in care
of North American Financial Holdings, Inc.s address, which
is 4725 Piedmont Row Drive, Suite 110, Charlotte,
NC 28210.
The percentages shown below have been calculated based on
83,877,846 total shares of common stock outstanding as of
February 9, 2011.
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Aggregate Number
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Number of Shares
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of Shares Beneficially
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Acquirable
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Percent
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Name of Beneficial Owner
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Owned(1)
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within 60 Days(2)
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of Class
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5% Shareholders
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North American Financial Holdings, Inc.
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71,000,000
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84.6
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%
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Directors
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R. Eugene Taylor(3)
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71,000,000
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84.6
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%
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Charles F. Atkins(4)
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137,013
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39,058
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*
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Peter N. Foss(5)
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William A. Hodges(5)
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Christopher G. Marshall(3)
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71,000,000
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|
|
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84.6
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%
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R. Bruce Singletary(3)
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71,000,000
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|
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84.6
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%
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O. A. Keller, III(6)
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380,248
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94,683
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*
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Named Executive Officers
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David C. Morgan(7)
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6,432
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|
|
|
23,500
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|
|
|
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*
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Mark J. Redmond(8)
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8,825
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|
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20,000
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|
|
|
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*
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B. Grant Yarber(9)
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27,246
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|
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45,000
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|
|
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*
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All directors and executive officers as a group (10 persons)
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71,559,764
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222,241
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85.3
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%
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|
|
|
|
|
|
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|
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* |
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Less than one percent |
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(1) |
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The securities beneficially owned by an individual
are determined in accordance with the definition of
beneficial ownership set forth in the regulations of
the SEC. Accordingly, they may include securities owned by or
for, among others, the spouse and/or minor children of the
individual and any other relative who has the same home as such
individual, as well as other securities as to which the
individual has or shares voting or investment power. Beneficial
ownership may be disclaimed as to certain of the securities. |
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(2) |
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Any shares that a person has the right to acquire within
60 days are deemed to be outstanding for the purpose of
computing the percentage ownership of such person but are not
deemed outstanding for the purpose of computing the percentage
ownership of any other person. This column reflects the number
of shares of common stock that could be purchased by exercise of
options to purchase common stock on February 9, 2011 or
within 60 days thereafter and the number of stock units
credited to the account of each nonemployee director
participating in the Directors Plan. Such stock units are
payable in shares of common stock following termination of
service or, in certain circumstances, on a date designated by
the participant, and do not have current voting or investment
power. The number of stock units credited to the accounts of the
directors as of February 9, 2011, is as follows: 32,058
stock units for Mr. Atkins and 81,883 stock units for
Mr. O. A. Keller, III. |
115
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(3) |
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Each of Messrs. Taylor, Marshall and Singletary hereby
disclaims beneficial ownership of the securities owned directly
or indirectly by NAFH, except to the extent of his pecuniary
interest therein, if any. |
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(4) |
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Includes 50,100 shares held by AGA Corporation, of which
Mr. Atkins owns 19.8% of the outstanding stock;
12,999 shares held by AK&K Corporation, of which
Mr. Atkins owns 25.0% of the outstanding stock; and
1,000 shares held by Taboys Corporation, a company wholly
owned by Mr. Atkins. From time to time, the shares held by
AGA Corporation and AK&K Corporation may be pledged in the
ordinary course of business. |
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(5) |
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Excludes securities owned directly or indirectly by NAFH,
beneficial ownership of which is hereby disclaimed by each of
Messrs. Foss and Hodges, except to the extent of his
pecuniary interest therein, if any. |
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(6) |
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Includes 21,633 shares held jointly with
Mr. Kellers wife; 25,950 shares held by
Mr. Kellers wife; 27,066 shares held in IRAs;
and 4,800 shares held as custodian by Mr. Keller for
his children and grandchildren. Also includes 43,250 shares
held by Amos Properties, LLC, of which Mr. Keller and his
wife each own 25.0% and with respect to which shares each of
them may be considered to have shared voting and investment
power. |
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(7) |
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Includes 1,730 shares held jointly with
Mr. Morgans wife. |
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(8) |
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Includes 3,623 shares held in an IRA. |
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(9) |
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Includes 500 shares held jointly with
Mr. Yarbers wife, 600 shares held as custodian
for Mr. Yarbers minor children, 2,470 shares
held in an IRA, and 5,300 shares held in the 401(k) Plan. |
116
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of the directors and executive officers of the Company,
members of their immediate families and entities with which they
are involved are customers of and borrowers from the Company. As
of December 31, 2010, total loans outstanding to directors
and executive officers of the Company, and their associates as a
group, equaled approximately $86.9 million. All outstanding
loans and commitments included in such transactions were made in
the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those
prevailing at the time in comparable transactions with persons
not related to the Company, and did not involve more than the
normal risk of collectability or present other unfavorable
features.
The Company has had, and expects to have in the future, banking
transactions in the ordinary course of its business with
directors, officers and principal shareholders of the Company,
and their associates, on the same terms, including interest
rates and collateral on loans, as those prevailing at the same
time for comparable transactions with persons not related to the
Company. The Company generally considers credit relationships
with directors
and/or their
affiliates to be immaterial and as not impairing the
directors independence so long as the terms of the credit
relationship are similar to other comparable borrowers. The
Company presumes extensions of credit that comply with Federal
Reserve Regulation O to be consistent with director
independence. In other words, the Company does not consider
normal, arms-length credit relationships entered into in
the ordinary course of business to negate a directors
independence.
Regulation O requires such loans to be made on
substantially the same terms, including interest rates and
collateral, and following credit underwriting procedures that
are no less stringent than those prevailing at the time for
comparable transactions by Capital Bank with persons not related
to the Company. Such loans also may not involve more than the
normal risk of repayment or present other unfavorable features.
Additionally, no event of default may have occurred (that is,
such loans are not disclosed as nonaccrual, past due,
restructured, or potential problems). The Board of Directors
must review any credit to a director or his or her related
interests that has become criticized in order to determine the
impact that such classification has on the directors
independence.
On January 28, 2011, NAFH purchased 71,000,000 shares
of the Companys common stock for $181,050,000 in cash,
resulting in NAFH owning approximately 84.6% of the
Companys common stock. As the Companys controlling
shareholder, NAFH has the power to control the election of the
Companys directors, determine our corporate and management
policies and determine the outcome of any corporate transaction
or other matter submitted to the Companys shareholders for
approval. NAFH also has sufficient voting power to amend the
Companys organizational documents. In addition, five of
our seven directors, our Chief Executive Officer, our Chief
Financial Officer, and our Chief Risk Officer are affiliated
with NAFH.
On March 18, 2010, the Company sold 849 units, priced
at $10,000 and consisting of a $3,996.90 subordinated promissory
note and a number of shares of the Companys common stock
valued at $6,003.10 (each, a Unit), for gross
proceeds of $8,490,000. Certain of the Companys officers
and directors, and family members and affiliates of the
Companys officers and directors, purchased Unites in the
offering, including current director Charles F. Atkins
($250,000); family members (including son and former director W.
Carter Keller) of O. A. Keller, III (aggregating $260,000)
and Amos Properties, LLC, a company partially owned by O. A.
Keller, III, his spouse and W. Carter Keller ($250,000);
former director George R. Perkins, III and his father
(aggregating $1.3 million); former director Don W. Perry
and Lee Brick & Tile Company, in which Mr. Perry
holds a 4% interest (aggregating $350,000); and Cross Creek
Associates, LP, a company in which former director Samuel J.
Wornom, III holds a 26% interest ($200,000).
O. A. Keller, III, a director of the Company, is the
father-in-law
of a lawyer at the law firm Smith, Anderson, Blount, Dorsett,
Mitchell & Jernigan, L.L.P. The Company paid legal
fees to such firm for services rendered in 2010, 2009 and 2008
in the aggregate amount of approximately $2,415,877, $819,500
and $705,850, respectively.
The Company leases its South Asheville, North Carolina, office
from Azalea Limited Partnership, a North Carolina limited
partnership, of which Carl H. Ricker, Jr., a former
director of the Company, is general partner.
117
The South Asheville facility, acquired through the merger with
High Street Corporation, comprising approximately
9,000 square feet of office space, is leased at a current
rate of approximately $226,000 per year with a 2% increase per
year. The lease commenced September 16, 1997 and is for an
initial term of 15 years, followed by three
10-year
renewal options at the Companys discretion. The Company
believes that these and other terms of the lease were negotiated
at arms length and are substantially the same as those
prevailing for comparable transactions with other landlords in
the marketplace.
The Company also entered into a lease in February 2004 with
Azalea Limited Partnership for its Leicester Highway branch in
Asheville, North Carolina. The initial term of the lease is for
15 years followed by three
5-year
renewal options at the Companys discretion. The Leicester
Highway facility is approximately 4,200 square feet, and
the annual lease expense for the second five years is
approximately $124,000. The annual rent increases 10% commencing
with the sixth year of the lease and another 10% starting with
the eleventh year of the lease. The Company believes that these
and other terms of the lease were negotiated at arms
length and are substantially the same as those prevailing for
comparable transactions with other landlords in the marketplace.
The Company paid lease payments to Azalea Limited Partnership in
2010, 2009 and 2008 in the aggregate amount of approximately
$368,554, $358,920 and $348,405, respectively.
The Company entered into a lease agreement in November 2005 for
its new headquarters in downtown Raleigh with 333 Ventures, LLC.
Grubb & Ellis|Thomas Linderman Graham, a
commercial real estate brokerage and property management
company, of which J. Rex Thomas, a former director of the
Company (resigning effective October 5, 2009), is the
Chairman and Chief Executive Officer, represented the Company in
the lease negotiations. Grubb & Ellis|Thomas
Linderman Graham received a commission of approximately $227,000
from 333 Ventures, LLC for the services provided. The commission
was paid as follows: $113,000 in 2005, $73,000 in 2006, $21,000
in 2007 and $20,963 in 2008. Mr. Thomas received 40% of the
commission paid to Grubb & Ellis|Thomas Linderman
Graham as compensation.
Grubb & Ellis|Thomas Linderman Graham represented
the Bank in subleasing unutilized office space in the downtown
Raleigh headquarters at Capital Bank Plaza, 333 Fayetteville
Street. Fees earned during 2008 were $29,165, of which the
broker, Jake Jones, was paid 50%. From time to time the Company
utilizes Grubb & Ellis|Thomas Linderman Graham to
assist in subleasing unutilized space in its facilities.
Grubb & Ellis|Thomas Linderman Graham also
represented Capital Bank in the sale of three of its branch
buildings to Southern Financial Properties, LLC, and Rex Thomas
and Jim McMillan were the brokers on the transactions. Fees paid
in 2008 at closing were $137,060, of which Mr. Thomas
earned 25% or $34,265.
In 2008, the Bank entered into a Real Estate Purchase Agreement
with Michael R. and Viola V. Moore, pursuant to which Capital
Bank purchased residential real estate located in Ohio and owned
by Mr. and Mrs. Moore for a purchase price of $345,000.
Mr. Moore, the seller of the real estate, was the chief
financial officer of the Company at the time of the transaction
and currently serves as an Executive Vice President of Capital
Bank.
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THE
RIGHTS OFFERING
The following describes the rights offering in general and
assumes, unless specifically provided otherwise, that you are a
record holder of our common stock on the record date. If you
hold your shares in a brokerage account or through a broker,
dealer, custodian bank or other nominee, please also refer to
Method of Exercising Subscription
Rights Subscription by Beneficial Owners and
Notice to Brokers and Nominees below.
The
Subscription Rights
We are distributing to holders of our common stock as of
5:00 p.m., Eastern Standard time, on January 27, 2011,
which is the record date for the rights offering, at no charge,
non-transferable subscription rights to purchase shares of our
common stock. You will receive 0.3882637 subscription rights for
each share of common stock you owned as of 5:00 p.m.,
Eastern Standard time, on January 27, 2011. The
subscription rights will not be evidenced by any certificates.
If our shareholders do not exercise their subscription rights in
full, we will not issue the full number of shares authorized for
issuance in connection with the rights offering.
Each whole subscription right that you own will entitle you to
purchase one share of our common stock at a subscription price
of $2.55 per share. You may exercise some or all of your
subscription rights, subject to an overall beneficial ownership
limit of 4.9% for each participant, or you may choose not to
exercise any of your subscription rights. Fractional
subscription rights will be eliminated by rounding down to the
nearest whole number of subscription rights and may not be
exercised.
For example, if you owned 1,000 shares of our common stock
as of 5:00 p.m., Eastern Standard time, on the record date,
you would receive 388.2637 subscription rights and would have
the right to purchase 388 shares of common stock (rounded
down from 388.2637 subscription rights) for $2.55 per share.
No
Over-Subscription Privilege or Backstop
There is no over-subscription privilege associated with the
rights offering. In addition, no shareholder, including NAFH,
will backstop the rights offering. This means that neither you
nor any shareholder, including NAFH, will have the opportunity
to purchase additional shares not purchased by other
shareholders pursuant to their subscription rights.
Limitation
on Exercise of Subscription Rights
Each participant in this offering is subject to an overall
beneficial ownership limit of 4.9%, calculated based on the
approximately 88,877,846 shares of common stock potentially
outstanding after the completion of this rights offering. Any
rights exercised by a rights holder for common stock subscribed
for by that holder that would cause such holder to exceed the
4.9% ownership limit will not be considered exercised or
subscribed for by that holder. The portion of the subscription
price paid by a holder for common stock not considered
subscribed for will be returned to that holder, without interest
or penalty, as soon as practicable after completion of this
offering.
We will also require each rights holder exercising its rights to
represent to us in the subscription rights election form that,
together with any of its affiliates or any other person with
whom it is acting in concert or as a partnership, syndicate or
other group for the purpose of acquiring, holding or disposing
of our securities, it will not beneficially own more than 4.9%
of our outstanding shares of common stock as a result of the
exercise of rights. With respect to any shareholder who already
beneficially owns in excess of 4.9% of our outstanding shares of
common stock, we will require such holder to represent to us in
the subscription rights election form that it will not, via the
exercise of its rights, increase its proportionate interest in
our common stock.
Any rights holder found to be in violation of either such
representation will have granted to us in the subscription
rights election form, with respect to any such excess shares,
(1) an irrevocable proxy and (2) a right for a limited
period of time to repurchase such excess shares at the lesser of
the subscription price and the market price for such shares,
each as set forth in more detail in the subscription rights
election form.
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Subscription
Price
The subscription price per share of common stock is $2.55. The
Investment Agreement required the subscription price to be $2.55
per share of common stock, which is the same per share purchase
price paid by NAFH in the Investment. The subscription price is
not necessarily related to our book value, results of
operations, cash flows, financial condition or the future market
value of our common stock. We cannot assure you that the market
price of the common stock will not decline during or after the
rights offering. We also cannot assure you that you will be able
to sell shares of common stock purchased during the rights
offering at a price equal to or greater than the subscription
price. We do not intend to change the subscription price in
response to changes in the trading price of our common stock
prior to the closing of the rights offering. We urge you to
obtain a current quote for our common stock before exercising
your subscription rights and make your own assessment of our
business and financial condition, our prospects for the future
and the terms of the rights offering. To be effective, any
payment related to the exercise of a subscription right must
clear prior to the expiration of the rights offering period.
We are not charging any fees or sales commissions to issue
subscription rights to you or to issue shares to you if you
exercise your subscription rights. If you exercise your
subscription rights through a broker or other holder of your
shares, you are responsible for paying any fees that person may
charge.
Expiration
Time and Date; Closing; Amendments
The subscription rights will expire at 5:00 p.m., Eastern
Standard time, on March 4, 2011. Although we have the
option of extending the expiration of the rights offering
period, we currently do not intend to do so. We will notify you
of any extension of the expiration date by issuing a press
release. You must properly complete the subscription rights
election form and deliver it, along with the full subscription
price, to the subscription agent before 5:00 p.m., Eastern
Standard time, on the expiration date of the rights offering.
All required documents must be received, and your payment must
be received and clear, prior to the expiration of the rights
offering period. After 5:00 p.m. on the expiration date,
all unexercised subscription rights will be null and void. We
will not be obligated to honor any purported exercise of
subscription rights that the subscription agent receives after
5:00 p.m. on the expiration date, regardless of when you
sent the documents regarding that exercise. All shares purchased
in the rights offering will be issued in book-entry, or
uncertificated, form. If your subscription payment exceeds the
subscription price for the exercise of all of your subscription
rights, or if you subscribe for more shares than you are
eligible to purchase (including if you attempt to exercise a
fractional subscription right), then the excess will be returned
to you, without interest or penalty, as soon as practicable
following the expiration date of the rights offering.
If you are a participant or other account holder in our 401(k)
Plan, please refer to the deadlines set out in
Special Instructions for Participants in Our
401(k) Plan.
We reserve the right to amend, extend, cancel or otherwise
modify the terms of the rights offering.
Reasons
for the Rights Offering
We are conducting the rights offering (1) to raise equity
capital and (2) to provide our existing shareholders with
the opportunity to increase their ownership of shares of our
common stock following the completion of the Investment by NAFH.
Anticipated
Proceeds From the Rights Offering
The total proceeds to us from the rights offering will depend on
the number of rights that are exercised. If we issue all
5,000,000 shares of common stock available in the rights
offering, the total proceeds to us, before expenses, will be
$12.75 million. We estimate that the expenses of the rights
offering will be approximately $250,000, resulting in estimated
net proceeds to us, assuming all of the shares available in the
rights offering are sold, of approximately $12.5 million.
We intend to use the net proceeds from the rights offering for
general corporate purposes, which may include investment in the
Bank.
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Method of
Exercising Subscription Rights
The exercise of subscription rights is irrevocable and may not
be cancelled or modified. You may exercise your subscription
rights as follows:
Subscription by Registered Holders. To
exercise your subscription rights, you must properly complete
and execute the subscription rights election form, together with
any required signature guarantees, and forward it, together with
payment in full of the subscription price for each share of our
common stock you are subscribing for, to the subscription agent
at the address set forth under Subscription
Agent, prior to the expiration of the rights offering
period. Your payment in any case must be received and cleared
prior to the expiration of the rights offering period. See
Receipt of Payment.
Subscription by Beneficial Owners. If you are
a beneficial owner of shares of our common stock, meaning that
you hold your shares in street name through a
broker, dealer, custodian bank or other nominee, we will ask
your broker, dealer, custodian bank or other nominee to notify
you of the rights offering. If you wish to exercise your
subscription rights, you will need to have your broker, dealer,
custodian bank or other nominee act for you and exercise your
subscription rights and deliver all documents and payment on
your behalf, including a Nominee Holder
Certification, prior to 5:00 p.m., Eastern Standard
time, on the expiration date of the rights offering. If you hold
certificates of our common stock directly and would prefer to
have your broker, dealer, custodian bank or other nominee act
for you, you should contact your nominee and request it to
effect the transactions for you.
To indicate your decision with respect to your subscription
rights, you should complete and return to your broker, dealer,
custodian bank or other nominee, the form entitled
Beneficial Owner Election Form. You should receive
this form from your broker, dealer, custodian bank or other
nominee with the other subscription rights offering materials.
If you wish to obtain a separate subscription rights election
form, you should contact the nominee as soon as possible and
request that a separate subscription rights election form be
issued to you. You should contact your broker, dealer, custodian
bank or other nominee if you do not receive this form, but you
believe you are entitled to participate in the rights offering.
We are not responsible if you do not receive the form from your
broker, dealer, custodian bank or other nominee or if you
receive it without sufficient time to respond.
Your subscription rights will not be considered exercised
unless the subscription agent actually receives from you, your
broker, dealer, custodian bank or other nominee, as the case may
be, all of the required documents and your full subscription
price payment (and your payment has cleared) prior to
5:00 p.m., Eastern Standard time, on March 4, 2011,
the scheduled expiration date of the rights offering.
If you are a participant or other account holder in our 401(k)
Plan, please refer to the information set out in
Special Instructions for Participants in Our
401(k) Plan.
Payment
Method
Your payment of the subscription price must be made in
U.S. dollars for the full number of shares of common stock
that you wish to acquire in the rights offering. Your payment
must be delivered in one of the following ways:
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uncertified personal check payable to Registrar and
Transfer Company; or
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wire transfer of same day funds using the following wire
instructions:
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For the Benefit Of:
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REGISTRAR AND TRANSFER COMPANY
As Rights Offering Agent for Various Holders
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Account Number:
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276-053-5977
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Bank:
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TD Bank
6000 Atrium Way
Mt. Laurel, NJ. 08054
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ABA Number:
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031-201-360
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121
If you wish to make payment by wire transfer, you must reference
the account number listed on your subscription rights election
form.
If you wish to use any other form of payment, then you must
obtain the prior approval of the subscription agent and make
arrangements in advance with the subscription agent for the
delivery of such payment.
Notwithstanding the foregoing, all subscription rights held in
401(k) Plan accounts that are exercised by participants and
other account holders must be paid with money generated by the
liquidation and transfer to the Capital Bank Corporation
Subscription Fund in such persons 401(k) Plan account as
described below. See Special Instructions for
Participants in Our 401(k) Plan. If you are a
participant in the 401(k) Plan exercising subscription rights
held by your 401(k) Plan account, please do not send cash,
checks or wire transfers to the subscription agent, the plan
administrator, or any other party for the exercise of any
subscription rights held by your 401(k) Plan account.
Receipt
of Payment
Your payment will be considered received by the subscription
agent only upon:
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clearance of any uncertified personal check deposited by the
subscription agent; or
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receipt by the subscription agent of any wire transfer of same
day funds.
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Clearance
of Uncertified Personal Checks
If you are paying by uncertified personal check, please note
that payment will not be deemed to have been received by the
subscription agent until the check has cleared, which could take
at least five or more business days. If you wish to pay the
subscription price by uncertified personal check, we urge you to
make payment sufficiently in advance of the time the rights
offering expires to ensure that your payment is received by the
subscription agent and clears by the expiration of the rights
offering period.
Instructions
for Completing Your Subscription Rights Election Form
You should read the instruction letter accompanying the
subscription rights election form carefully and strictly follow
it. Do not send the subscription rights election form or
payment to us. We will not consider your subscription
received until the subscription agent has received delivery of a
properly completed and duly executed subscription rights
election form and payment of the full subscription amount and
such payment has cleared. The risk of delivery of all documents
and payment is on you or your nominee, not us or the
subscription agent.
The method of delivery of the subscription rights election form
and payment of the subscription amount to the subscription agent
will be at the risk of the holders of subscription rights. We
recommend that you send the election forms and payments by
overnight courier or by first class mail, and that a sufficient
number of days be allowed to ensure delivery to the subscription
agent and clearance of payment before the expiration of the
rights offering period. Because uncertified personal checks may
take at least five or more business days to clear, we urge you
to pay or arrange for payment by means of wire transfers of same
day funds to avoid missing the opportunity to exercise your
subscription rights should you decide to exercise your
subscription rights.
Missing
or Incomplete Subscription Information; Manner of
Delivery
If you do not indicate the number of subscription rights being
exercised, or do not forward full payment of the total
subscription price for the number of subscription rights that
you indicate are being exercised, then you will be deemed to
have exercised your subscription rights with respect to the
maximum number of whole subscription rights that may be
exercised with the aggregate subscription price payment you
delivered to the subscription agent. If we do not apply your
full subscription price payment to your purchase of shares of
our common stock, the subscription agent will return the excess
amount to you by mail, without interest or penalty, as soon as
practicable after the expiration date of the rights offering.
If you deliver your subscription rights election form and other
documents or payment in a manner different from that described
in this prospectus, we may not honor the exercise of your
subscription rights.
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Special
Instructions for Participants in Our 401(k) Plan
Subscription rights will be allocated to any participant or
other account holder (such as a beneficiary) in the 401(k) Plan
whose account under the 401(k) Plan held shares of our common
stock as of the record date for the rights offering, based upon
the number of shares held in the account as of the record date.
Those participants (or other account holders) with 401(k) Plan
accounts who are allocated subscription rights will have the
ability to direct the 401(k) Plan trustee to exercise some or
all of the subscription rights allocable to them.
If shares of our common stock were held in your account under
the 401(k) Plan as of the record date, you will receive
subscription solicitation materials from the subscription agent,
which will include specific instructions for participating in
the rights offering with respect to subscription rights held by
the 401(k) Plan, a copy of this prospectus and a special
election form, called the 401(k) Plan Participant Election
Form. If you wish to exercise your subscription rights, in
whole or in part, your completed 401(k) Plan Participant
Election Form must be received by the subscription agent by the
close of business on February 24, 2011. If your 401(k) Plan
Participant Election Form is not received by such special
deadline, your election to exercise your subscription rights
with respect to shares of our common stock that you hold through
the 401(k) Plan will not be effective. This is a special
deadline that applies to participants (and other account
holders) in the 401(k) Plan (notwithstanding the different
deadline set forth in this prospectus for shareholders
generally) and solely with respect to the subscription rights
held by the 401(k) Plan. Any subscription rights credited to
your 401(k) Plan account will expire unless they are properly
exercised by this special deadline. You should receive the
401(k) Plan Participant Election Form with the other rights
offering materials. If you do not receive this form, you should
contact our information agent, Eagle Rock Proxy Advisors, LLC,
if you believe you are entitled to participate in the rights
offering with respect to shares you hold under the 401(k) Plan.
If you elect to exercise some or all of the subscription rights
in your 401(k) Plan account, you must also ensure that you have
provided in your 401(k) Plan Participant Election Form
instructions for the liquidation and transfer of the total
amount of the funds required for such exercise to the Capital
Bank Corporation Subscription Fund in your 401(k) Plan account
and that such amount remains in the Capital Bank Corporation
Subscription Fund until February 28, 2011). On or about
February 28, 2011, the Capital Bank Corporation
Subscription Fund will be liquidated and cash equal to the
necessary subscription payment amount will be transferred to the
subscription agent. However, notwithstanding any election forms
received from participants (and other account holders) in the
401(k) Plan regarding the exercise of their subscription rights
with respect to shares of common stock held in their 401(k) Plan
accounts, no subscription rights held by the 401(k) Plan will be
exercised if the closing price of our common stock on
March 3, 2011, as reported by NASDAQ, is not greater than
or equal to the subscription price of $2.55 per share.
Notwithstanding your election to exercise all of your
subscription rights, if the value of the Capital Bank
Corporation Subscription Fund in your 401(k) Plan account does
not equal or exceed the purchase price of the shares of common
stock that you have elected to purchase in the rights offering,
none of the subscription rights held by your 401(k) Plan account
will be exercised for shares of common stock and you will be
deemed not to have exercised your subscription rights with
regard to any shares held in your 401(k) Plan account.
Any shares of our common stock purchased upon exercise of the
subscription rights held by your 401(k) Plan account will be
allocated to your account under the common stock investment
option, where they will remain subject to your further
investment directions in accordance with the terms of the 401(k)
Plan.
Once you submit your completed 401(k) Plan Participant Election
Form, you may not revoke your exercise instructions. If you
elect to exercise your subscription rights, you should be aware
that the market value of our common stock may go up or down
during the period after you submit your 401(k) Plan Participant
Election Form and before the time that our common stock is
purchased under the subscription rights and allocated to your
account under the 401(k) Plan. However, as discussed above,
notwithstanding any election that you make pursuant to a 401(k)
Plan Participant Election Form, the subscription rights held by
your 401(k) Plan account will not be exercised if the closing
price of our common stock on March 3, 2011, as reported by
NASDAQ, is not greater than or equal to the subscription price
of $2.55 per share. Also, if you have elected to participate in
the rights offering and purchase shares of our common stock, but
the Capital
123
Bank Corporation Subscription Fund in your 401(k) Plan account
does not hold enough funds to purchase the number of shares you
elected, then no shares of common stock will be purchased for
your 401(k) Plan account.
All subscription payments received by the subscription agent on
your behalf and not applied to the purchase of shares of our
common stock will be returned to the 401(k) Plan and deposited
in the Capital Bank Corporation Subscription Fund. Similarly, as
described above, if on March 3, 2011 the closing price of
our common stock is not greater than or equal to $2.55 per share
and your subscription rights are therefore not exercised, all
unused subscription payments will be returned to the 401(k) Plan
and deposited in the Capital Bank Corporation Subscription Fund.
Neither we, the subscription agent, the information agent, nor
the 401(k) Plan trustee, or anyone else will be under any duty
to notify you of any defect or irregularity in connection with
your submission of the 401(k) Plan Participant Election Form,
and we will not be liable for failure to notify you of any
defect or irregularity with respect to the completion of such
form. We reserve the right to reject your exercise of
subscription rights if your exercise is not in accordance with
the terms of the rights offering or in the proper form. We will
also not accept the exercise of your subscription rights if the
issuance of shares of our common stock to you could be deemed
unlawful under applicable law.
The 401(k) Plan Participant Election Form must be received by
the subscription agent by the close of business on
February 24, 2011. A self-addressed envelope has been
included in the materials provided to our 401(k) Plan
participants and other account holders along with this
prospectus, which may be used to mail the 401(k) Plan
Participant Election Form. In any event, you must use the
address set forth below:
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By mail:
Registrar and Transfer Company
Attn: Reorg/Exchange Dept.
P.O. Box 645
Cranford, New Jersey
07016-0645
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By hand or overnight courier:
Registrar and Transfer Company
Attn: Reorg/Exchange Dept.
10 Commerce Drive
Cranford, New Jersey 07016
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Delivery to any address or by a method other than those set
forth above does not constitute valid delivery.
Conditions
and Cancellation
We reserve the right to amend, extend, cancel, or otherwise
modify the rights offering at any time before completion of the
rights offering and for any reason. If we cancel the rights
offering, we will issue a press release notifying shareholders
of the cancellation, all affected subscription rights will
expire without value, and all subscription payments received by
the subscription agent will be returned, without interest or
penalty, as soon as practicable to those persons who subscribed
for shares in the rights offering. In addition, we reserve the
right to change, prior to the distribution of rights, the record
date of the rights offering, and we may be required to do so to
comply with the Companys bylaws if we are unable to
distribute the rights prior to the seventieth day following the
original record date of January 27, 2011. In the event of
any such change of the record date, NAFH will remain ineligible
to participate in the rights offering.
Subscription
Agent and Information Agent
Registrar and Transfer Company is acting as the subscription
agent for the rights offering under an agreement with us. All
subscription rights election forms, payments of the subscription
price, and nominee holder certifications, to the extent
applicable to your exercise of rights, must be delivered to
Registrar and Transfer Company as follows:
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By mail:
Registrar and Transfer Company
Attn: Reorg/Exchange Dept.
P.O. Box 645
Cranford, New Jersey
07016-0645
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By hand or overnight courier:
Registrar and Transfer Company
Attn: Reorg/Exchange Dept.
10 Commerce Drive
Cranford, New Jersey 07016
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124
You should direct any questions or requests for assistance
concerning the method of subscribing for the shares of common
stock or for additional copies of this prospectus to the
information agent, Eagle Rock Proxy Advisors, LLC, by calling
(877) 864-5053
toll-free or, if you are a bank or broker,
(908) 497-2340.
We will pay the fees and expenses of Registrar and Transfer
Company and Eagle Rock Proxy Advisors, LLC. We have also agreed
to indemnify Eagle Rock Proxy Advisors, LLC against certain
liabilities in connection with the rights offering.
Fees and
Expenses
We will pay all fees charged by Registrar and Transfer Company
as the subscription agent and Eagle Rock Proxy Advisors, LLC as
the information agent. You are responsible for paying any other
commissions, fees, taxes or other expenses incurred in
connection with the exercise of the subscription rights. Neither
we nor the subscription agent will pay such expenses.
Notice to
Brokers and Nominees
If you are a broker, dealer, custodian bank or other nominee who
holds shares of our common stock for the account of others on
the rights offering record date, you should notify the
respective beneficial owners of such shares of the rights
offering as soon as possible to learn their intentions with
respect to exercising their subscription rights. You should
obtain instructions from the beneficial owners with respect to
their subscription rights, as set forth in the instructions we
have provided to you for your distribution to beneficial owners.
If the beneficial owner so instructs, you should complete the
appropriate subscription rights election form and submit it to
the subscription agent together with the form entitled
Nominee Holder Certification and with the proper
payment. We will provide the Nominee Holder Certification form
to you with your rights offering materials. If you did not
receive this form, you should contact the subscription agent to
request a copy. If you hold shares of our common stock for the
account(s) of more than one beneficial owner, you may exercise
the number of subscription rights to which all such beneficial
owners in the aggregate otherwise would have been entitled had
they been direct record holders of our common stock on the
rights offering record date, provided that you, as a nominee
record holder, make a proper showing to the subscription agent
by submitting the Nominee Holder Certification form.
In the case of subscription rights that you hold of record on
behalf of others through the Depository Trust Company
(DTC), those subscription rights may be exercised by
instructing DTC to transfer the subscription rights from your
DTC account to the subscription agents DTC account, and by
delivering to the subscription agent the required certification
as to the number of shares subscribed for pursuant to the
exercise of the subscription rights of the beneficial owners on
whose behalf you are acting, together with payment of the full
subscription price.
Questions
About Exercising Subscription Rights
If you have any questions or require assistance regarding the
method of exercising your subscription rights or requests for
additional copies of this document or the Instructions For
Use of Capital Bank Corporation Subscription Rights Election
Form, you should contact our information agent, Eagle Rock Proxy
Advisors, LLC, by calling
(877) 864-5053
toll-free or, if you are a bank or broker,
(908) 497-2340.
Transferability
of Rights
The subscription rights granted to you may be exercised only by
you. You may not sell, transfer or assign your subscription
rights to anyone else.
Validity
of Subscriptions
We will resolve, in our sole discretion, all questions regarding
the validity and form of the exercise of your subscription
rights, including time of receipt and eligibility to participate
in the rights offering. Our determination will be final and
binding. Once made, subscriptions and directions are
irrevocable, and we will
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not accept any alternative, conditional or contingent
subscriptions or directions. We reserve the absolute right to
reject any subscriptions or directions not properly submitted or
of which the acceptance would be unlawful. You must resolve any
irregularities in connection with your subscriptions before the
subscription period expires, unless waived by us in our sole
discretion. Neither the subscription agent, the information
agent nor we shall be under any duty to notify you or your
representative of defects in your subscription(s). A
subscription will be considered accepted, subject to our right
to cancel the rights offering, only when a properly completed
and duly executed subscription rights election form and any
other required documents and payment of the full subscription
amount have been received by the subscription agent (and any
payment by uncertified personal check has cleared). Our
interpretations of the terms and conditions of the rights
offering will be final and binding.
Segregated
Account; Return of Funds
The subscription agent will hold funds received in payment for
shares of the common stock in a segregated account pending
completion of the rights offering. The subscription agent will
hold this money until the rights offering is completed or is
cancelled. You will not be entitled to any interest on these
funds. If the rights offering is cancelled for any reason, the
subscription agent will return this money to subscribers,
without interest or penalty, as soon as practicable.
Uncertificated
Shares of Common Stock
All shares of our common stock that you purchase in the rights
offering will be issued in book-entry, or uncertificated, form.
When issued, the shares will be registered in the name of the
subscription rights holder of record. As soon as practicable
after the expiration of the rights offering, the subscription
agent will arrange for issuance to each subscription rights
holder of record that has validly exercised its subscription
rights the shares of common stock purchased in the rights
offering. Subject to state securities laws and regulations, we
have the discretion to delay distribution of any shares you may
have elected to purchase by exercise of your rights in order to
comply with state securities laws.
Rights of
Subscribers
You will have no rights as a shareholder with respect to the
shares of our common stock purchased in the rights offering
until your account, or your account at your broker, dealer,
custodian bank or other nominee, is credited with such shares.
You will have no right to revoke your subscription after you
deliver your completed subscription rights election form,
payment and any other required documents to the subscription
agent. If the rights offering is not completed, the subscription
agent will return all subscription payments, without interest or
penalty, as soon as practicable.
Foreign
Shareholders
We will not mail subscription rights election forms to
shareholders whose addresses are outside the United States or
who have an army post office or foreign post office address. To
exercise subscription rights, our foreign shareholders and
shareholders with an army post office or foreign post office
address must notify the subscription agent prior to
5:00 p.m., Eastern Standard time, at least three business
days prior to the expiration date of the rights offering and
demonstrate to the satisfaction of the Company that the exercise
of such subscription rights does not violate the laws of the
jurisdiction of such shareholder.
No
Revocation or Change
Once you submit the subscription rights election form to
exercise any subscription rights, you are not allowed to revoke
or change the exercise or request a refund of monies paid,
unless we are required by law to grant revocation rights. All
exercises of subscription rights are irrevocable, unless we are
required by law to grant revocation rights, even if you learn
information about us that you consider to be unfavorable. You
should not exercise your subscription rights unless you are
certain that you wish to purchase the shares of our common stock
offered pursuant to the rights offering.
126
Regulatory
Limitation
We will not be required to issue to you shares of our common
stock pursuant to the rights offering if, in our opinion, you
are required to obtain prior clearance or approval from, or
submit a prior notice to, any state or federal regulatory
authorities to own or control the shares and if, at the time the
rights offering expires, we determine that you have not properly
obtained such clearance or approval or submitted such notice.
See also Limitation on Exercise of
Subscription Rights.
No
Recommendation to Subscription Rights Holders
Neither our Board of Directors nor NAFH is making any
recommendations regarding your exercise of the subscription
rights. Shareholders who exercise subscription rights risk
investment loss. We cannot assure you that the market price of
our common stock will be above the subscription price at the
time of exercise or at the expiration of the rights offering or
that anyone purchasing shares at the subscription price will be
able to sell those shares in the future at the same price or a
higher price or at all. You are urged to decide whether or not
to exercise your subscription rights based on your own
assessment of our business and the rights offering. Among other
things, you should carefully consider the risks described under
the heading Risk Factors in this prospectus.
Listing
The subscription rights may not be sold, transferred or assigned
to anyone else and will not be listed on NASDAQ or any other
stock exchange or trading market. Our common stock currently
trades on the NASDAQ Global Select Market under the symbol
CBKN, and the shares to be issued in connection with
the rights offering are expected to be eligible for trading on
NASDAQ under the same symbol.
Shares of
Common Stock Outstanding After the Rights Offering
As of the record date, there were 12,877,846 shares of our
common stock outstanding. As of February 9, 2011, following
the closing of the Investment, there were 83,877,846 shares
of our common stock outstanding. If all of our shareholders
exercise their subscription rights in full, we will issue
5,000,000 shares of common stock in the rights offering,
which represents approximately 5.6% of the
88,877,846 shares of common stock potentially outstanding
upon the consummation of the rights offering.
Other
Matters
We are not making the rights offering in any state or other
jurisdiction in which it is unlawful to do so, nor are we
distributing or accepting any offers to purchase any shares of
our common stock from subscription rights holders who are
residents of those states or other jurisdictions or who are
otherwise prohibited by federal or state laws or regulations to
accept or exercise the subscription rights. We may delay the
commencement of the rights offering in those states or other
jurisdictions, or change the terms of the rights offering, in
whole or in part, in order to comply with the securities laws or
other legal requirements of those states or other jurisdictions.
Subject to state securities laws and regulations, we also have
the discretion to delay allocation and distribution of any
shares you may elect to purchase by exercise of your
subscription rights in order to comply with state securities
laws. We may decline to make modifications to the terms of the
rights offering requested by those states or other
jurisdictions, in which case, if you are a resident in those
states or jurisdictions or if you are otherwise prohibited by
federal or state laws or regulations from accepting or
exercising the subscription rights, you will not be eligible to
participate in the rights offering. However, we are not
currently aware of any states or jurisdictions that would
preclude participation in the rights offering.
127
DESCRIPTION
OF CAPITAL STOCK
The following description of our capital stock is based upon our
Articles of Incorporation, our Bylaws and applicable provisions
of law. We have summarized certain portions of the Articles of
Incorporation and Bylaws below. The summary is not complete. The
Articles of Incorporation and Bylaws are incorporated by
reference as exhibits to the registration statement of which
this prospectus forms a part. You should read the Articles of
Incorporation and Bylaws for the provisions that are important
to you.
Common
Stock
General
Our Articles of Incorporation authorize us to issue
300,000,000 shares of common stock, no par value per share,
and 100,000 shares of preferred stock. As of
February 9, 2011, there were 83,877,846 shares of our
common stock outstanding held of record by approximately
2,217 shareholders. Our common stock is listed on the
NASDAQ Global Select Market under the symbol CBKN.
Each share of our common stock has the same relative rights and
is identical in all respects to each other share of our common
stock. Other than the subscription rights offered in this
offering, our common shareholders have no preemptive,
subscription or conversion rights. The issued and outstanding
shares of our common stock are not subject to any redemption or
sinking fund provisions. The rights, preferences and privileges
of holders of our common stock are subject to any shares of our
preferred stock we may issue in the future.
Voting
Rights
Our common shareholders are entitled to vote together as a class
on all matters submitted to a vote of our shareholders. Except
for the election of directors by plurality, if a quorum is
present, action on a matter is approved if the votes cast
favoring the action exceed the votes cast against the action,
unless the vote of a greater number is required by the North
Carolina Business Corporation Act, the Articles of Incorporation
or the Bylaws. Our common shareholders do not have cumulative
voting rights.
Dividends
Our common shareholders are entitled to receive dividends only
when, as and if approved by our Board of Directors from funds
legally available for the payment of dividends, after payment on
our subordinated debentures (and our trust preferred
securities). We are subject to various regulatory policies and
requirements relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory
minimums. The Federal Reserve is authorized to determine, under
certain circumstances relating to the financial condition of a
bank holding company, such as us, that the payment of dividends
would be an unsafe or unsound practice and to prohibit payment
thereof. In addition, we are subject to North Carolina state
laws relating to the payment of dividends.
Liquidation
Rights
The holders of our common stock and the holders of any class or
series of stock entitled to participate with the holders of our
common stock as to the distribution of assets in the event of
any liquidation, dissolution or winding up of us, whether
voluntary or involuntary, will become entitled to participate
equally in the distribution of any of our assets remaining after
we have paid, or provided for the payment of, all of our debts
and liabilities and after we have paid to the holders of any
class of stock having preference over the common stock in the
event of liquidation, dissolution or winding up, the full
preferential amounts, if any, to which they are entitled.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is
Registrar and Transfer Company.
128
Preferred
Stock
Our Articles of Incorporation authorize us to issue
100,000 shares of preferred stock. As of the date of this
prospectus, we do not have any preferred stock outstanding.
Our Board of Directors is authorized to issue one or more
classes, or one or more series within a class, of preferred
stock in the future and to fix the designations, preferences,
rights, powers, including voting powers and par value, if any
(or qualifications, limitations and restrictions) of such
preferred stock. As a result, the Board of Directors could
adversely affect the rights of the holders of common stock
without a vote of such shareholders.
Anti-takeover
Effects of Our Articles of Incorporation and Bylaws
The following is a summary of certain provisions of our Articles
of Incorporation and Bylaws that may have the effect of
discouraging, delaying or preventing a change of control, change
in management or an unsolicited acquisition proposal that a
shareholder might consider favorable, including proposals that
might result in the payment of a premium over the market price
for the shares held by our shareholders. This summary does not
purport to be complete and is qualified in its entirety by
reference to the documents referenced.
While these provisions of our Articles of Incorporation and
Bylaws might be deemed to have some anti-takeover
effect, the principal effect of these provisions is to protect
our shareholders generally and to provide our Board of Directors
and shareholders a reasonable opportunity to evaluate and
respond to unsolicited acquisition proposals.
Authorized But Unissued Stock. Our Articles of
Incorporation authorize the issuance of 300,000,000 shares
of common stock and 100,000 shares of preferred stock. A
large quantity of authorized but unissued shares may deter
potential takeover attempts because of the ability of our Board
of Directors to authorize the issuance of some or all of these
shares to a friendly party, or to the public, which would make
it more difficult for a potential acquirer to obtain control.
This possibility may encourage persons seeking to acquire us to
negotiate directly with our Board of Directors. The authorized
but unissued common stock also could facilitate acquisitions by
us.
Our authorized but unissued shares of preferred stock could also
have anti-takeover effects. Under certain circumstances, any or
all of such preferred stock could be used as a method of
discouraging, delaying or preventing a change in control of us.
For example, our Board of Directors could designate and issue a
series of preferred stock in an amount that sufficiently
increases the number of outstanding shares to overcome a vote by
the holders of common stock or with rights and preferences that
include special voting rights to veto a change in control. The
preferred stock could also be used in connection with the
issuance of a shareholder rights plan, sometimes referred to as
a poison pill. For example, a class or series of
preferred stock could be designated that would be convertible
into common stock upon the acquisition by a third party of a
specified percentage of our voting stock. Typically, under most
shareholder rights plans, if a third party acquires the
specified percentage (usually 15% to 20%) of a
corporations voting stock, the shareholders of that
corporation (other than the shareholder who purchased the
specified percentage interest in the corporation) have the right
to purchase shares of the corporations common stock at a
discount to the market price. This results in dilution to the
third party, both economically and in terms of its percentage
ownership of the corporations shares. Our Board of
Directors is able to implement a shareholder rights plan without
further action by our shareholders.
Use of the preferred stock in the foregoing manner could delay
or frustrate a merger, tender offer or proxy contest, the
removal of incumbent directors, or the assumption of control by
shareholders, even if such proposed actions would be beneficial
to our shareholders. This could include discouraging bids for us
even if such bid represents a premium over our then-existing
trading price and thereby prevent shareholders from receiving
the maximum value for their shares.
Provision for Classified Board of Directors. A
classified board of directors may have an anti-takeover effect
by making it more difficult for an entity that owns a majority
of a companys shares (or which is able successfully to
solicit a majority) to force an immediate change in the
composition of a majority of the
129
companys board of directors. Our Articles of Incorporation
provide that, if there are at least nine directors, our Board of
Directors will be divided into three classes, with each class
elected to serve a term of three years. If the size of our Board
of Directors increases to nine members, only one-third of our
Board of Directors would be elected each year, and thus even a
majority shareholder could not elect a majority of our Board of
Directors in less than two years. Consequently, the staggered
board would have the effect of delaying the time within which an
acquirer may gain control of our Board of Directors. This delay
factor would also likely encourage potential acquirers to
negotiate with our Board of Directors prior to attempting to
gain control of us.
Limited Ability To Call Special Meetings of
Shareholders. A potential acquirer may wish to
call a special meeting of shareholders of a target to consider
removing directors or to consider an acquisition offer. It could
also call a meeting or series of meetings to harass management
and disrupt the targets business. Thus, limited rights of
shareholders to call special meetings can have an anti-takeover
effect. Shareholders of publicly traded North Carolina
corporations, like us, are not entitled to call a special
meeting of shareholders unless the corporations charter or
bylaws authorize them to do so. Our Bylaws provide that only the
chief executive officer, president, secretary, or Board of
Directors may call special meetings of our shareholders.
Unanimous Requirement for Written Consent of
Shareholders. Shareholders of publicly traded
North Carolina corporations may act without a meeting only by
unanimous written consent. Our Bylaws also require unanimous
written consent for shareholder action without a meeting. As a
practical matter, the requirement of unanimity makes it
exceedingly difficult for a potential acquirer to accomplish its
objective through a written consent with respect to a public
company that has a large number of shareholders.
No Cumulative Voting for Directors. Cumulative
voting permits a shareholder to cumulate his total shareholder
votes for a single candidate in an election of directors. For
example, a shareholder holding 1,000 shares in an election
for five directors could cumulate all 5,000 votes for one
director. Cumulative voting may make it easier for a potential
acquirer or dissident shareholder to gain a board seat. Under
North Carolina law, by virtue of our date of incorporation, our
status as a public company and the fact that the Articles of
Incorporation do not give our shareholders the right to cumulate
their votes, our shareholders are not entitled to cumulate their
votes. In addition, our Bylaws specifically deny cumulative
voting rights.
130
PLAN OF
DISTRIBUTION
On or about February 16, 2011, we will distribute the
subscription rights, subscription rights election forms and
copies of this prospectus to individuals who owned shares of
common stock of record as of 5:00 p.m., Eastern Standard
time, on January 27, 2011, the record date for the rights
offering. If you wish to exercise your subscription rights and
purchase shares of common stock, you should complete the
subscription rights election form and return it with payment for
the shares to the subscription agent. See The Rights
Offering Method of Exercising Subscription
Rights. If you have any questions, you should contact our
information agent, Eagle Rock Proxy Advisors, LLC, by calling
(877) 864-5053
toll-free or, if you are a bank or broker,
(908) 497-2340.
The subscription rights will not be listed on NASDAQ or any
other stock exchange or trading market. The shares of common
stock issuable upon exercise of the subscription rights will be
listed on NASDAQ under the symbol CBKN.
We have agreed to pay the subscription agent and information
agent customary fees plus certain expenses in connection with
the rights offering. We have not employed any brokers, dealers
or underwriters in connection with the solicitation of exercise
of subscription rights. Except as described in this section, we
are not paying any other commissions, underwriting fees or
discounts in connection with the rights offering. We estimate
that our total expenses in connection with the rights offering
will be approximately $250,000.
131
CERTAIN
MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain material
U.S. federal income tax consequences of the rights offering
to U.S. holders (as defined below). This summary is based
upon provisions of the Code, applicable Treasury Regulations,
administrative rulings, judicial authorities and other
applicable existing U.S. federal income tax authorities,
all of which are subject to change or differing interpretations,
possibly with retroactive effect which could result in
U.S. federal income tax consequences different from those
discussed below. No assurance can be given that the Internal
Revenue Service (IRS) will not challenge one or more
of the tax results described in this discussion, and no ruling
from the IRS has been, or is expected to be, sought with respect
to the U.S. federal tax consequences of the rights offering.
This summary does not provide a complete analysis of all
potential tax considerations. This summary is only applicable to
U.S. holders of common stock who acquire the subscription
rights pursuant to the terms of the rights offering, have held
the common stock, and will hold the subscription rights, as
capital assets (generally, property held for investment) within
the meaning of Section 1221 of the Code. This summary does
not address all tax consequences that may be relevant to holders
in light of their personal circumstances or particular
situations, such as holders who may be subject to special tax
treatment under the Code, including (without limitation) dealers
in securities or currencies, financial institutions, insurance
companies, regulated investment companies, real estate
investment trusts, tax-exempt entities or traders in securities
that elect to use a
mark-to-market
method of accounting for their securities, persons holding
subscription rights or common stock as part of a hedging,
integrated or conversion transaction or a straddle, persons
deemed to sell common stock, under the constructive sale
provisions of the Code, persons whose functional
currency is not the U.S. dollar, and foreign
taxpayers. This summary does not address any tax consequences
arising under the unearned income Medicare contribution tax
pursuant to the Health Care and Education Reconciliation Act of
2010, any U.S. federal non-income, state, local or foreign
tax consequences, estate or gift tax consequences, or
alternative minimum tax consequences, nor does it address any
tax considerations to persons other than U.S. holders.
For purposes of this discussion, a U.S. holder
is a beneficial owner of subscription rights or our common stock
that is, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation, or other business entity treated as a corporation
for U.S. federal income tax purposes, created or organized
in or under the laws of the United States, any state of the
United States or the District of Columbia;
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an estate, if its income is subject to U.S. federal income
taxation regardless of its source; or
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a trust, if (i) a U.S. court can exercise primary
supervision over the trusts administration and one or more
U.S. persons (within the meaning of the Code) have the
authority to control all of its substantial decisions or
(ii) the trust has a valid election in effect under
applicable Treasury Regulations to be treated as a
U.S. person.
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If a partnership (including any entity treated as a partnership
for U.S. federal income tax purposes) receives the
subscription rights or exercises the subscription rights, the
tax treatment of a partner in a partnership generally will
depend upon the status of the partner and the activities of the
partnership. Such a partner or partnership should consult its
tax advisor as to the U.S. federal income tax consequences
of the receipt, exercise or lapse of the subscription rights.
Holders of common stock are urged to consult their own tax
advisors as to the specific tax consequences of the rights
offering to them, including the applicable federal, state, local
and foreign tax consequences of the rights offering to them and
the effect of possible changes in tax laws.
Taxation
of Subscription Rights
Receipt of Subscription Rights. Your receipt
of subscription rights pursuant to the rights offering should be
treated as a nontaxable distribution with respect to your
existing common stock for U.S. federal income tax
132
purposes, and the following summary assumes you will qualify for
such nontaxable treatment. If, however, the rights offering does
not qualify as nontaxable, you would be treated as receiving a
taxable distribution equal to the fair market value of the
subscription rights on their distribution date. The distribution
would be taxed as a dividend to the extent made out of our
current or accumulated earnings and profits; any excess would be
treated first as a return of your basis (investment) in your
common stock to the extent thereof, and then as a capital gain.
In such case, the expiration of the subscription rights would
result in a capital loss.
If the fair market value of the subscription rights you receive
is less than 15% of the fair market value of your existing
common stock on the date you receive the subscription rights,
the subscription rights will be allocated a basis of zero for
U.S. federal income tax purposes, unless you elect to
allocate basis between your existing common stock and the
subscription rights in proportion to the relative fair market
values of the existing common stock and the subscription rights
determined on the date of receipt of the subscription rights. If
you choose to allocate basis between your existing common stock
and the subscription rights, you must make this election on a
statement included with your tax return for the taxable year in
which you receive the subscription rights. Such an election is
irrevocable. The fair market value of the subscription rights on
the date the subscription rights are distributed is uncertain,
and we have not obtained, and do not intend to obtain, an
appraisal of the fair market value of the subscription rights on
that date. In determining the fair market value of the
subscription rights, you should consider all relevant facts and
circumstances, including any difference between the subscription
price of the subscription rights and the trading price of our
common stock on the date that the subscription rights are
distributed, the length of the period during which the
subscription rights may be exercised and the fact that the
subscription rights are non-transferable.
On the other hand, if the fair market value of the subscription
rights you receive is 15% or more of the fair market value of
your existing common stock on the date you receive the
subscription rights, then you must allocate your basis in your
existing common stock between the existing common stock and the
subscription rights you receive in proportion to their fair
market values determined on the date you receive the
subscription rights.
Your holding period in a subscription right will include your
holding period in the common stock with respect to which the
subscription right was distributed.
Exercise of Subscription Rights. Generally,
you will not recognize gain or loss on the exercise of a
subscription right in the rights offering. Your tax basis in new
shares of common stock acquired when you exercise a subscription
right in the rights offering will be equal to your adjusted tax
basis in the subscription right plus the subscription price. The
holding period of a share of common stock acquired when you
exercise a subscription right in the rights offering will begin
on the date of exercise.
If you exercise a subscription right received in the rights
offering after disposing of the share of our common stock with
respect to which such subscription right is received, then
certain aspects of the tax treatment of the exercise of the
subscription right are unclear, including (1) the
allocation of tax basis between the common stock previously sold
and the subscription right, (2) the impact of such
allocation on the amount and timing of gain or loss recognized
with respect to the common stock previously sold, and
(3) the impact of such allocation on the tax basis of
common stock acquired through exercise of the subscription
right. If you exercise a subscription right received in the
rights offering after disposing of the common stock with respect
to which the subscription right is received, you should consult
your tax advisor.
Non-Exercising Subscription Rights. If you do
not exercise your subscription rights, you should not recognize
a capital loss for U.S. federal income tax purposes and any
portion of the tax basis in your existing shares of common stock
previously allocated to the subscription right not exercised
should be re-allocated to the existing common stock.
133
LEGAL
MATTERS
The validity of the shares of common stock issuable upon
exercise of the rights and offered by this prospectus will be
passed upon for us by Wachtell, Lipton, Rosen & Katz.
EXPERTS
The consolidated financial statements included in this
prospectus and registration statement have been included in
reliance upon the report of Grant Thornton LLP, independent
registered public accountants, upon the authority of said firm
as experts in accounting and auditing in giving said reports.
WHERE YOU
CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. Our SEC filings are
available to the public over the Internet at the SECs web
site at
http://www.sec.gov
and on the investor relations page of our web site at
http://www.capitalbank-us.com.
Information on our web site is not part of this prospectus. You
may also read and copy any document we file with the SEC at the
SECs Public Reference Room at 100 F Street NE,
Washington, DC 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room.
We have filed a registration statement, of which this prospectus
is a part, covering the securities offered hereby. As allowed by
SEC rules, this prospectus does not contain all of the
information and exhibits included in the registration statement.
We refer you to the information and exhibits included in the
registration statement for further information. This prospectus
is qualified in its entirety by such information and exhibits.
134
CAPITAL
BANK CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
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December 31,
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December 31,
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2009
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2008
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(Dollars in thousands except per share data)
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Assets
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Cash and due from banks:
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Interest earning
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$
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4,511
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$
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26,621
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Noninterest earning
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25,002
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27,705
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Federal funds sold and short term investments
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129
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Total cash and cash equivalents
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29,513
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54,455
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Investment securities:
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Investment securities available for sale, at fair
value
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235,426
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266,656
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Investment securities held to maturity, at amortized
cost
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3,676
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5,194
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Other investments
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6,390
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6,288
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Total investment securities
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245,492
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278,138
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Loans net of unearned income and deferred fees
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1,390,302
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1,254,368
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Allowance for loan losses
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(26,081
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)
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(14,795
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Net loans
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1,364,221
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1,239,573
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Premises and equipment, net
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23,756
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24,640
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Bank-owned life insurance
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22,746
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22,368
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Deposit premium, net
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2,711
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3,857
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Deferred income tax
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12,096
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9,342
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Accrued interest receivable
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6,590
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6,225
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Other assets
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27,543
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15,634
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Total assets
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$
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1,734,668
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$
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1,654,232
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Liabilities
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Deposits:
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Demand, noninterest bearing
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$
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141,069
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$
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125,281
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Savings and interest bearing checking
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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.
F-2
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.
F-3
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.
F-4
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
F-5
|
|
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 Companys 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 Banks customers are individuals and small-
to medium-size businesses. The Banks 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 Companys 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 Companys obligation under the subordinated
debentures constitutes a full and unconditional guarantee by the
Company of the Trusts 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.
F-6
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
F-7
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 managements 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
borrowers 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 Companys
historical loss experience in each pool and managements
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
Companys 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.
F-8
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
assets fair value. The goodwill impairment analysis is a
two-step test. The first, used to identify potential impairment,
involves comparing each reporting units 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 Companys 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 Companys 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.
F-9
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 Companys common stock at the date of
grant is used as the fair value of restricted stock awards.
Compensation cost is recognized over the
F-10
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
Companys common stock for a period approximating the
expected life of the option, the expected dividend yield is
based on the Companys 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
managements assumptions (unobservable inputs). For assets
and liabilities recorded at fair value, the Companys
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:
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Level 1 Valuations for assets and
liabilities traded in active exchange markets, such as the New
York Stock Exchange.
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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 Companys
principal market for these securities is the secondary
institutional markets, and valuations are based on observable
market data in those markets.
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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.
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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
F-11
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:
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2009
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2008
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2007
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(Dollars in thousands except share data)
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Earnings (loss) attributable to common shareholders
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$
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(9,168
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)
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$
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(55,808
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)
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$
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7,858
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Shares used in the computation of earnings per share:
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Weighted average number of shares outstanding basic
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11,470,314
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11,302,769
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11,424,171
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Incremental shares from assumed exercise of stock options
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68,557
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Weighted average number of shares outstanding diluted
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11,470,314
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11,302,769
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11,492,728
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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
Companys 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 Companys 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 Companys other
comprehensive income (loss) for the years ended
December 31, 2009, 2008 and 2007 is as follows:
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2009
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2008
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2007
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(Dollars in thousands)
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Unrealized gains (losses) on
available-for-sale
investment securities
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$
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8,220
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$
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(22
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)
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$
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1,056
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Unrealized (loss) gain on change in fair value of cash flow hedge
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(3,151
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)
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1,202
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|
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1,821
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Prior service cost recognized on SERP, net of amortization
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(46
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)
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Income tax expense
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(1,954
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)
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(455
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)
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(1,159
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)
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Other comprehensive income
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$
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3,069
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$
|
725
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$
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1,718
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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 Companys 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 years 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
F-12
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 Companys 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
Codificationtm
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 Companys 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 Companys 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
F-13
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
Companys 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
Companys
other-than-temporary
impairment analysis and its impact on the Companys
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 entitys 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 Companys financial condition or results of
operations. See Note 14 (Derivative Financial Instruments)
for disclosures required by these provisions of ASC Topic 815.
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2.
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Mergers
and Acquisitions
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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:
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As of
|
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December 12, 2008
|
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|
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(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
|
)
|
|
|
|
|
|
F-14
Investment securities as of December 31, 2009 and 2008 are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
The following table summarizes the gross unrealized losses and
fair value of the Companys 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
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
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
F-16
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
Companys 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 Companys 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 Companys
investment in Silverton Bank and was recorded as a reduction to
noninterest income on the Consolidated Statements of Operations.
F-17
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
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
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.
F-18
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.
F-19
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit Premium
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Goodwill
|
|
|
Gross
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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 Companys
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.
F-20
As of December 31, 2009, the scheduled maturities of time
deposits are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Amount
|
|
|
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.
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
|
|
Maximum
|
|
|
|
|
Weighted
|
|
|
|
Interest
|
|
Outstanding at
|
|
|
Balance
|
|
Average Rate
|
|
Balance
|
|
Rate
|
|
Any Month End
|
|
|
(Dollars in thousands)
|
|
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
Companys 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
|
|
F-21
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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
Companys 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
Companys 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Balance
|
|
|
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
|
%
|
|
|
|
|
|
|
|
|
|
F-22
|
|
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 Companys 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
Companys 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 Companys 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 Companys 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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sublease
|
|
|
|
Lease Payments
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
F-23
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
employees contributions are 100% vested at all times, and
the Companys 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 employees
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 Companys 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
participants 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 directors 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 Companys 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.
F-24
A summary of the activity during the years ending
December 31, 2009, 2008 and 2007 of the Companys
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
Companys stock options as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining Contractual
|
|
|
Number
|
|
|
Intrinsic
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Exercisable
|
|
|
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 Companys common
stock for a period approximating the expected life; the expected
dividend yield is based on the Companys 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.
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
F-25
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
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
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
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 managements 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 Companys cumulative previous three-year
F-27
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 Companys
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 Companys 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 managements 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.
F-28
The Companys 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 Companys 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 Companys 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 Companys 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.
F-29
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 securitys 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
managements 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
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
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
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Active Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(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 Companys 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 Companys financial instruments,
the fair value of such instruments has been derived based on
managements 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.
F-31
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 Companys
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
Companys financial instruments as of December 31,
2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
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 Companys 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
Companys 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 Companys 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
F-32
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 Companys 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 Banks 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 Banks
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 Companys
quarterly cash dividend to its common shareholders.
F-33
To be categorized as well capitalized, the Company and the Bank
must maintain minimum amounts and ratios. The Companys and
the Banks 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
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
(Dollars in thousands)
|
|
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
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
F-34
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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 Companys
quarterly cash dividend to its common shareholders to preserve
capital.
F-35
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
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 Corporations 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 Corporations 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 (not separately included herein),
expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Raleigh, North Carolina
March 10, 2010
F-37
CAPITAL
BANK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2010 and December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Assets
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
18,086
|
|
|
$
|
25,002
|
|
Interest-bearing deposits with banks
|
|
|
49,983
|
|
|
|
4,511
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
|
68,069
|
|
|
|
29,513
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Investment securities available for sale, at fair
value
|
|
|
184,724
|
|
|
|
235,426
|
|
Investment securities held to maturity, at amortized
cost
|
|
|
2,822
|
|
|
|
3,676
|
|
Other investments
|
|
|
8,500
|
|
|
|
6,390
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
|
196,046
|
|
|
|
245,492
|
|
Mortgage loans held for sale
|
|
|
8,528
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
Loans net of unearned income and deferred fees
|
|
|
1,324,932
|
|
|
|
1,390,302
|
|
Allowance for loan losses
|
|
|
(36,249
|
)
|
|
|
(26,081
|
)
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
|
1,288,683
|
|
|
|
1,364,221
|
|
Other real estate
|
|
|
17,865
|
|
|
|
10,732
|
|
Premises and equipment, net
|
|
|
24,855
|
|
|
|
23,756
|
|
Bank-owned life insurance
|
|
|
6,895
|
|
|
|
22,746
|
|
Core deposit intangible, net
|
|
|
2,006
|
|
|
|
2,711
|
|
Deferred income tax
|
|
|
15,152
|
|
|
|
12,096
|
|
Other assets
|
|
|
21,600
|
|
|
|
23,401
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,649,699
|
|
|
$
|
1,734,668
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand, noninterest checking
|
|
$
|
125,438
|
|
|
$
|
141,069
|
|
NOW accounts
|
|
|
183,014
|
|
|
|
175,084
|
|
Money market deposit accounts
|
|
|
139,772
|
|
|
|
184,146
|
|
Savings accounts
|
|
|
31,117
|
|
|
|
28,958
|
|
Time deposits
|
|
|
880,010
|
|
|
|
848,708
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,359,411
|
|
|
|
1,377,965
|
|
Repurchase agreements and federal funds purchased
|
|
|
|
|
|
|
6,543
|
|
Borrowings
|
|
|
129,000
|
|
|
|
167,000
|
|
Subordinated debentures
|
|
|
34,323
|
|
|
|
30,930
|
|
Other liabilities
|
|
|
10,862
|
|
|
|
12,445
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,533,596
|
|
|
|
1,594,883
|
|
Shareholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $1,000 par value; 100,000 shares
authorized; 41,279 shares issued and outstanding
(liquidation preference of $41,279)
|
|
|
40,345
|
|
|
|
40,127
|
|
Common stock, no par value; 50,000,000 shares authorized;
12,880,954 and 11,348,117 shares issued and outstanding
|
|
|
145,461
|
|
|
|
139,909
|
|
Accumulated deficit
|
|
|
(73,955
|
)
|
|
|
(44,206
|
)
|
Accumulated other comprehensive income
|
|
|
4,252
|
|
|
|
3,955
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
116,103
|
|
|
|
139,785
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
1,649,699
|
|
|
$
|
1,734,668
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-38
CAPITAL
BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended
September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands except per share data)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loan fees
|
|
$
|
17,357
|
|
|
$
|
18,720
|
|
|
$
|
52,080
|
|
|
$
|
52,224
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable interest income
|
|
|
1,854
|
|
|
|
2,348
|
|
|
|
5,851
|
|
|
|
7,708
|
|
Tax-exempt interest income
|
|
|
285
|
|
|
|
759
|
|
|
|
1,369
|
|
|
|
2,286
|
|
Dividends
|
|
|
22
|
|
|
|
13
|
|
|
|
58
|
|
|
|
26
|
|
Federal funds and other interest income
|
|
|
17
|
|
|
|
18
|
|
|
|
37
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
19,535
|
|
|
|
21,858
|
|
|
|
59,395
|
|
|
|
62,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
4,683
|
|
|
|
6,797
|
|
|
|
16,438
|
|
|
|
21,596
|
|
Borrowings and repurchase agreements
|
|
|
1,470
|
|
|
|
1,506
|
|
|
|
4,281
|
|
|
|
4,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
6,153
|
|
|
|
8,303
|
|
|
|
20,719
|
|
|
|
26,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
13,382
|
|
|
|
13,555
|
|
|
|
38,676
|
|
|
|
35,900
|
|
Provision for loan losses
|
|
|
6,763
|
|
|
|
3,564
|
|
|
|
38,534
|
|
|
|
11,242
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
6,619
|
|
|
|
9,991
|
|
|
|
142
|
|
|
|
24,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges and other fees
|
|
|
746
|
|
|
|
990
|
|
|
|
2,468
|
|
|
|
2,901
|
|
Bank card services
|
|
|
521
|
|
|
|
409
|
|
|
|
1,479
|
|
|
|
1,133
|
|
Mortgage origination and other loan fees
|
|
|
442
|
|
|
|
410
|
|
|
|
1,108
|
|
|
|
1,520
|
|
Brokerage fees
|
|
|
271
|
|
|
|
155
|
|
|
|
743
|
|
|
|
468
|
|
Bank-owned life insurance
|
|
|
138
|
|
|
|
240
|
|
|
|
632
|
|
|
|
1,663
|
|
Net gain on investment securities
|
|
|
244
|
|
|
|
148
|
|
|
|
641
|
|
|
|
164
|
|
Other
|
|
|
138
|
|
|
|
155
|
|
|
|
474
|
|
|
|
488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
2,500
|
|
|
|
2,507
|
|
|
|
7,545
|
|
|
|
8,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
|
|
5,918
|
|
|
|
5,128
|
|
|
|
16,637
|
|
|
|
16,945
|
|
Occupancy
|
|
|
1,460
|
|
|
|
1,471
|
|
|
|
4,418
|
|
|
|
4,192
|
|
Furniture and equipment
|
|
|
867
|
|
|
|
771
|
|
|
|
2,312
|
|
|
|
2,340
|
|
Data processing and telecommunications
|
|
|
488
|
|
|
|
555
|
|
|
|
1,530
|
|
|
|
1,759
|
|
Advertising and public relations
|
|
|
435
|
|
|
|
394
|
|
|
|
1,464
|
|
|
|
940
|
|
Office expenses
|
|
|
320
|
|
|
|
386
|
|
|
|
940
|
|
|
|
1,043
|
|
Professional fees
|
|
|
626
|
|
|
|
358
|
|
|
|
1,785
|
|
|
|
1,171
|
|
Business development and travel
|
|
|
363
|
|
|
|
268
|
|
|
|
937
|
|
|
|
843
|
|
Amortization of core deposit intangible
|
|
|
235
|
|
|
|
287
|
|
|
|
705
|
|
|
|
862
|
|
Other real estate and other loan-related losses
|
|
|
1,833
|
|
|
|
370
|
|
|
|
3,858
|
|
|
|
938
|
|
Directors fees
|
|
|
236
|
|
|
|
295
|
|
|
|
828
|
|
|
|
1,131
|
|
FDIC deposit insurance
|
|
|
712
|
|
|
|
474
|
|
|
|
2,028
|
|
|
|
1,882
|
|
Other
|
|
|
717
|
|
|
|
341
|
|
|
|
1,738
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
14,210
|
|
|
|
11,098
|
|
|
|
39,180
|
|
|
|
35,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income taxes
|
|
|
(5,091
|
)
|
|
|
1,400
|
|
|
|
(31,493
|
)
|
|
|
(2,132
|
)
|
Income tax expense (benefit)
|
|
|
3,975
|
|
|
|
(2,143
|
)
|
|
|
(3,510
|
)
|
|
|
(2,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(9,066
|
)
|
|
$
|
3,543
|
|
|
$
|
(27,983
|
)
|
|
$
|
429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and accretion on preferred stock
|
|
|
588
|
|
|
|
590
|
|
|
|
1,766
|
|
|
|
1,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
(9,654
|
)
|
|
$
|
2,953
|
|
|
$
|
(29,749
|
)
|
|
$
|
(1,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
(0.74
|
)
|
|
$
|
0.26
|
|
|
$
|
(2.34
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(0.74
|
)
|
|
$
|
0.26
|
|
|
$
|
(2.34
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-39
CAPITAL
BANK CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
For the
Nine Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Income
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands except share data)
|
|
|
Balance at January 1, 2009
|
|
|
41,279
|
|
|
$
|
39,839
|
|
|
|
11,238,085
|
|
|
$
|
139,209
|
|
|
$
|
886
|
|
|
$
|
(31,420
|
)
|
|
$
|
148,514
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
429
|
|
|
|
429
|
|
Net unrealized gain on securities, net of tax of $3,778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,022
|
|
|
|
|
|
|
|
6,022
|
|
Net unrealized loss on cash flow hedge, net of tax benefit of
$1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,709
|
)
|
|
|
|
|
|
|
(1,709
|
)
|
Prior service cost recognized on SERP, net of amortization of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock discount
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(216
|
)
|
|
|
|
|
Restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
120
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Directors deferred compensation
|
|
|
|
|
|
|
|
|
|
|
42,284
|
|
|
|
417
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,548
|
)
|
|
|
(1,548
|
)
|
Dividends on common stock ($0.24 per share)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,710
|
)
|
|
|
(2,710
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2009
|
|
|
41,279
|
|
|
$
|
40,055
|
|
|
|
11,300,369
|
|
|
$
|
139,784
|
|
|
$
|
5,151
|
|
|
$
|
(35,465
|
)
|
|
$
|
149,525
|
|
Balance at January 1, 2010
|
|
|
41,279
|
|
|
$
|
40,127
|
|
|
|
11,348,117
|
|
|
$
|
139,909
|
|
|
$
|
3,955
|
|
|
$
|
(44,206
|
)
|
|
$
|
139,785
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,983
|
)
|
|
|
(27,983
|
)
|
Net unrealized gain on securities, net of tax of $182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
|
|
|
|
291
|
|
Amortization of prior service cost on SERP
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(27,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of preferred stock discount
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(218
|
)
|
|
|
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
1,468,770
|
|
|
|
5,065
|
|
|
|
|
|
|
|
|
|
|
|
5,065
|
|
Restricted stock forfeiture
|
|
|
|
|
|
|
|
|
|
|
(400
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
Directors deferred compensation
|
|
|
|
|
|
|
|
|
|
|
64,467
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
Dividends on preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,548
|
)
|
|
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2010
|
|
|
41,279
|
|
|
$
|
40,345
|
|
|
|
12,880,954
|
|
|
$
|
145,461
|
|
|
$
|
4,252
|
|
|
$
|
(73,955
|
)
|
|
$
|
116,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-40
CAPITAL
BANK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30,
2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(27,983
|
)
|
|
$
|
429
|
|
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
38,534
|
|
|
|
11,242
|
|
Amortization of core deposit intangible
|
|
|
705
|
|
|
|
862
|
|
Depreciation
|
|
|
1,939
|
|
|
|
2,271
|
|
Stock-based compensation
|
|
|
581
|
|
|
|
546
|
|
Gain on investment securities, net
|
|
|
(641
|
)
|
|
|
(164
|
)
|
Amortization of premium/discount on investment securities, net
|
|
|
52
|
|
|
|
117
|
|
Increase in mortgage loans held for sale
|
|
|
(8,528
|
)
|
|
|
|
|
Write-down in value of other real estate
|
|
|
1,682
|
|
|
|
|
|
Loss on disposal of premises, equipment and other real estate
|
|
|
299
|
|
|
|
79
|
|
Increase in cash surrender value of bank-owned life insurance
|
|
|
(632
|
)
|
|
|
(203
|
)
|
Deferred income tax (benefit) expense
|
|
|
(3,238
|
)
|
|
|
886
|
|
Net decrease (increase) in accrued interest receivable and other
assets
|
|
|
1,707
|
|
|
|
(746
|
)
|
Net (decrease) increase in accrued interest payable and other
liabilities
|
|
|
(669
|
)
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,808
|
|
|
|
15,437
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Decrease (increase) in loans, net
|
|
|
20,679
|
|
|
|
(118,709
|
)
|
Additions to premises and equipment
|
|
|
(3,051
|
)
|
|
|
(2,710
|
)
|
Proceeds from sales of premises, equipment and real estate owned
|
|
|
7,224
|
|
|
|
3,452
|
|
Proceeds from surrender of bank-owned life insurance
|
|
|
16,483
|
|
|
|
|
|
Purchases of FHLB stock, net
|
|
|
(1,980
|
)
|
|
|
(20
|
)
|
Purchase of securities available for sale
|
|
|
(66,035
|
)
|
|
|
(31,842
|
)
|
Proceeds from principal repayments/calls/maturities of
securities available for sale
|
|
|
117,670
|
|
|
|
56,048
|
|
Proceeds from principal repayments/calls/maturities of
securities held to maturity
|
|
|
853
|
|
|
|
1,300
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
91,843
|
|
|
|
(92,481
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
(Decrease) increase in deposits, net
|
|
|
(18,554
|
)
|
|
|
69,936
|
|
Decrease in repurchase agreements, net
|
|
|
(6,543
|
)
|
|
|
(5,546
|
)
|
Proceeds from borrowings
|
|
|
189,000
|
|
|
|
120,000
|
|
Principal repayments of borrowings
|
|
|
(227,000
|
)
|
|
|
(105,000
|
)
|
Proceeds from issuance of subordinated debentures
|
|
|
3,393
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
5,065
|
|
|
|
|
|
Dividends paid
|
|
|
(2,456
|
)
|
|
|
(4,107
|
)
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(57,095
|
)
|
|
|
75,283
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
38,556
|
|
|
|
(1,761
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
29,513
|
|
|
|
54,455
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
68,069
|
|
|
$
|
52,694
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
Transfer of loans and premises to other real estate owned
|
|
$
|
16,325
|
|
|
$
|
10,605
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) for:
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
(248
|
)
|
|
$
|
(4,297
|
)
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
20,832
|
|
|
$
|
27,412
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
F-41
|
|
1.
|
Significant
Accounting Policies and Interim Reporting
|
The accompanying unaudited condensed consolidated financial
statements include the accounts of Capital Bank Corporation (the
Company) and its wholly owned subsidiary, Capital
Bank (the Bank). In addition, the Company has
interests in three trusts, Capital Bank Statutory
Trust I, II, and III (hereinafter collectively
referred to as the Trusts). The Trusts have not been
consolidated with the financial statements of the Company. The
interim financial statements have been prepared in accordance
with accounting principles generally accepted in the United
States of America (U.S. GAAP). They do not
include all of the information and footnotes required by such
accounting principles for complete financial statements, and
therefore should be read in conjunction with the audited
consolidated financial statements and accompanying footnotes in
the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect reported amounts of assets and
liabilities 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 taxes, and
impairment of long-lived assets, including intangible assets.
Actual results could differ from those estimates.
In the opinion of management, all adjustments necessary for a
fair presentation of the financial position and results of
operations for the periods presented have been included, and all
significant intercompany transactions have been eliminated in
consolidation. Certain amounts reported in prior periods have
been reclassified to conform to the current presentation. Such
reclassifications have no effect on total assets, net income or
shareholders equity as previously reported. The results of
operations for the nine months ended September 30, 2010 are
not necessarily indicative of the results of operations that may
be expected for the year ending December 31, 2010.
The condensed consolidated balance sheet at December 31,
2009 has been derived from the audited consolidated financial
statements contained in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
The accounting policies followed by the Company are as set forth
in Note 1 of the Notes to Consolidated Financial Statements
in the Companys Annual Report on
Form 10-K
for the year ended December 31, 2009.
Current
Accounting Developments
In July 2010, the Financial Accounting Standards Board (the
FASB) issued Accounting Standards Update
(ASU)
2010-20,
Disclosures about the Credit Quality of Financing Receivables
and the Allowance for Credit Losses, to amend FASB
Accounting Standards Codification (ASC) Topic 320,
Receivables. The amendments in this update are intended
to provide disclosures that facilitate financial statement
users evaluation of the nature of credit risk inherent in
the entitys portfolio of financing receivables, how that
risk is analyzed and assessed in arriving at the allowance for
credit losses, and the changes and reasons for those changes in
the allowance for credit losses. The disclosures as of the end
of a reporting period are effective for interim and annual
periods ending on or after December 15, 2010. The
disclosures about activity that occurs during a reporting period
are effective for interim and annual reporting periods beginning
on or after December 15, 2010. Management does not
anticipate that adoption of this update will have a material
impact on the Companys financial position or results of
operations.
In April 2010, the FASB issued ASU
2010-18,
Effect of a Loan Modification When the Loan Is Part of a Pool
That Is Accounted for as a Single Asset, to amend ASC Topic
320, Receivables. The amendments in this update provide
that for acquired troubled loans which meet the criteria to be
accounted for within a pool, modifications to one or more of
these loans does not result in the removal of the modified loan
from the pool even if the modification would otherwise be
considered a troubled debt restructuring. The pool of assets in
which the loan is included will continue to be considered for
impairment. The amendments do not apply to loans not meeting the
criteria to be accounted for within a pool. These amendments
were effective for modifications of loans accounted for within
pools occurring in the first interim or annual period ending on
or
F-42
after July 15, 2010. Adoption of this update did not have a
material impact on the Companys financial position or
results of operations.
In February 2010, the FASB issued ASU
2010-09,
Amendments to Certain Recognition and Disclosure
Requirements, to amend ASC Topic 855, Subsequent
Events. The amendments in this update removed the
requirement to disclose the date through which subsequent events
have been evaluated and became effective immediately upon
issuance. Adoption of this update did not have a material impact
on the Companys financial position or results of
operations.
In January 2010, the FASB issued ASU
2010-06,
Improving Disclosures about Fair Value Measurements, to
amend ASC Topic 820, Fair Value Measurements and
Disclosures. The amendments in this update require more
robust disclosures about the different classes of assets and
liabilities measured at fair value, the valuation techniques and
inputs used, the activity in Level 3 fair value
measurements, and 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
after 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. Management does not anticipate that adoption of
this update will have a material impact on the Companys
financial position or results of operations.
|
|
2.
|
Earnings
(Loss) Per Share
|
Basic earnings (loss) 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. The weighted average
number of shares outstanding for the three and nine months ended
September 30, 2010 and 2009 were as follows:
Three
Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
(9,654
|
)
|
|
$
|
2,953
|
|
|
|
|
|
|
|
|
|
|
Shares used in the computation of earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
|
|
|
13,060,739
|
|
|
|
11,469,064
|
|
Incremental shares from assumed exercise of stock options and
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding diluted
|
|
|
13,060,739
|
|
|
|
11,469,064
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share basic
|
|
$
|
(0.74
|
)
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share diluted
|
|
$
|
(0.74
|
)
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, 2010 and 2009,
outstanding options to purchase 313,420 and 377,083 shares,
respectively, of common stock were excluded from the diluted
calculation because the option exercise prices exceeded the
average fair market value of the associated shares of common
stock. For both the three months ended September 30, 2010
and 2009, outstanding warrants to purchase 749,619 shares
of common stock were excluded from the diluted calculation
because the warrant exercise price exceeded the average fair
market value of the associated shares of common stock. There
were no dilutive stock options or warrants outstanding for the
three months ended September 30, 2010 and 2009.
F-43
Nine
Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(29,749
|
)
|
|
$
|
(1,335
|
)
|
|
|
|
|
|
|
|
|
|
Shares used in the computation of earnings per share:
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding basic
|
|
|
12,702,625
|
|
|
|
11,450,640
|
|
Incremental shares from assumed exercise of stock options and
warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding diluted
|
|
|
12,702,625
|
|
|
|
11,450,640
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share basic
|
|
$
|
(2.34
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share diluted
|
|
$
|
(2.34
|
)
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2010 and 2009,
outstanding options to purchase 313,420 and 377,083 shares,
respectively, 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. For both
the nine months ended September 30, 2010 and 2009,
outstanding warrants to purchase 749,619 shares of common
stock were excluded from the diluted calculation because the
warrant exercise price exceeded the average fair market value of
the associated shares of common stock. There were no dilutive
stock options or warrants outstanding for the nine months ended
September 30, 2010 and 2009.
|
|
3.
|
Comprehensive
Income (Loss)
|
Comprehensive income (loss) represents the change in the
Companys 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 Companys 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 Companys other
comprehensive income (loss) for the three and nine months ended
September 30, 2010 and 2009 is as follows:
Three
Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Unrealized gain on securities available for sale
|
|
$
|
65
|
|
|
$
|
7,556
|
|
Unrealized loss on change in fair value of cash flow hedge
|
|
|
|
|
|
|
(1,125
|
)
|
Amortization of prior service cost on SERP
|
|
|
2
|
|
|
|
1
|
|
Income tax effect
|
|
|
(25
|
)
|
|
|
(2,479
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
42
|
|
|
$
|
3,953
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Unrealized gain on securities available for sale
|
|
$
|
473
|
|
|
$
|
9,800
|
|
Unrealized loss on change in fair value of cash flow hedge
|
|
|
|
|
|
|
(2,781
|
)
|
Prior service cost recognized on SERP, net of amortization
|
|
|
6
|
|
|
|
(48
|
)
|
Income tax effect
|
|
|
(182
|
)
|
|
|
(2,706
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
$
|
297
|
|
|
$
|
4,265
|
|
|
|
|
|
|
|
|
|
|
F-44
Investment securities as of September 30, 2010 and
December 31, 2009 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations
|
|
$
|
35,012
|
|
|
$
|
273
|
|
|
$
|
|
|
|
$
|
35,285
|
|
Municipal bonds
|
|
|
22,892
|
|
|
|
396
|
|
|
|
125
|
|
|
|
23,163
|
|
Mortgage-backed securities issued by GSEs
|
|
|
110,336
|
|
|
|
6,960
|
|
|
|
|
|
|
|
117,296
|
|
Non-agency mortgage-backed securities
|
|
|
6,248
|
|
|
|
37
|
|
|
|
362
|
|
|
|
5,923
|
|
Other securities
|
|
|
3,252
|
|
|
|
8
|
|
|
|
203
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,740
|
|
|
|
7,674
|
|
|
|
690
|
|
|
|
184,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
|
300
|
|
|
|
3
|
|
|
|
|
|
|
|
303
|
|
Mortgage-backed securities issued by GSEs
|
|
|
1,219
|
|
|
|
79
|
|
|
|
|
|
|
|
1,298
|
|
Non-agency mortgage-backed securities
|
|
|
1,303
|
|
|
|
2
|
|
|
|
42
|
|
|
|
1,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,822
|
|
|
|
84
|
|
|
|
42
|
|
|
|
2,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
8,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
189,062
|
|
|
$
|
7,758
|
|
|
$
|
732
|
|
|
$
|
196,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
238,981
|
|
|
$
|
8,041
|
|
|
$
|
1,584
|
|
|
$
|
245,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-45
The following table summarizes the gross unrealized losses and
fair value of the Companys 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 September 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
|
$
|
1,647
|
|
|
$
|
18
|
|
|
$
|
2,734
|
|
|
$
|
107
|
|
|
$
|
4,381
|
|
|
$
|
125
|
|
Non-agency mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
4,148
|
|
|
|
362
|
|
|
|
4,148
|
|
|
|
362
|
|
Other securities
|
|
|
|
|
|
|
|
|
|
|
797
|
|
|
|
203
|
|
|
|
797
|
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,647
|
|
|
|
18
|
|
|
|
7,679
|
|
|
|
672
|
|
|
|
9,326
|
|
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-agency mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
745
|
|
|
|
42
|
|
|
|
745
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,647
|
|
|
$
|
18
|
|
|
$
|
8,424
|
|
|
$
|
714
|
|
|
$
|
10,071
|
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Losses
|
|
|
|
(Dollars in thousands)
|
|
|
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
|
|
$
|
24,905
|
|
|
$
|
541
|
|
|
$
|
8,374
|
|
|
$
|
1,043
|
|
|
$
|
33,279
|
|
|
$
|
1,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At the end of each quarter, 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.
Unrealized losses on the Companys investments in
non-agency mortgage-backed securities, or private label mortgage
securities, are related to five different securities. These
losses are due to a combination of changes in credit spreads and
other market factors. These mortgage securities are not issued
and guaranteed by an agency of the federal government but are
instead issued by private 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,
geography of collateral, remaining terms, interest rates, loan
types, etc. The Company has engaged a third party expert to
provide a quarterly stress test of each private
label mortgage
F-46
security through a 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 Companys investments in municipal
bonds are related to six different securities. These losses are
primarily related to concerns in the marketplace regarding
credit quality of certain municipalities in light of the recent
economic recession and high unemployment rates as well as
expectations of future market interest rates. 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.
As of September 30, 2010, two investment securities
remained in an
other-than-temporarily
impaired position. The first of these investments was a private
label mortgage security with a book value and unrealized loss of
$723,000 and ($331,000), respectively, as of September 30,
2010. This impairment determination was initially made at
December 31, 2009 and was based on the extent and duration
of the unrealized loss as well as recent credit rating
downgrades from rating agencies 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 private financial
institution with a book value and unrealized loss of
$1.0 million and ($203,000), respectively, as of
September 30, 2010. This impairment determination was
initially made at December 31, 2009 and was based on the
extent of the unrealized loss as well as adverse economic and
market conditions for financial institutions 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 securities in an unrealized loss position as of
September 30, 2010 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 September 30, 2010.
Other investment securities primarily include an investment in
Federal Home Loan Bank (FHLB) stock, which has no
readily determinable market value and is recorded at cost. As of
September 30, 2010 and December 31, 2009, the
Companys investment in FHLB stock totaled
$8.0 million and $6.0 million, respectively. Based on
its quarterly evaluation, management has concluded that the
Companys investment in FHLB stock was not impaired as of
September 30, 2010 and that ultimate recoverability of the
par value of this investment is probable. During the nine months
ended September 30, 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 Office of the Comptroller of the Currency in 2009.
The loss represented the full amount of the Companys
investment in Silverton Bank and was recorded as a reduction to
noninterest income on the Condensed Consolidated Statements of
Operations.
The amortized cost and estimated market values of debt
securities as of September 30, 2010 by final 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.
F-47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
Held to Maturity
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
|
(Dollars in thousands)
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300
|
|
|
$
|
303
|
|
Due after one year through five years
|
|
|
29,906
|
|
|
|
30,196
|
|
|
|
|
|
|
|
|
|
Due after five years through ten years
|
|
|
13,365
|
|
|
|
13,441
|
|
|
|
811
|
|
|
|
869
|
|
Due after ten years
|
|
|
132,719
|
|
|
|
139,329
|
|
|
|
1,711
|
|
|
|
1,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt securities
|
|
|
175,990
|
|
|
|
182,966
|
|
|
|
2,822
|
|
|
|
2,864
|
|
Total equity securities
|
|
|
1,750
|
|
|
|
1,758
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities
|
|
$
|
177,740
|
|
|
$
|
184,724
|
|
|
$
|
2,822
|
|
|
$
|
2,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the nine months ended September 30, 2010, the
Company recognized gross gains and (losses) of $519,000 and
($8,000), respectively, on sales of
available-for-sale
investment securities. These gains and losses are included in
net gain on investment securities in the Condensed Consolidated
Statements of Operations. Also included in net gain on
investment securities for the nine months ended
September 30, 2010 was $130,000 of appreciation on the fair
value of a publicly traded equity security that was
marked-to-market
through the Condensed Consolidated Statement of Operations.
During the nine months ended September 30, 2009, the
Company recognized gross gains of $484,000 on sales of
available-for-sale
investment securities. Included as a reduction to net gain on
investment securities for the nine months ended
September 30, 2009 was a $320,000 loss on an equity
investment in Silverton Bank. Proceeds received from sales of
available-for-sale
investment securities totaled $77.6 million and
$20.5 million in the nine months ended September 30,
2010 and 2009, respectively.
|
|
5.
|
Loans and
Allowance for Loan Losses
|
The composition of the loan portfolio by loan classification as
of September 30, 2010 and December 31, 2009 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Commercial real estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
391,749
|
|
|
$
|
452,120
|
|
Commercial non-owner occupied
|
|
|
274,635
|
|
|
|
245,674
|
|
|
|
|
|
|
|
|
|
|
Total commercial real estate
|
|
|
666,384
|
|
|
|
697,794
|
|
|
|
|
|
|
|
|
|
|
Consumer real estate:
|
|
|
|
|
|
|
|
|
Residential mortgage
|
|
|
171,792
|
|
|
|
165,374
|
|
Home equity lines
|
|
|
92,944
|
|
|
|
97,129
|
|
|
|
|
|
|
|
|
|
|
Total consumer real estate
|
|
|
264,736
|
|
|
|
262,503
|
|
|
|
|
|
|
|
|
|
|
Commercial owner occupied
|
|
|
178,920
|
|
|
|
194,359
|
|
Commercial and industrial
|
|
|
165,526
|
|
|
|
183,733
|
|
Consumer
|
|
|
6,683
|
|
|
|
9,692
|
|
Other loans
|
|
|
41,601
|
|
|
|
41,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,323,850
|
|
|
|
1,389,932
|
|
Deferred loan fees and origination costs, net
|
|
|
1,082
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,324,932
|
|
|
$
|
1,390,302
|
|
|
|
|
|
|
|
|
|
|
F-48
A summary of activity in the allowance for loan losses for the
nine months ended September 30, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
26,081
|
|
|
$
|
14,795
|
|
Loans charged off
|
|
|
(29,104
|
)
|
|
|
(6,654
|
)
|
Recoveries of loans previously charged off
|
|
|
738
|
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(28,366
|
)
|
|
|
(6,526
|
)
|
Provision for loan losses
|
|
|
38,534
|
|
|
|
11,242
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
36,249
|
|
|
$
|
19,511
|
|
|
|
|
|
|
|
|
|
|
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
Condensed Consolidated Balance Sheets. As of September 30,
2010 and December 31, 2009, the reserve for unfunded
lending commitments totaled $475,000 and $351,000, respectively.
The following is a summary of information related to
nonperforming assets as of September 30, 2010 and
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Nonperforming assets:
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
68,757
|
|
|
$
|
39,512
|
|
Accruing loans greater than 90 days past due
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
69,926
|
|
|
|
39,512
|
|
Other real estate
|
|
|
17,865
|
|
|
|
10,732
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
87,791
|
|
|
$
|
50,244
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30, 2010 and 2009, no
interest income was recognized on loans while in nonaccrual
status. Cumulative interest payments collected on active
nonaccrual loans and applied as a reduction to the principal
balance of the respective loans totaled $510,000 and $366,000 as
of September 30, 2010 and December 31, 2009,
respectively.
|
|
6.
|
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 options for the
purchase of up to 1,150,000 shares of the Companys
common stock to officers and directors. As of September 30,
2010, options for 293,600 shares of common stock were
outstanding and options for 598,859 shares of common stock
remained available for future issuance. In addition, options for
566,071 shares of common stock were assumed by the company
under various plans from previously acquired financial
institutions, of which options for 19,820 shares 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 certain vesting provisions.
F-49
The following table summarizes the activity in the
Companys stock option plans, including the weighted
average exercise price (WAEP), during the nine
months ended September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
|
Remaining Contractual
|
|
|
Aggregate
|
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
Term in Years
|
|
|
Intrinsic Value
|
|
|
Outstanding at beginning of period
|
|
|
366,583
|
|
|
$
|
11.76
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
19,250
|
|
|
|
4.38
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited and expired
|
|
|
(72,413
|
)
|
|
|
8.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
313,420
|
|
|
$
|
12.05
|
|
|
|
4.73
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period
|
|
|
225,870
|
|
|
$
|
13.74
|
|
|
|
3.37
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about the
Companys stock options as of September 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining Contractual
|
|
|
Number
|
|
|
Intrinsic
|
|
Exercise Price
|
|
Outstanding
|
|
|
Life in Years
|
|
|
Exercisable
|
|
|
Value
|
|
|
$3.85 - $6.00
|
|
|
79,250
|
|
|
|
8.57
|
|
|
|
12,000
|
|
|
$
|
|
|
$6.01 - $9.00
|
|
|
10,040
|
|
|
|
0.25
|
|
|
|
10,040
|
|
|
|
|
|
$9.01 - $12.00
|
|
|
74,880
|
|
|
|
1.45
|
|
|
|
73,380
|
|
|
|
|
|
$12.01 - $15.00
|
|
|
20,000
|
|
|
|
5.88
|
|
|
|
12,000
|
|
|
|
|
|
$15.01 - $18.37
|
|
|
129,250
|
|
|
|
4.44
|
|
|
|
118,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
313,420
|
|
|
|
4.73
|
|
|
|
225,870
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 price 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 Companys
common stock for a period approximating the expected life; the
expected dividend yield is based on the Companys
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 nine months
ended September 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
September 30,
|
|
|
2010
|
|
2009
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
|
|
Expected volatility
|
|
|
33.0
|
%
|
|
|
|
|
Risk-free interest rate
|
|
|
3.1
|
%
|
|
|
|
|
Expected life
|
|
|
7 years
|
|
|
|
|
|
The weighted average fair value of the 19,250 options granted in
the nine months ended September 30, 2010 was $1.80 per
option. There were no options granted in the nine months ended
September 30, 2009.
As of September 30, 2010, the Company had unamortized
compensation expense related to unvested stock options of
$102,000, which is expected to be fully amortized over the next
four years. For the nine months ended September 30, 2010
and 2009, the Company recorded compensation expense of $37,000
and $38,000, respectively, related to stock options.
F-50
Restricted
Stock
Pursuant to the Equity Incentive Plan, the Board of Directors
may grant restricted stock to certain employees and Board
members at its discretion. There have been no restricted stock
grants since 2008. Nonvested 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. Nonvested restricted stock for the nine
months ended September 30, 2010 is summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at beginning of period
|
|
|
24,000
|
|
|
$
|
8.08
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(400
|
)
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
Nonvested at end of period
|
|
|
23,600
|
|
|
$
|
8.12
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2010, the Company had
23,600 shares of nonvested restricted stock grants, which
represents unrecognized compensation expense of $102,000 to be
recognized over the remaining vesting period of the respective
grants. Total compensation expense related to these restricted
stock awards for the nine months ended September 30, 2010
and 2009 totaled $92,000 and $91,000, 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% 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 nine months ended
September 30, 2010 and 2009, the Company recognized
compensation expense of $452,000 and $417,000, respectively,
related to the Deferred Compensation Plan.
|
|
7.
|
Derivative
Instruments
|
The Company enters into interest rate lock commitments with
customers and commitments to sell mortgages to investors. The
period of time between the issuance of a mortgage loan
commitment and the closing and sale of the mortgage loan is
generally less than 60 days. Interest rate lock commitments
and forward loan sale commitments represent derivative
instruments which are carried at fair value. These derivative
instruments do not qualify for hedge accounting. The fair values
of the Companys interest rate lock commitments and forward
loan sales commitments are based on current secondary market
pricing and are included on the Condensed Consolidated Balance
Sheets in mortgage loans held for sale and on the Condensed
Consolidated Statements of Operations in mortgage origination
and other loan fees.
As of September 30, 2010, the Company had
$16.0 million of commitments outstanding to originate
mortgage loans held for sale at fixed rates and
$24.5 million of forward commitments under best efforts
contracts to sell mortgages to four different investors. The
fair value adjustments of the interest rate lock commitments and
forward loan sales commitments were not considered material as
of September 30, 2010. Thus, there was no impact to the
Condensed Consolidated Statements of Operations for the three or
nine months ended September 30, 2010. There were no such
commitments outstanding as of December 31, 2009 or
September 30, 2009.
F-51
|
|
8.
|
Commitments
and Contingencies
|
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 various types of commitments to extend credit,
including unused lines of credit and overdraft lines, as well as
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 Companys 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 managements 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 Companys exposure to off-balance-sheet credit risk as
of September 30, 2010 and December 31, 2009 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands)
|
|
|
Commitments to extend credit
|
|
$
|
179,254
|
|
|
$
|
231,691
|
|
Standby letters of credit
|
|
|
9,866
|
|
|
|
9,144
|
|
|
|
|
|
|
|
|
|
|
Total commitments
|
|
$
|
189,120
|
|
|
$
|
240,835
|
|
|
|
|
|
|
|
|
|
|
The Company has limited partnership investments in two related
private investment funds which totaled $1.8 million as of
both September 30, 2010 and December 31, 2009. These
investments are recorded on the cost basis and were included in
other assets on the Condensed Consolidated Balance Sheets.
Remaining capital commitments to these investment funds totaled
$1.6 million as of September 30, 2010.
|
|
9.
|
Fair
Value Measurement
|
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 securitys 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.
Mortgage loans held for sale are carried at the lower of cost or
market value. The fair values of mortgage loans held for sale
are based on commitments on hand from investors within the
secondary market for loans with similar characteristics. As
such, the fair value adjustment for mortgage loans held for sale
is classified as nonrecurring Level 2.
F-52
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 that are
collateral dependent is based on collateral value. For impaired
loans that are not collateral dependent, estimated value is
based on either an observable market price, if available, or the
present value of expected future cash flows. Those impaired
loans not requiring an allowance represent loans for which the
estimated fair value exceeds the recorded investments in such
loans. When the fair value of an impaired loan 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
managements 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 September 30, 2010 and December 31, 2009
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Active Markets
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations
|
|
$
|
|
|
|
$
|
35,285
|
|
|
$
|
|
|
|
$
|
35,285
|
|
Municipal bonds
|
|
|
|
|
|
|
23,163
|
|
|
|
|
|
|
|
23,163
|
|
Mortgage-backed securities issued by GSEs
|
|
|
|
|
|
|
117,296
|
|
|
|
|
|
|
|
117,296
|
|
Non-agency mortgage-backed securities
|
|
|
|
|
|
|
5,923
|
|
|
|
|
|
|
|
5,923
|
|
Other securities
|
|
|
1,757
|
|
|
|
|
|
|
|
1,300
|
|
|
|
3,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,757
|
|
|
$
|
181,667
|
|
|
$
|
1,300
|
|
|
$
|
184,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. agency obligations
|
|
$
|
|
|
|
$
|
1,029
|
|
|
$
|
|
|
|
$
|
1,029
|
|
Municipal bonds
|
|
|
|
|
|
|
72,894
|
|
|
|
|
|
|
|
72,894
|
|
Mortgage-backed securities issued by GSEs
|
|
|
|
|
|
|
151,658
|
|
|
|
|
|
|
|
151,658
|
|
Non-agency mortgage-backed securities
|
|
|
|
|
|
|
7,797
|
|
|
|
|
|
|
|
7,797
|
|
Other securities
|
|
|
748
|
|
|
|
|
|
|
|
1,300
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
748
|
|
|
$
|
233,378
|
|
|
$
|
1,300
|
|
|
$
|
235,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
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 nine months ended
September 30, 2010:
|
|
|
|
|
|
|
Level 3
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
1,300
|
|
Total unrealized losses included in:
|
|
|
|
|
Net income
|
|
|
|
|
Other comprehensive income
|
|
|
|
|
Purchases, sales and issuances, net
|
|
|
|
|
Transfers in and (out) of Level 3
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,300
|
|
|
|
|
|
|
Assets and liabilities measured at fair value on a nonrecurring
basis as of September 30, 2010 and December 31, 2009
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Other
|
|
Significant
|
|
|
|
|
Quoted Prices in
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Active Markets
|
|
Inputs
|
|
Inputs
|
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
|
(Dollars in thousands)
|
|
September 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
67,501
|
|
|
$
|
4,359
|
|
|
$
|
71,860
|
|
Other real estate
|
|
|
|
|
|
|
17,865
|
|
|
|
|
|
|
|
17,865
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
|
|
|
$
|
36,972
|
|
|
$
|
34,181
|
|
|
$
|
71,153
|
|
Other real estate
|
|
|
|
|
|
|
10,732
|
|
|
|
|
|
|
|
10,732
|
|
|
|
10.
|
Fair
Value of Financial Instruments
|
Due to the nature of the Companys 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 Companys financial instruments,
the fair value of such instruments has been derived based on
managements 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 liquid 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.
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
F-54
institutions with equivalent credit risk. The estimated fair
value for the Companys 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
Companys financial instruments as of September 30,
2010 and December 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2010
|
|
December 31, 2009
|
|
|
Carrying
|
|
Estimated
|
|
Carrying
|
|
Estimated
|
|
|
Amount
|
|
Fair Value
|
|
Amount
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
Financial Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
68,069
|
|
|
$
|
68,069
|
|
|
$
|
29,513
|
|
|
$
|
29,513
|
|
Investment securities
|
|
|
196,046
|
|
|
|
196,088
|
|
|
|
245,492
|
|
|
|
245,438
|
|
Mortgage loans held for sale
|
|
|
8,528
|
|
|
|
8,528
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
1,288,683
|
|
|
|
1,283,521
|
|
|
|
1,364,221
|
|
|
|
1,368,233
|
|
Accrued interest receivable
|
|
|
6,120
|
|
|
|
6,120
|
|
|
|
6,590
|
|
|
|
6,590
|
|
Financial Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-maturity deposits
|
|
$
|
479,401
|
|
|
$
|
479,401
|
|
|
$
|
529,257
|
|
|
$
|
529,257
|
|
Time deposits
|
|
|
880,010
|
|
|
|
888,071
|
|
|
|
848,708
|
|
|
|
861,378
|
|
Repurchase agreements
|
|
|
|
|
|
|
|
|
|
|
6,543
|
|
|
|
6,543
|
|
Borrowings
|
|
|
129,000
|
|
|
|
137,540
|
|
|
|
167,000
|
|
|
|
171,278
|
|
Subordinated debentures
|
|
|
34,323
|
|
|
|
15,593
|
|
|
|
30,930
|
|
|
|
12,200
|
|
Accrued interest payable
|
|
|
1,710
|
|
|
|
1,710
|
|
|
|
1,824
|
|
|
|
1,824
|
|
There was no material difference between the carrying amount and
estimated fair value of off-balance-sheet commitments totaling
$189.1 million and $240.8 million as of
September 30, 2010 and December 31, 2009,
respectively, which are primarily comprised of unfunded loan
commitments and standby letters of credit. The Companys
remaining assets and liabilities are not considered financial
instruments.
|
|
11.
|
Private
Placement Offering
|
On March 18, 2010, the Company sold 849 investment units
(Units) for gross proceeds of $8.5 million.
Each Unit was priced at $10,000 and consisted of a $3,996.90
subordinated promissory note and a number of shares of the
Companys common stock valued at $6,003.10. The offering
and sale of the Units was limited to accredited investors. As a
result of the sale of the Units, the Company sold
$3.4 million in aggregate principal amount of subordinated
promissory notes due March 18, 2020 (the Notes)
and 1,468,770 shares of the Companys common stock
valued at $5.1 million. The Notes were recorded in
subordinated debentures on the Condensed Consolidated Balance
Sheets. The Company is obligated to pay interest on the Notes at
10% per annum payable in quarterly installments commencing on
the third month anniversary of the date of issuance of the
Notes. The Company may prepay the Notes at any time after
March 18, 2015 subject to approval by the Federal Reserve
and compliance with applicable law.
The Companys obligation to repay the Notes is subordinate
to all indebtedness owed by the Company to its current and
future secured creditors and general creditors, including the
Federal Reserve and the Federal Deposit Insurance Corporation,
and certain other financial obligations of the Company.
On October 28, 2010, the Company entered into an informal
Memorandum of Understanding (MOU) with the Federal
Depository Insurance Corporation and the North Carolina
Commissioner of Banks. An MOU is characterized by regulatory
authorities as an informal action that is not published or
publicly available and
F-55
that is used when circumstances warrant a milder form of action
than a formal supervisory action, such as a formal written
agreement or order. In accordance with the terms of the MOU, the
Company has agreed to, among other things, (i) increase
regulatory capital to achieve and maintain a minimum Tier 1
leverage capital ratio of at least 8% and a total risk-based
capital ratio of at least 12%, (ii) monitor and reduce its
commercial real estate concentration, (iii) timely identify
and reduce its overall level of problem loans,
(iv) establish and maintain an adequate allowance for loan
losses, and (v) ensure adherence to loan policy guidelines.
The MOU will remain in effect until modified, terminated,
lifted, suspended or set aside by the regulatory authorities.
On November 4, 2010, the Company announced its entry into
an Investment Agreement whereby North American Financial
Holdings, Inc. (NAFH) has agreed to purchase
71.0 million shares of the Companys common stock for
a purchase price of $2.55 per share, for a total investment of
approximately $181 million. NAFH also agreed to issue a
non-transferable contingent value right that will attach to each
share of the Companys common stock outstanding as of a
specified record date (other than shares of common stock held by
NAFH) that will provide existing shareholders with the
opportunity to receive up to $0.75 per share five years from the
closing date of the proposed transaction, depending on the level
of loan charge-offs during that five-year period. After giving
effect to the NAFH investment, NAFH would own approximately 85%
of the Companys outstanding shares of common stock. The
Company also intends to conduct a rights offering to legacy
shareholders of rights to purchase up to 5.0 million shares
of common stock at a price of $2.55 per share. Further, NAFH
would have the right to conduct a tender offer at any time to
purchase up to 5.25 million shares of the Companys
common stock at a price not less than $2.55 per share. Upon
closing of the investment, R. Eugene Taylor, NAFHs CEO,
and Christopher G. Marshall, NAFHs CFO, will be added to
the management team as the Companys CEO and CFO and
members of the Companys Board of Directors upon closing of
the investment transaction. B. Grant Yarber and Michael R. Moore
are expected to remain in senior executive roles at Capital
Bank. The Companys Board of Directors will be
reconstituted with a combination of two existing members and new
NAFH-designated Board members.
The investment is subject to satisfaction or waiver of certain
closing conditions, including shareholder approval of the terms
of the investment and an increase in our authorized shares of
common stock under our Articles of Incorporation, reaching an
agreement with the U.S. Department of the Treasury to
repurchase the preferred stock and warrant issued under the
Troubled Asset Relief Program Capital Purchase Program on terms
acceptable to NAFH, and the receipt by NAFH and the Company of
the requisite governmental and regulatory approvals.
F-56
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution.
|
The following table sets forth the fees and expenses payable by
us in connection with the sale of the securities being
registered hereunder, all of which will be borne by us. All
amounts shown are estimates except for the SEC registration fee.
|
|
|
|
|
SEC registration fee
|
|
$
|
1,480
|
|
Subscription and information agent fees and expenses
|
|
$
|
30,000
|
|
Legal fees and expenses
|
|
$
|
152,520
|
|
Accounting fees and expenses
|
|
$
|
20,000
|
|
Printing costs
|
|
$
|
28,000
|
|
Mailing and other miscellaneous expenses
|
|
$
|
18,000
|
|
|
|
|
|
|
Total
|
|
$
|
250,000
|
|
|
|
|
|
|
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Sections 55-8-50
through
55-8-58 of
the North Carolina Business Corporation Act permit a corporation
to indemnify its directors, officers, employees or agents under
either or both a statutory or nonstatutory scheme of
indemnification. Under the statutory scheme, a corporation may,
with certain exceptions, indemnify a director, officer, employee
or agent of the corporation who was, is or is threatened to be
made, a party to any threatened, pending or completed legal
action, suit or proceeding, whether civil, criminal,
administrative or investigative, because of the fact that such
person was a director, officer, agent or employee of the
corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the
obligation to pay any judgment, settlement, penalty, fine
(including an excise tax assessed with respect to an employee
benefit plan) and reasonable expenses incurred in connection
with a proceeding (including counsel fees), but no such
indemnification may be granted unless such director, officer,
agent or employee (i) conducted himself in good faith,
(ii) reasonably believed (1) that any action taken in
his official capacity with the corporation was in the best
interest of the corporation or (2) that in all other cases
his conduct at least was not opposed to the corporations
best interest, and (iii) in the case of any criminal
proceeding, had no reasonable cause to believe his conduct was
unlawful. Whether a director has met the requisite standard of
conduct for the type of indemnification set forth above is
determined by the board of directors, a committee of directors,
special legal counsel or the shareholders in accordance with
Section 55-8-55.
A corporation may not indemnify a director under the statutory
scheme in connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the
corporation or in connection with a proceeding in which a
director was adjudged liable on the basis of having received an
improper personal benefit.
In addition,
Section 55-8-57
of the North Carolina Business Corporation Act permits a
corporation to indemnify or agree to indemnify any of its
directors, officers, employees or agents against liability and
expenses (including attorneys fees) in any proceeding
(including proceedings brought by or on behalf of the
corporation) arising out of their status as such or their
activities in any of the foregoing capacities; provided,
however, that a corporation may not indemnify or agree to
indemnify a person against liability or expenses such person may
incur on account of activities that were, at the time taken,
known or believed by the person to be clearly in conflict with
the best interests of the corporation.
Our Bylaws provide for indemnification, to the fullest extent
permitted by law, of our directors and officers and anyone who
at our request, was serving as an officer, director, agent,
partner, trustee, administrator or employee of another entity
against any threatened, pending or completed civil, criminal,
administrative, investigative or arbitrative action, suit or
proceeding, or any appeal of such an action, seeking to hold him
or
II-1
her liable by reason of the fact that he or she was acting in
such capacity. We also may provide such indemnification for our
employees and agents as we deem appropriate.
The rights of indemnification found in our Bylaws cover:
|
|
|
|
|
reasonable expenses, including without limitation all
attorneys fees actually and necessarily incurred by him or
her in connection with any action, suit or proceeding;
|
|
|
|
all reasonable payments in satisfaction of any judgment, money
decree, fine, penalty or settlement; and
|
|
|
|
all reasonable expense incurred in enforcing the indemnification
rights.
|
Sections 55-8-52
and 55-8-56
of the North Carolina Business Corporation Act require a
corporation, unless its articles of incorporation provide
otherwise, to indemnify a director or officer who has been
wholly successful, on the merits or otherwise, in the defense of
any proceeding to which such director or officer was a party.
Unless prohibited by the articles of incorporation, a director
or officer also may make application and obtain court-ordered
indemnification if the court determines that such director or
officer is fairly and reasonably entitled to such
indemnification as provided in
Sections 55-8-54
and 55-8-56.
Finally,
Section 55-8-57
of the North Carolina Business Corporation Act provides that a
corporation may purchase and maintain insurance on behalf of an
individual who is or was a director, officer, employee or agent
of the corporation against certain liabilities incurred by such
persons, whether or not the corporation is otherwise authorized
by the North Carolina Business Corporation Act to indemnify such
party. Our directors and officers are currently covered under
directors and officers insurance policies maintained
by us. As permitted by North Carolina law, our Articles of
Incorporation limit the personal liability of directors for
monetary damages for breaches of duty as a director, provided
that such limitation will not apply to (i) acts or
omissions that the director at the time of the breach knew or
believed were clearly in conflict with our best interests,
(ii) any liability for unlawful distributions under
Section 55-8-33
of the North Carolina Business Corporation Act, or
(iii) any transaction from which the director derived an
improper personal benefit. In addition, our Articles of
Incorporation stipulate that the liability of a director is
eliminated or limited to the fullest extent permitted by the
North Carolina Business Corporation Act, as it may be amended in
the future.
On January 28, 2011, we entered into indemnification
agreements (each, an Indemnification Agreement) with
each of our directors and senior executive officers (each an
Indemnitee). The Indemnification Agreements provide
the Indemnitees with, among other things, indemnification
against liabilities relating to their services as directors and
officers of Capital Bank Corporation
and/or the
Bank and the advancement of expenses under certain
circumstances, in each case to the fullest extent permitted by
law. The Indemnification Agreements also require us and the Bank
to take reasonable best efforts to purchase and maintain one or
more policies of directors and officers liability
insurance to cover liabilities asserted against, or incurred by,
the Indemnitees.
In connection with our merger with 1st State Bancorp, Inc.
in 2006, we agreed to, or to cause the Bank to, obtain and
maintain 1st State Bancorp, Inc.s directors and
officers liability insurance policies or comparable
policies for a period of six years after January 3, 2006.
In connection with the Investment, we agreed to indemnify,
defend and hold harmless, and provide advancement of defense
costs and other expenses to, each person who was at any time
prior to the closing of the Investment, an officer or director
of our company or any of our subsidiaries against all losses,
claims, damages, costs, expenses, liabilities or judgments or
amounts that are paid in settlement of or in connection with any
claim, action, suit, proceeding or investigation based in whole
or in part on or arising in whole or in part out of the fact
that such person was a director or officer of our company or any
of our subsidiaries, and pertaining to any matter existing or
occurring, or any acts or omissions occurring, at or prior to
the closing of the Investment, whether asserted or claimed prior
to, at or after the closing of the Investment.
In the ordinary course of our business we may from time to time
enter into additional contracts under which we and our directors
and officers are provided with standard rights of
indemnification against liability that they may incur in their
capacities as such and in connection with activities performed
under the terms of such contracts.
II-2
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
On December 12, 2008, we entered into a Letter Agreement
and Securities Purchase Agreement Standard Terms
with the Treasury pursuant to which we sold, and the Treasury
purchased, for an aggregate purchase price of $41,279,000 in
cash (i) 41,279 shares of our Fixed Rate Cumulative
Perpetual Preferred Stock, Series A, liquidation preference
of $1,000 per share, and (ii) a ten-year warrant to
purchase 749,619 shares of our common stock at an exercise
price, subject to anti-dilution adjustments, of $8.26 per share.
The securities were sold in a private placement exempt from
registration pursuant to Section 4(2) of the Securities
Act. We did not engage in a general solicitation or advertising
with regard to the issuance and sale of such securities and did
not offer securities to the public in connection with this
issuance and sale.
On March 18, 2010, we sold 849 units for gross
proceeds of $8,490,000. Each unit was priced at $10,000 and
consisted of a $3,996.90 subordinated promissory note and a
number of shares of common stock valued at $6,003.10. As a
result of the sale of the units, we sold $3,393,368 in aggregate
principal amount of subordinated promissory notes due
March 18, 2020 and 1,468,770 shares of common stock.
The aggregate offering price of the common stock was
$5,096,631.90, with a per share offering price of $3.47. Offers
and sales of the units were made pursuant to Regulation D
of the Securities Act and only made to accredited investors.
There was no underwriting discount or commission.
On January 28, 2011, pursuant to the terms of the
Investment Agreement, we issued to NAFH for $181,050,000 in
cash, 71,000,000 shares of our common stock at a purchase
price of $2.55 per share. The issuance of securities pursuant to
the Investment was a private placement to an accredited
investor (as that term is defined under Rule 501 of
Regulation D) exempt from registration under the
Securities Act in reliance upon Section 4(2) of the
Securities Act and Rule 506 of Regulation D
promulgated thereunder, as a transaction by an issuer not
involving a public offering.
|
|
|
|
|
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 our 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 2.01 above (incorporated by reference to
Exhibit 2.2 to our Current Report on
Form 8-K
filed with the SEC on June 29, 2005)
|
|
3
|
.01
|
|
Articles of Incorporation of Capital Bank Corporation, as
amended*
|
|
3
|
.02
|
|
Bylaws of Capital Bank Corporation, as amended to date
(incorporated by reference to Exhibit 3.02 to our Annual
Report on
Form 10-K
filed with the SEC on March 29, 2002)
|
|
4
|
.01
|
|
Specimen Common Stock Certificate of Capital Bank Corporation
(incorporated by reference to Exhibit 4.1 to our
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.
|
|
5
|
.01
|
|
Opinion of Wachtell, Lipton, Rosen & Katz
|
|
10
|
.01
|
|
Equity Incentive Plan (incorporated by reference to
Exhibit 10.02 to our 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 our 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 our 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 to Appendix A to our
Proxy Statement for Annual Meeting held on May 26, 2005)
|
II-3
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.05
|
|
Amended and Restated Deferred Compensation Plan for Outside
Directors, effective November 20, 2008 (incorporated by
reference to Exhibit 10.04 to our 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 our
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 10.06 to our 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 our 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 10.08 to our Annual Report on
Form 10-K
filed with the SEC on March 16, 2009)
|
|
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 our Current Report on
Form 8-K
filed with the SEC on September 22, 2008)
|
|
10
|
.11
|
|
Amendment to Amended and Restated Employment Agreement, dated
January 14, 2011, among Capital Bank, Capital Bank
Corporation, and B. Grant Yarber (incorporated by reference to
Exhibit 10.2 to our Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.12
|
|
Employment Agreement, dated January 31, 2008, by and
between Michael R. Moore and Capital Bank Corporation
(incorporated by reference to Exhibit 10.2 to our Current
Report on
Form 8-K
filed with the SEC on January 31, 2008)
|
|
10
|
.13
|
|
Amendment to Employment Agreement, dated January 14, 2011,
among Capital Bank, Capital Bank Corporation, and Michael R.
Moore (incorporated by reference to Exhibit 10.3 to our
Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.14
|
|
Employment Agreement, dated January 25, 2008, by and
between David C. Morgan and Capital Bank Corporation
(incorporated by reference to Exhibit 10.1 to our Current
Report on
Form 8-K
filed with the SEC on January 31, 2008)
|
|
10
|
.15
|
|
Amendment to Employment Agreement, dated January 14, 2011,
among Capital Bank, Capital Bank Corporation, and David C.
Morgan (incorporated by reference to Exhibit 10.4 to our
Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.16
|
|
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 our Current Report on
Form 8-K
filed with the SEC on September 22, 2008)
|
|
10
|
.17
|
|
Amendment to Amended and Restated Employment Agreement, dated
January 14, 2011, among Capital Bank, Capital Bank
Corporation, and Mark Redmond (incorporated by reference to
Exhibit 10.5 to our Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.18
|
|
Letter Agreement, dated November 18, 2008, by and between
Capital Bank and Ralph J. Edwards (incorporated by reference to
Exhibit 10.14 to our Annual Report on
Form 10-K
filed with the SEC on March 10, 2010)
|
|
10
|
.19
|
|
Lease Agreement, dated November 16, 1999, between Crabtree
Park, LLC and Capital Bank Corporation (incorporated by
reference to Exhibit 10.01 to our Annual Report on
Form 10-K
filed with the SEC on March 27, 2000)
|
|
10
|
.20
|
|
Lease Agreement, dated November 1, 2005, by and between
Capital Bank Corporation and 333 Ventures, LLC (incorporated by
reference to Exhibit 10.1 to our Current Report on
Form 8-K
filed with the SEC on November 28, 2005)
|
|
10
|
.21
|
|
Agreement, dated November 2001, between Fiserv Solutions, Inc.
and Capital Bank Corporation (incorporated by reference to
Exhibit 10.08 to our Annual Report on
Form 10-K
filed with the SEC on March 29, 2002)
|
II-4
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.22
|
|
Letter Agreement, dated December 12, 2008, including
Securities Purchase Agreement Standard Terms
incorporated by reference therein, by and between Capital Bank
Corporation and the United States Department of Treasury
(incorporated by reference to Exhibit 10.1 to our Current
Report on
Form 8-K
filed with the SEC on December 15, 2008)
|
|
10
|
.23
|
|
Form of Waiver with Senior Executive Officers (incorporated by
reference to Exhibit 10.2 to our Current Report on
Form 8-K
filed with the SEC on December 15, 2008)
|
|
10
|
.24
|
|
Form of Letter Agreement Limiting Executive Compensation with
Senior Executive Officers (incorporated by reference to
Exhibit 10.3 to our Current Report on
Form 8-K
filed with the SEC on December 15, 2008)
|
|
10
|
.25
|
|
Summary of Material Terms of the Capital Bank Annual Incentive
Plan (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on
Form 10-Q
for the period ended March 31, 2008 filed with the SEC on
May 8, 2008)
|
|
10
|
.26
|
|
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 our Quarterly Report on
Form 10-Q
for the period ended September 30, 2008 filed with the SEC
on November 7, 2008)
|
|
10
|
.27
|
|
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 our Current
Report on
Form 8-K
filed with the SEC on October 9, 2008)
|
|
10
|
.28
|
|
Investment Agreement, dated November 3, 2010, among Capital
Bank Corporation, Capital Bank and North American Financial
Holdings, Inc. (incorporated by reference to Exhibit 10.1
to our Current Report on
Form 8-K
filed with the SEC on November 4, 2010)
|
|
10
|
.29
|
|
First Amendment to Investment Agreement, dated January 14,
2011, among Capital Bank Corporation, Capital Bank and North
American Financial Holdings, Inc. (incorporated by reference to
Exhibit 10.1 to our Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.30
|
|
Contingent Value Rights Agreement, dated January 28, 2011,
of Capital Bank Corporation (incorporated by reference to
Exhibit 10.1 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
10
|
.31
|
|
Registration Rights Agreement dated January 28, 2011, by
and between Capital Bank Corporation and North American
Financial Holdings, Inc. (incorporated by reference to
Exhibit 10.2 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
10
|
.32
|
|
Form of Indemnification Agreement by and between Capital Bank
Corporation and its directors and certain officers (incorporated
by reference to Exhibit 10.3 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
10
|
.33
|
|
Form of Indemnification Agreement by and between Capital Bank
and its directors and certain officers (incorporated by
reference to Exhibit 10.4 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
21
|
.01
|
|
Subsidiaries of the Registrant*
|
|
23
|
.01
|
|
Consent of Grant Thornton LLP
|
|
23
|
.02
|
|
Consent of Wachtell, Lipton, Rosen & Katz (contained
in Exhibit 5.01)
|
|
24
|
.01
|
|
Power of Attorney*
|
|
99
|
.1
|
|
Form of Capital Bank Corporation Subscription Rights Election
Form
|
|
99
|
.2
|
|
Form of Instructions for Use of Capital Bank Corporation
Subscription Rights Election Form
|
|
99
|
.3
|
|
Form of Letter to Registered Holders of Common Stock
|
|
99
|
.4
|
|
Form of Letter to Brokers and Other Nominee Holders
|
|
99
|
.5
|
|
Form of Beneficial Owner Election Form
|
|
99
|
.6
|
|
Form of Nominee Holder Certification
|
II-5
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
99
|
.7
|
|
Form of Letter to Participants in Capital Bank 401(k) Retirement
Plan
|
|
99
|
.8
|
|
Form of Capital Bank 401(k) Retirement Plan Subscription Rights
Election Form
|
|
|
* |
Previously filed with the registrants Registration
Statement on Form S-1 (No. 333-172025), which was
filed with the SEC on February 2, 2011.
|
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
Calculation of Registration Fee table in the
effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under
the Securities Act to any purchaser, each prospectus filed
pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and
included in the registration statement as of the date it is
first used after effectiveness. Provided, however, that no
statement made in a registration statement or prospectus that is
part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the
registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify
any statement that was made in the registration statement or
prospectus that was part of the registration statement or made
in any such document immediately prior to such date of first use.
(5) That, for the purpose of determining liability of the
registrant under the Securities Act of 1933 to any purchaser in
the initial distribution of the securities, the undersigned
registrant undertakes that in a primary offering of securities
of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell
the securities to the purchaser, if the securities are offered
or sold to such purchaser by means of any of the following
communications, the undersigned
II-6
registrant will be a seller to the purchaser and will be
considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
(6) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(7) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Raleigh, State of North
Carolina, on February 10, 2011.
CAPITAL BANK CORPORATION
|
|
|
|
By:
|
/s/ Christopher
G. Marshall
|
Christopher G. Marshall
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed by the
following persons in the capacities and on the dates indicated
as of February 10, 2011.
|
|
|
|
|
Name
|
|
Title
|
|
|
|
|
*
R.
Eugene Taylor
|
|
President, Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
|
|
|
|
*
Christopher
G. Marshall
|
|
Executive Vice President,
Chief Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
|
|
|
|
*
R.
Bruce Singletary
|
|
Executive Vice President,
Chief Risk Officer and Director
|
|
|
|
*
Peter
N. Foss
|
|
Director
|
|
|
|
*
William
A. Hodges
|
|
Director
|
|
|
|
*
O.
A. Keller, III
|
|
Director
|
|
|
|
*
Charles
F. Atkins
|
|
Director
|
The undersigned, by signing his name hereto, signs and executes
this registration statement pursuant to Powers of Attorney
executed by the above named directors and officers and filed
with the U.S. Securities and Exchange Commission.
|
|
* By: |
/s/ Christopher
G. Marshall
|
Christopher G. Marshall
Chief Financial Officer
II-8
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 our 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 2.01 above (incorporated by reference to
Exhibit 2.2 to our Current Report on
Form 8-K
filed with the SEC on June 29, 2005)
|
|
3
|
.01
|
|
Articles of Incorporation of Capital Bank Corporation, as
amended*
|
|
3
|
.02
|
|
Bylaws of Capital Bank Corporation, as amended to date
(incorporated by reference to Exhibit 3.02 to our Annual
Report on
Form 10-K
filed with the SEC on March 29, 2002)
|
|
4
|
.01
|
|
Specimen Common Stock Certificate of Capital Bank Corporation
(incorporated by reference to Exhibit 4.1 to our
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.
|
|
5
|
.01
|
|
Opinion of Wachtell, Lipton, Rosen & Katz
|
|
10
|
.01
|
|
Equity Incentive Plan (incorporated by reference to
Exhibit 10.02 to our 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 our 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 our 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 to Appendix A to our
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 10.04 to our 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 our
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 10.06 to our 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 our 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 10.08 to our Annual Report on
Form 10-K
filed with the SEC on March 16, 2009)
|
|
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 our Current Report on
Form 8-K
filed with the SEC on September 22, 2008)
|
|
10
|
.11
|
|
Amendment to Amended and Restated Employment Agreement, dated
January 14, 2011, among Capital Bank, Capital Bank
Corporation, and B. Grant Yarber (incorporated by reference to
Exhibit 10.2 to our Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.12
|
|
Employment Agreement, dated January 31, 2008, by and
between Michael R. Moore and Capital Bank Corporation
(incorporated by reference to Exhibit 10.2 to our Current
Report on
Form 8-K
filed with the SEC on January 31, 2008)
|
|
10
|
.13
|
|
Amendment to Employment Agreement, dated January 14, 2011,
among Capital Bank, Capital Bank Corporation, and Michael R.
Moore (incorporated by reference to Exhibit 10.3 to our
Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.14
|
|
Employment Agreement, dated January 25, 2008, by and
between David C. Morgan and Capital Bank Corporation
(incorporated by reference to Exhibit 10.1 to our Current
Report on
Form 8-K
filed with the SEC on January 31, 2008)
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.15
|
|
Amendment to Employment Agreement, dated January 14, 2011,
among Capital Bank, Capital Bank Corporation, and David C.
Morgan (incorporated by reference to Exhibit 10.4 to our
Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.16
|
|
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 our Current Report on
Form 8-K
filed with the SEC on September 22, 2008)
|
|
10
|
.17
|
|
Amendment to Amended and Restated Employment Agreement, dated
January 14, 2011, among Capital Bank, Capital Bank
Corporation, and Mark Redmond (incorporated by reference to
Exhibit 10.5 to our Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.18
|
|
Letter Agreement, dated November 18, 2008, by and between
Capital Bank and Ralph J. Edwards (incorporated by reference to
Exhibit 10.14 to our Annual Report on
Form 10-K
filed with the SEC on March 10, 2010)
|
|
10
|
.19
|
|
Lease Agreement, dated November 16, 1999, between Crabtree
Park, LLC and Capital Bank Corporation (incorporated by
reference to Exhibit 10.01 to our Annual Report on
Form 10-K
filed with the SEC on March 27, 2000)
|
|
10
|
.20
|
|
Lease Agreement, dated November 1, 2005, by and between
Capital Bank Corporation and 333 Ventures, LLC (incorporated by
reference to Exhibit 10.1 to our Current Report on
Form 8-K
filed with the SEC on November 28, 2005)
|
|
10
|
.21
|
|
Agreement, dated November 2001, between Fiserv Solutions, Inc.
and Capital Bank Corporation (incorporated by reference to
Exhibit 10.08 to our Annual Report on
Form 10-K
filed with the SEC on March 29, 2002)
|
|
10
|
.22
|
|
Letter Agreement, dated December 12, 2008, including
Securities Purchase Agreement Standard Terms
incorporated by reference therein, by and between Capital Bank
Corporation and the United States Department of Treasury
(incorporated by reference to Exhibit 10.1 to our Current
Report on
Form 8-K
filed with the SEC on December 15, 2008)
|
|
10
|
.23
|
|
Form of Waiver with Senior Executive Officers (incorporated by
reference to Exhibit 10.2 to our Current Report on
Form 8-K
filed with the SEC on December 15, 2008)
|
|
10
|
.24
|
|
Form of Letter Agreement Limiting Executive Compensation with
Senior Executive Officers (incorporated by reference to
Exhibit 10.3 to our Current Report on
Form 8-K
filed with the SEC on December 15, 2008)
|
|
10
|
.25
|
|
Summary of Material Terms of the Capital Bank Annual Incentive
Plan (incorporated by reference to Exhibit 10.1 to our
Quarterly Report on
Form 10-Q
for the period ended March 31, 2008 filed with the SEC on
May 8, 2008)
|
|
10
|
.26
|
|
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 our Quarterly Report on
Form 10-Q
for the period ended September 30, 2008 filed with the SEC
on November 7, 2008)
|
|
10
|
.27
|
|
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 our Current
Report on
Form 8-K
filed with the SEC on October 9, 2008)
|
|
10
|
.28
|
|
Investment Agreement, dated November 3, 2010, among Capital
Bank Corporation, Capital Bank and North American Financial
Holdings, Inc. (incorporated by reference to Exhibit 10.1
to our Current Report on
Form 8-K
filed with the SEC on November 4, 2010)
|
|
10
|
.29
|
|
First Amendment to Investment Agreement, dated January 14,
2011, among Capital Bank Corporation, Capital Bank and North
American Financial Holdings, Inc. (incorporated by reference to
Exhibit 10.1 to our Current Report on
Form 8-K
filed with the SEC on January 18, 2011)
|
|
10
|
.30
|
|
Contingent Value Rights Agreement, dated January 28, 2011,
of Capital Bank Corporation (incorporated by reference to
Exhibit 10.1 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
10
|
.31
|
|
Registration Rights Agreement dated January 28, 2011, by
and between Capital Bank Corporation and North American
Financial Holdings, Inc. (incorporated by reference to
Exhibit 10.2 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
10
|
.32
|
|
Form of Indemnification Agreement by and between Capital Bank
Corporation and its directors and certain officers (incorporated
by reference to Exhibit 10.3 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
10
|
.33
|
|
Form of Indemnification Agreement by and between Capital Bank
and its directors and certain officers (incorporated by
reference to Exhibit 10.4 to our Current Report on
Form 8-K
filed with the SEC on February 1, 2011)
|
|
21
|
.01
|
|
Subsidiaries of the Registrant*
|
|
23
|
.01
|
|
Consent of Grant Thornton LLP
|
|
23
|
.02
|
|
Consent of Wachtell, Lipton, Rosen & Katz (contained
in Exhibit 5.01)
|
|
24
|
.01
|
|
Power of Attorney*
|
|
99
|
.1
|
|
Form of Capital Bank Corporation Subscription Rights Election
Form
|
|
99
|
.2
|
|
Form of Instructions for Use of Capital Bank Corporation
Subscription Rights Election Form
|
|
99
|
.3
|
|
Form of Letter to Registered Holders of Common Stock
|
|
99
|
.4
|
|
Form of Letter to Brokers and Other Nominee Holders
|
|
99
|
.5
|
|
Form of Beneficial Owner Election Form
|
|
99
|
.6
|
|
Form of Nominee Holder Certification
|
|
99
|
.7
|
|
Form of Letter to Participants in Capital Bank 401(k) Retirement
Plan
|
|
99
|
.8
|
|
Form of Capital Bank 401(k) Retirement Plan Subscription Rights
Election Form
|
|
|
* |
Previously filed with the registrants Registration
Statement on Form S-1 (No. 333-172025), which was
filed with the SEC on February 2, 2011.
|