-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PHLyw3gDcjLKR2r0cJoCWouL2/Gb59H8+B89wxZLipVHFWb5u8wYEAV26jJgH7bj NA0wKrnQKNECwmU1hUc8Ag== 0000914317-02-000305.txt : 20020415 0000914317-02-000305.hdr.sgml : 20020415 ACCESSION NUMBER: 0000914317-02-000305 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL BANK CORP CENTRAL INDEX KEY: 0001071992 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 562101930 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30062 FILM NUMBER: 02593598 BUSINESS ADDRESS: STREET 1: 4400 FALLS OF NEUSE ROAD CITY: RALEIGH STATE: NC ZIP: 27609 BUSINESS PHONE: 9198783100 MAIL ADDRESS: STREET 1: JAMES A BECK, REGISTERED AGENT FOR CBC STREET 2: PO BOX 18949 CITY: RALEIGH STATE: NC ZIP: 27619-8949 10-K 1 form10k-42903_4102.txt #Form 10-K.doc #Form 10-K.doc UNITED STATES OF AMERICA FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 Commission File Number 0-30062 CAPITAL BANK CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-2101930 (State of incorporation) (I.R.S. Employer Identification Number) 4901 Glenwood Avenue 27612 Raleigh, North Carolina (Zip Code) (Address of principal executive office) Registrant's telephone number, including area code: (919) 645-6400 Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value per share (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. The aggregate market value of the registrant's Common Stock, no par value per share, as of March 21, 2002, held by those persons deemed by the registrant to be non-affiliates was approximately $66,900,000. As of March 15, 2002, there were 5,485,668 shares of the registrant's Common Stock, no par value per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE Document Where Incorporated - -------- ------------------ 1. Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 2001 Part I and Part II 2. Portions of the registrant's Proxy Statement for the Annual Meeting of Shareholders to be held on May 23, 2002 Part III
CAPITAL BANK CORPORATION Annual Report on Form 10-K INDEX PART I...................................................................................................1 Item 1. Business....................................................................................1 Item 2. Properties.................................................................................10 Item 3. Legal Proceedings..........................................................................11 Item 4. Submission of Matters to a Vote of Security Holders........................................11 PART II.................................................................................................11 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................11 Item 6. Selected Financial Data....................................................................11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......11 Item 7A. Quantitative and Qualitative Disclosure About Market Risk..................................11 Item 8. Financial Statements and Supplementary Data................................................12 Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.......12 PART III................................................................................................12 Item 10. Directors and Executive Officers of the Registrant.........................................12 Item 11. Executive Compensation.....................................................................12 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................12 Item 13. Certain Relationships and Related Transactions.............................................12 PART IV.................................................................................................13 Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K..........................13 Forward-Looking Statements..............................................................................14 Signatures..............................................................................................15
PART I Item 1. Business. General Capital Bank Corporation (the "Company") is a financial holding company incorporated under the laws of North Carolina on August 10, 1998. The Company's primary function is to serve as the holding company for its wholly-owned subsidiaries, Capital Bank and Capital Bank Investment Services, Inc. Capital Bank (the "Bank") was incorporated under the laws of the State of North Carolina on May 30, 1997, and commenced operations as a state-chartered banking corporation on June 20, 1997. The Bank is not a member of the Federal Reserve System and has no subsidiaries. Capital Bank Investment Services, Inc. ("CBIS") was incorporated under the laws of the State of North Carolina on January 3, 2001 and commenced operations as a full service investment company on March 1, 2001. On January 18, 2002, the Company acquired First Community Financial Corporation ("First Community"), a bank holding company located in Burlington, North Carolina. First Community was incorporated on October 7, 1998 to serve as the holding company for Community Savings Bank, Inc. ("Community Savings Bank"). Community Savings Bank was originally chartered in 1934, and its market area consisted of the communities in Alamance County, North Carolina. Community Savings Bank operated four full service branches and primarily engaged in soliciting deposit accounts from businesses and the general public and making commercial loans, construction loans, residential real estate loans, home equity line of credit loans, consumer loans and various investments. The merger was approved by the shareholders of the Company and First Community in special meetings of shareholders held by each company on January 17, 2002 and consummated on January 18, 2002. On March 15, 2002, Community Savings Bank was merged into the Bank and the Bank thereby assumed all of the operations of Community Savings Bank. As used in this report, the term "Company" refers to Capital Bank Corporation and its subsidiaries. As of December 31, 2001, the Company had assets of approximately $406.7 million, gross loans outstanding of approximately $306.9 million and deposits of approximately $304.4 million. Immediately after the acquisition of First Community, the Company had assets of approximately $621.4 million, gross loans outstanding of approximately $443.5 million and deposits of approximately $480.9 million. The Company's corporate office is located at 4901 Glenwood Avenue, Raleigh, North Carolina 27612, and its telephone number is (919) 645-6400. In addition to the corporate office, the Company has three branch offices in Raleigh, two in Cary, one in Siler City, two in Oxford, one in Warrenton, one in Woodland, one in Seaboard, three in Sanford, three in Burlington, and one in Graham, North Carolina. The Company also has a loan origination office in Greensboro, NC. Capital Bank is a locally-owned community bank engaged in the general commercial banking business in Wake, Chatham, Northampton, Granville, Warren, Alamance and Lee Counties, North Carolina. Wake County has a diversified economic base, comprised primarily of services, retail trade, government and manufacturing and includes the City of Raleigh, the state capital. Lee, Northampton, Granville, Warren and Chatham counties are significant centers for various industries, including agriculture, manufacturing, lumber and tobacco. Alamance County has a diversified economic base, 1 comprised primarily of manufacturing, agriculture, retail and wholesale trade, government, services and utilities. The Bank offers a full range of banking services, including the following: checking accounts; savings accounts; NOW accounts; money market accounts; certificates of deposit; loans for real estate, construction, businesses, agriculture, personal uses, home improvement and automobiles; equity lines of credit; credit loans; consumer loans; credit cards; individual retirement accounts; safe deposit boxes; bank money orders; electronic funds transfer services including wire transfers; traveler's checks; various investments; 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. At present, the Bank does not provide the services of a trust department. The investment services subsidiary, Capital Bank Investment Services, Inc., makes available a full range of non-deposit investment services to individuals and corporations, including the customers of the Bank. These investment services include full-service securities brokerage, asset management, financial planning and retirement services, such as 401-k plans, all provided exclusively through a strategic alliance with Raymond James Financial Services, Inc. ("Raymond James"). Raymond James Financial Services is a wholly owned subsidiary of Raymond James Financial, Inc. (NYSE: RJF) and is a leading provider of third party investment services, serving more than 250 community banks nationwide. These services are available in the offices of Capital Bank through registered investment representatives. Lending Activities and Deposits Loan Types and Lending Policies. The Company makes a variety of loans, including loans secured by real estate, loans for construction, loans for commercial purposes and loans to individuals for personal and household purposes. There were no large concentrations of credit to any particular industry. The economic trends of the area served by the Company are influenced by the significant industries within the region. Consistent with the Company's emphasis on being a community-oriented financial institution, virtually all the Company's business activity is with customers located either in the Research Triangle Park area of North Carolina and surrounding counties or Alamance County. The ultimate collectibility of the Company's loan portfolio is susceptible to changes in the market conditions of these geographic regions. The Company uses a centralized risk management process to insure uniform credit underwriting that adheres to bank policy. Lending policies are reviewed on a regular basis to confirm that the Company is prudent in setting its underwriting criteria. Credit risk is managed through a number of methods including loan grading of commercial loans, committee approval of larger loans and class and purpose coding of loans. Management believes that early detection of credit problems through regular contact with the Company's clients coupled with consistent reviews of the borrowers' financial condition are important factors in overall credit risk management. The following table sets forth, as of December 31, 2001, the approximate composition of the Company's loan portfolio: 2 Loan Type Amount Percentage --------- ------ ---------- (in thousands) Commercial........................... $229,386 74.7% Consumer............................. 28,201 9.2 Real Estate.......................... 20,921 6.8 Equity Lines......................... 28,383 9.3 ------- --- Total.................... $306,891 100.0% ======== ===== Deposits. The majority of the Company's deposit customers are individuals and small to medium-size businesses located in Wake, Chatham, Granville, Warren, Northampton, Alamance, and Lee Counties, North Carolina and contiguous areas. The Company's deposit base is well diversified, with no material concentration in a single industry or group of related industries. The management of the Company does not believe that the deposits or the business of the Company in general are seasonal in nature. The deposits may, however, vary with local and national economic conditions but not enough, management believes, to have a material effect on planning and policy making. The Company attempts to control deposit flow through the pricing of deposits and promotional activities. Management believes that the Company's rates are competitive with those offered by other institutions in the same geographic area. The following table sets forth the mix of depository accounts at the Company as a percentage of total deposits as of December 31, 2001: Non-interest bearing demand ........... 9.4% Interest checking ..................... 12.4 Market rate investment ................ 19.0 Savings .............................. 2.0 Time deposits Under $100,000...................... 42.5 Equal to or over $100,000........... 14.7 ----- 100.0 % ===== Competition Commercial banking in North Carolina is extremely competitive in large part due to statewide branching. The Company competes in its market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of the Company's competitors have broader geographic markets and higher lending limits than the Company and are also able to provide more services and make greater use of media advertising. The enactment of legislation authorizing interstate banking has caused great increases in the size and financial resources of some of the Company's competitors. In addition, as a result of interstate banking, out-of-state commercial banks may acquire North Carolina banks and heighten the competition among banks in North Carolina. 3 Despite the competition in its market area, the Company believes that it has certain competitive advantages that distinguish it from its competition. The Company believes that its primary competitive advantages are its strong local identity and affiliation with the communities it serves and its emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. The Company offers customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. The Company offers many personalized services and attracts customers by being responsive and sensitive to their individualized needs. The Company also 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 community, the Company supports and participates in local events and its officers and directors serve on boards of local civic and charitable organizations. Employees At March 15, 2002, the Company employed 180 persons, of which 170 were full-time and 10 were part-time. None of its employees are represented by any collective bargaining unit. The Company considers relations with its employees to be good. Supervision and Regulation Holding companies, banks and many of their non-bank affiliates are extensively regulated under both federal and state law. The following is a brief summary of certain statutes, rules and regulations affecting the Company and the Bank. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the Company's or the Bank's business. Supervision, regulation and examination of the Company and the Bank by bank regulatory agencies is intended primarily for the protection of the Bank's depositors rather than holders of the Common Stock of the Company. Holding Company Regulation General. The Company is a holding company registered with the Federal Reserve under the Bank Holding Company Act of 1956 (the "BHCA"). As such, the Company and the Bank are subject to the supervision, examination and reporting requirements contained in the BHCA and the regulation of the Federal Reserve. The BHCA requires that a bank holding company obtain the prior approval of the Federal Reserve before (i) acquiring direct or indirect ownership or control of more than five percent of the voting shares of any bank, (ii) taking any action that causes a bank to become a subsidiary of the 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, with certain exceptions, from engaging in activities other than banking, or managing or controlling banks or other permissible subsidiaries, and from acquiring or retaining direct or indirect control of any company engaged in any activities other than those activities determined by the Federal Reserve to be closely related to banking, or managing or controlling banks, as to be a proper incident thereto. In determining whether a particular activity is permissible, the Federal Reserve must consider whether the performance of such an activity can 4 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, banking, operating a thrift institution, extending credit or servicing loans, leasing real or personal property, conducting discount securities brokerage activities, performing 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 activities. Pursuant to delegated authority, the Federal Reserve Bank of Richmond has authority to approve certain activities of holding companies within its district, including the Company, provided the nature of the activity has been approved by the Federal Reserve. Despite prior approval, the Federal Reserve has the power to order a holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that bank holding company. Financial Holding Companies. The Gramm-Leach-Bliley Financial Modernization Act of 1999 ("GLB") was enacted on November 12, 1999. The GLB: o allows bank holding companies meeting management, capital and the Community Reinvestment Act of 1977 (the "CRA") standards to engage in a substantially broader range of nonbanking activities than was permissible prior to enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies; o allows insurers and other financial services companies to acquire banks; o removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and o establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations. This part of the GLB became effective on March 11, 2000. The Federal Reserve Board notified the Company that, effective April 23, 2001, the Company was authorized to operate as a financial holding company and therefore is eligible to engage in the broader range of activities that are permitted by the GLB. The GLB also is designed to modify other current financial laws, including laws related to financial privacy and community reinvestment. The new financial privacy provisions generally prohibit financial institutions, including the Company, from disclosing nonpublic personal financial information to nonaffiliated third parties unless customers have the opportunity to "opt out" of the disclosure. Mergers and Acquisitions. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions of banks and bank holding companies without geographic limitation, subject to any state requirement that the bank has been organized for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to, or following the proposed acquisition, controls no more than 5 10% of the total amount of deposits of insured depository institutions in the U.S. and no more than 30% of such deposits in any state (or such lesser or greater amount set by state law). In addition, the IBBEA permits a bank to merge with a bank in another state as long as neither of the states has opted out of the IBBEA prior to May 31, 1997. The state of North Carolina has "opted in" to such legislation, effective June 22, 1995. In addition, a bank may establish and operate a de novo branch in a state in which the bank does not maintain a branch if that state expressly permits de novo interstate branching. As a result of North Carolina's opt-in law, North Carolina law permits unrestricted interstate de novo branching. 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 thereof 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 also regulates certain debt obligations, changes in control of bank holding companies and capital requirements. Under the provisions of the North Carolina law, the Company is registered with and subject to supervision by the North Carolina Commissioner of Banks (the "Commissioner"). Capital Requirements. The Federal Reserve has established risk-based capital guidelines for bank holding companies and state member banks. 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. At least half of this capital 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 ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of mandatory convertible debt securities and 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 between four percent and five percent. The guidelines also provide that bank holding companies experiencing significant growth, whether through internal expansion or acquisitions, will be expected to maintain strong capital ratios substantially 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 6 institutions if warranted by particular circumstances or the institution's risk profile. Furthermore, the guidelines indicate that the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") will continue to consider a "tangible Tier 1 Leverage Ratio" (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised the Company of any specific minimum Leverage Ratio or tangible Tier 1 Leverage Ratio applicable to it. As of December 31, 2001, the Company had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 9.63%, 10.88% and 8.75%, respectively, all in excess of the minimum requirements. International Money Laundering Abatement and Financial Anti-Terrorism Act Of 2001. On October 26, 2001, the President signed the USA Patriot Act of 2001 into law. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the "IMLAFA"). The IMLAFA contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The IMLAFA requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions' operations. As of the date of this filing, the Company has not determined the impact that IMLAFA will have on the Bank's operations but the impact is not expected to be material. The Bank will establish policies and procedures to ensure compliance with the IMLAFA. Bank Regulation The Bank is subject to numerous state and federal statutes and regulations that affect its business, activities, and operations, and is supervised and examined by the Commissioner and the Federal Reserve. The Federal Reserve and the Commissioner regularly examine the operations of banks over which they exercise jurisdiction. They have the authority to approve or disapprove the establishment of branches, mergers, consolidations and other similar corporate actions. They also have authority to prevent the continuance or development of unsafe or unsound banking practices and other violations of law. The Federal Reserve and the Commissioner regulate and monitor all areas of the operations of banks and their subsidiaries, including loans, mortgages, issuances of securities, capital adequacy, loss reserves and compliance with the CRA as well as other laws and regulations. Interest and certain other charges collected and contracted for by banks are also subject to state usury laws and certain federal laws concerning interest rates. The deposit accounts of the Bank are insured by the Bank Insurance Fund (the "BIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to a maximum of $100,000 per insured depositor. 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 7 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. Under the 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 Company's total assets would be less than its liabilities. In general, the Company's ability to pay cash dividends is dependent upon the amount of dividends paid 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. The Federal Reserve also imposes limits on the Bank's payment of dividends. 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. At December 31, 2001, the Bank had Tier 1 risk-adjusted, total regulatory capital and leverage capital of approximately 9.64%, 10.89% and 8.36%, respectively, all in excess of the minimum requirements. The Bank is subject to insurance assessments imposed by the FDIC. Effective January 1, 1997, the FDIC adopted a risk-based assessment schedule providing for annual assessment rates ranging from 0% to 27% of an institution's average assessment base, applicable to institutions insured by both the BIF and the Savings Association Insurance Fund ("SAIF"). The actual assessment to be paid by each insured institution is based on the institution's assessment risk classification, which focuses on whether the institution is considered "well capitalized," "adequately capitalized" or "under capitalized," as such terms are defined in the applicable federal regulations. Within each of these three risk classifications, each institution will be assigned to one of three subgroups based on supervisory risk factors. In particular, regulators will assess supervisory risk based on whether the institution is financially sound with only a few minor weaknesses (Subgroup A), whether it has weaknesses which, if not corrected, could result in an increased risk of loss to the BIF (Subgroup B) or whether such weaknesses pose a substantial risk of loss to the BIF unless corrective action is taken (Subgroup C). The FDIC also is authorized to impose one or more special assessments in an amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United States Treasury Department and, beginning in 1997, all banks are required to pay additional annual assessments at rates set by the Financing Corporation, which was established by the Competitive Equality Banking Act of 1987. 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. 8 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. Banks are also subject to the CRA, which requires the appropriate federal bank regulatory agency, in connection with its examination of a bank, to assess such bank's record in meeting the credit needs of the community served by that bank, including low and moderate-income neighborhoods. Each institution is assigned one of the following four ratings of its record in meeting community credit needs: "outstanding," "satisfactory," "needs to improve" or "substantial noncompliance." The regulatory agency's assessment of the bank's record is made available to the public. Further, such assessment is required of any bank which has applied to (i) charter a national bank, (ii) obtain deposit insurance coverage for a newly chartered institution, (iii) establish a new branch office that will accept deposits, (iv) relocate an office or (v) merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve will assess the record of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. Effective May 12, 2000, the GLB's "CRA Sunshine Requirements" call for financial institutions to disclose publicly certain written agreements made in fulfillment of the CRA. Banks that are parties to such agreements also 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. This annual reporting requirement is effective for any agreements made after May 12, 2000. Monetary Policy and Economic Controls The Company and the Bank are directly affected by governmental policies and regulatory measures affecting the banking industry in general. Of primary importance is the Federal Reserve Board, whose actions directly affect the money supply which, in turn, affects banks' lending abilities by increasing or decreasing the cost and availability of funds to banks. The Federal Reserve Board regulates the availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in United States government securities, changes in the discount rate on member bank borrowings, changes in reserve requirements against bank deposits and limitations on interest rates that banks may pay on time and savings deposits. Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks have 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 9 interest rates has generally increased banks' cost of funds and made them more sensitive to fluctuations in money market rates. In view of the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand, or the business and earnings of the Bank or the Company. As a result, banks, including the Bank, face a significant challenge to maintain acceptable net interest margins. Executive Officers The executive officers of the Company are as follows: Name Age Position With Company - ---- --- --------------------- James A. Beck 49 President and Chief Executive Officer Allen T. Nelson, Jr. 52 Executive Vice President, Chief Financial Officer and Secretary Franklin G. Shell 43 Executive Vice President and Chief Credit Officer James A. Beck is currently President and Chief Executive Officer of the Company, a position he has held since the Company commenced operations. Mr. Beck served as Chairman, President and Chief Executive Officer of SouthTrust Bank of North Carolina, N.A. from January 1991 until June 1996 when it was merged into the SouthTrust Charlotte-based bank. Mr. Beck thereafter served as President and a director of the combined bank until January 1997, when he resigned to join the Company. Allen T. Nelson, Jr. has been employed by the Company since February 2, 1998, as its Chief Financial Officer and Secretary. From December 1993 through January 1998, Mr. Nelson served as the Senior Vice President and Chief Financial Officer for Jefferson Bankshares, Inc. and its principal subsidiary, Jefferson National Bank, both based in Charlottesville, Virginia. Franklin G. Shell has been employed with the Company since April 14, 1997, as its Executive Vice President and Chief Credit Officer. Prior thereto, from 1989, Mr. Shell was employed by the North Carolina-based bank, Branch Banking and Trust Company, serving as a commercial loan officer in its Raleigh, North Carolina office. Item 2. Properties. The Company currently leases property located at 4901 Glenwood Avenue, Raleigh, North Carolina for the its principal offices and a branch office. The lease is for approximately 21,600 square feet, of which 10 approximately 19,600 square feet is for the Company's principal offices and the remainder for the branch office. In addition to this facility, the Company also has various branches and offices either owned or leased throughout its market area. See also Note 6 to the Company's Consolidated Financial Statements included on page 32 of the 2001 Annual Report, filed as Exhibit 13 to this report, which is incorporated herein by reference. Item 3. Legal Proceedings. There are no pending legal proceedings to which the Company is a party or of which any of its property is subject. In addition, the Company is not aware of any threatened litigation, unasserted claims or assessments that could have a material adverse effect on the Company's business, operating results or financial condition. Item 4. Submission of Matters to a Vote of Security Holders During the fourth quarter of the year ended December 31, 2001, there were no matters submitted to a vote of the Company's shareholders. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Information relating to the market for the Company's Common Stock is incorporated by reference from page 44 of the 2001 Annual Report to Shareholders of Capital Bank Corporation, filed as Exhibit 13 to this report. Information relating to dividends on the Company's Common Stock is incorporated by reference from the section entitled "Capital Resources" on page 14 of the 2001 Annual Report, filed as Exhibit 13 to this report, and from Note 11 in the Notes to Consolidated Financial Statements on page 33 of the 2001 Annual Report, filed as Exhibit 13 to this report. Holders of Common Stock. The Company has 1,128 holders of record as of March 15, 2002. Recent Sales of Unregistered Securities. The Company did not sell any securities in the fiscal year ended December 31, 2001 which were not registered under the Securities Act of 1933, as amended, except that during such fiscal year the Company granted options to employees and directors to acquire an aggregate of 108,350 shares of its Common Stock at a weighted average exercise price of $10.62 per share pursuant to the Company's Stock Option Plans. Item 6. Selected Financial Data. This information is incorporated by reference from page 1 of the 2001 Annual Report, filed as Exhibit 13 to this report. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. This information is incorporated by reference from pages 6 through 16 of the 2001 Annual Report, filed as Exhibit 13 to this report. Item 7A. Quantitative and Qualitative Disclosure About Market Risk This information is incorporated by reference from page 16 of the 2001 Annual Report, filed as Exhibit 13 to this report. Item 8. Financial Statements and Supplementary Data. This information is incorporated by reference from pages 17 through 40 of the 2001 Annual Report, filed as Exhibit 13 to this report. Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure. None. PART III This Part incorporates certain information from the definitive proxy statement (the "2002 Proxy Statement") for the 2002 Annual Meeting of Shareholders of Capital Bank Corporation, to be filed with the Securities and Exchange Commission on April 8, 2002 which is not later than 120 days after the end of the Company's fiscal year covered by this Report on Form 10-K. Item 10. Directors and Executive Officers of the Registrant. Information concerning the Company's executive officers is included under the caption "Executive Officers" on pages 9 and 10 of this report. Information concerning the Company's directors and filing of certain reports of beneficial ownership is incorporated by reference to the 2002 Proxy Statement. Item 11. Executive Compensation. This information is incorporated by reference to the Company's 2002 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. This information is incorporated by reference to the Company's 2002 Proxy Statement. Item 13. Certain Relationships and Related Transactions. 12 This information is incorporated by reference to the Company's 2002 Proxy Statement. 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K. (a)(1) Financial Statements. The following financial statements included in the 2001 Annual Report, filed as Exhibit 13 to this report, are incorporated by reference in Item 8 of this report: Annual Report to Financial Statements and Information Shareholders Page Consolidated Balance Sheets dated as of December 31, 2001 and 2000 17 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 18 Consolidated Statements of Changes in Shareholders' 19 Equity for the years ended December 31, 2001, 2000 and 1999 Consolidated Statements of Cash Flows for the years ended 20 - 21 December 31, 2001, 2000 and 1999 Notes to Consolidated Statements 22 - 40 Report of Independent Accountants 41 (a)(2) Financial Statement Schedules. All applicable financial statement schedules required under Regulation S-X and pursuant to Industry Guide 3 under the Securities Act of 1933 have been included in the Notes to the Financial Statements. (a)(3) Exhibits. The exhibits required by Item 601 of Regulation S-K are listed in the Exhibit Index immediately following the signature pages to this report. (b) Reports on Form 8-K. The Company filed a report on Form 8-K on 14 October 12, 2001. FORWARD-LOOKING STATEMENTS Information set forth in this Annual Report on Form 10-K contains various "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which statements represent the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results 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. The Company cautions that any such forward looking statements are further qualified by important factors that could cause the Company's actual operating results to differ materially from those in the forward looking statements, including without limitation, the Company's management of its growth, the risks associated with possible or completed acquisitions, competition within the industry, dependence on key personnel, government regulation and the other risk factors described in Exhibit 99 attached to this report. 15 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the 29th day of March, 2002. CAPITAL BANK CORPORATION By: /s/ James A. Beck ------------------------------------- James A. Beck President and Chief Executive Officer 16 SIGNATURES AND POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints James A. Beck and Allen T. Nelson, Jr., and each of them, with full power to act without the other, his true and lawful attorneys-in-fact and agents, with full powers of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities indicated and on March 29, 2002. Signature Title --------- ----- /s/ James A. Beck - ------------------------ President, Chief Executive Officer and Director James A. Beck /s/ Allen T. Nelson, Jr. - ------------------------ Executive Vice President and Chief Financial Officer Allen T. Nelson, Jr. /s/ William C. Burkhardt - ------------------------ Director William C. Burkhardt /s/ William R. Gilliam - ------------------------ Vice Chairman of the Board of Directors William R. Gilliam /s/ Robert L. Jones - ------------------------ Director Robert L. Jones /s/ Oscar A. Keller, III - ------------------------ Chairman of the Board of Directors Oscar A. Keller, III /s/ Oscar A. Keller, Jr. - ------------------------ Director Oscar A. Keller, Jr. /s/ Charles LeGrand - ------------------------ Director Charles LeGrand /s/ James D. Moser - ------------------------ Director James D. Moser /s/ Samuel J. Wornom, III - ------------------------- Director Samuel J. Wornom, III 17 EXHIBIT INDEX - Exhibit No. Description - ----------- ----------- 2.01(1) Merger Agreement, dated October 4, 2001, between the Company and First Community Financial Corporation and Related Plan of Merger. 3.01(2) Articles of Incorporation of the Company 3.02 Bylaws of the Company, as amended to date 4.01(2) Specimen Common Stock Certificate of the Company 10.01(2,3) Amended and Restated Employment Agreement, dated May 22, 1997, between NB Acquisition Corp., as predecessor to the Company, and James A. Beck. 10.02(2,3) Incentive Stock Option Plan 10.03(2,3) Non-Qualified Stock Option Plan 10.04(2,3) Deferred Compensation Plan for Outside Directors 10.05(3,4) Change in Control Agreement, dated February 1, 2000 between Capital Bank and Allen T. Nelson, Jr. 10.06(3,4) Change in Control Agreement, dated February 27, 2000 between Capital Bank and Franklin G. Shell 10.07(4) Lease Agreement, dated November 16, 1999, between Crabtree Park, LLC and the Company. 10.08(5) Agreement, dated November 2001 between Fiserv Solutions, Inc. and the Company. 13 Portions of the Annual Report to Shareholders for fiscal year ended December 31, 2001. 21 Subsidiaries of the Registrant 23 Consent of Independent Accountants 99 Risk Factors Relating to the Company 19 __________________________ 1 Incorporated by reference to the Company's Registration Statement on Form S-4 filed with the SEC on November 14, 2001. 2 Incorporated by reference to the Company's Registration Statement on Form S-4 filed with the SEC on October 19, 1998, as amended on November 10, 1998, December 21, 1998 and February 8, 1999. 3 Denotes a management contract or compensatory plan, contract or arrangement. 4 Incorporated by reference to the Company's Form 10-K filed with the SEC on March 27, 2000. 5 Confidential treatment of portions of this document has been requested pursuant to Rule 24b-2 of the Securities and Exchange Commission. 20 EX-3.02 3 exhibit3-02.txt EXHIBIT 3.02 BYLAWS OF CAPITAL BANK CORPORATION ARTICLE I DEFINITIONS In these bylaws, unless otherwise provided, the following terms shall have the following meanings: (1) "Act" shall mean the North Carolina Business Corporation Act as codified in Chapter 55 of the North Carolina General Statutes effective July 1, 1990, and as amended from time to time; (2) "Articles of incorporation" shall mean the Corporation's articles of incorporation, including amended and restated articles of incorporation and articles of merger; (3) "Corporation" shall mean Capital Bank Corporation. (4) "Distribution" shall mean a direct or indirect transfer of money or other property (except the Corporation's own shares) or incurrence of indebtedness by the Corporation to or for the benefit of its shareholders in respect of any of its shares. A distribution may be in the form of a declaration or payment of a dividend, a purchase, redemption, or other acquisition of shares, a distribution of indebtedness, or otherwise; (5) "Emergency" shall mean a catastrophic event which prevents a quorum of the board of directors from being readily assembled; (6) "Shares" shall mean the units into which the proprietary interests in the Corporation are divided; and (7) "Voting group" shall mean all shares of one or more classes or series that under the articles of incorporation or the Act are entitled to vote and be counted together collectively on a matter at a meeting of shareholders. All shares entitled by the articles of incorporation or the Act to vote generally on a matter are for that purpose a single voting group. ARTICLE II OFFICES SECTION 1. Principal Office: The principal office of the Corporation shall be located at 4400 Falls of Neuse Road, Raleigh, Wake County, North Carolina 27609, or at such other place as may be determined from time to time by the directors. SECTION 2. Registered Office: The registered office of the Corporation shall be located at 4400 Falls of Neuse Road, Raleigh, Wake County, North Carolina 27609. The mailing address of the registered office of the Corporation shall be P.O. Box 18949, Raleigh, North Carolina 27619-8949. SECTION 3. Other Offices: The Corporation may have offices at such other places, either within or without the State of North Carolina, as the board of directors may from time to time determine, or as the affairs of the Corporation may require. ARTICLE III MEETINGS OF SHAREHOLDERS SECTION 1. Place of Meetings: All meetings of shareholders shall be held at the principal office of the Corporation, or at such other place, either within or without the State of North Carolina, as shall be designated in the notice of the meeting or as may be agreed upon by a majority of the shareholders entitled to vote at the meeting. SECTION 2. Annual Meeting: The annual meeting of shareholders for the election of directors and the transaction of other business shall be held annually, on any day (except Saturday, Sunday or a legal holiday) not later than the thirtieth (30th) day of June in each year as fixed by the board of directors. SECTION 3. Substitute Annual Meeting: If the annual meeting shall not be held on the day designated pursuant to these bylaws, a substitute annual meeting may be called in accordance with the provisions of Section 4 of this Article. A meeting so called shall be designated and treated for all purposes as the annual meeting. SECTION 4. Special Meetings: Special meetings of the shareholders may be called at any time by the chief executive officer, president, secretary, or board of directors. In addition, special meetings may be called at any time by the shareholders if the holders of at least ten percent (10%) of all the votes entitled to be cast on any issue proposed to be considered at the proposed special meeting sign, date, and deliver to the secretary a written demand for the meeting describing the purpose or purposes for which it is to be held; provided, however, the shareholders shall not have such right to call a special meeting if the Corporation has a class of shares registered under Section 12 of the Securities Exchange Act of 1934, as amended. Only business within the purpose or purposes described in the meeting notice specified in Section 5 of this Article may be conducted at a special meeting of shareholders. SECTION 5. Notice of Meeting: Written or printed notice stating the time and place of the meeting shall be delivered not less than ten (10) nor more than sixty (60) days before the date of any shareholders' meeting, either personally, by mail, by telegraph, by teletype, or by facsimile transmission, by or at the direction of the chief executive officer, the president, the secretary, or other person calling the meeting to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the shareholder at his address as it appears on the record of the shareholders of the Corporation, with postage thereon prepaid. In the case of a special meeting, the notice of meeting shall specifically state the purpose or purposes for which the meeting is called. In the case of an annual or substitute annual meeting, the notice of meeting need not specifically state the business to be transacted unless such a statement is required by the Act. When an annual or special meeting is adjourned to a different date, time, and place, it is not necessary to give any notice of the adjourned meeting other than by announcement at the meeting at which the adjournment is taken; provided, however, that if a new record date for the adjourned meeting is or must be set, notice of the adjourned meeting must be given to persons who are shareholders as of the new record date. The record date for determining the shareholders entitled to notice of and to vote at an annual or special meeting shall be fixed as provided in Section 3 of Article VIII.` SECTION 6. Waiver of Notice: A shareholder may waive notice of any meeting either before or after such meeting. Such waiver shall be in writing, signed by the shareholder, and filed with the minutes or corporate records. A shareholder's attendance at a meeting: (i) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting; and (ii) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter before it is voted upon. SECTION 7. Shareholder List: Commencing two (2) business days after notice of a meeting of shareholders is given and continuing through such meeting, the secretary of the Corporation shall maintain at the principal office of the Corporation an alphabetical list of the shareholders entitled to vote at such meeting, arranged by voting group, with the address of and number of shares held by each. This list shall be subject to inspection by any shareholder or his agent or attorney at any time during usual business hours and may be copied at the shareholder's expense. SECTION 8. Quorum: A majority of the votes entitled to be cast on a matter by any voting group, represented in person or by proxy, shall constitute a quorum of that voting group for action on that matter. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. In the absence of a quorum at the opening of any meeting of shareholders, such meeting may be adjourned from time to time by a majority of the votes voting on the motion to adjourn; and at any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the original meeting. SECTION 9. Proxies: Shares may be voted either in person or by one or more agents authorized by a written proxy executed by the shareholder or by his duly authorized attorney in fact. A proxy may take the form of a telegram, telex, facsimile or other form of wire or wireless communication which appears to have been transmitted by a shareholder. A proxy is effective when received by the secretary or other officer or agent authorized to tabulate votes. A proxy is not valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it specifies therein the length of time for which it is to continue in force or limits its use to a particular meeting. SECTION 10. Voting of Shares: Subject to the provisions of Section 4 of Article IV, the articles of incorporation, and the Act, each outstanding voting share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of shareholders. Except for the election of directors, which is governed by the provisions of Section 3 of Article IV, if a quorum is present, action on a matter by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast against the action, unless the vote of a greater number is required by the Act, the articles of incorporation, or these bylaws. Shares of the Corporation are not entitled to vote if: (i) they are owned, directly or indirectly, by the Corporation, unless they are held by it in a fiduciary capacity; (ii) they are owned, directly or indirectly, by a second corporation in which the Corporation owns a majority of the shares entitled to vote for directors of the second corporation; or (iii) they are redeemable shares and (x) notice of redemption has been given and (y) a sum sufficient to redeem the shares has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price upon surrender of the shares. SECTION 11. Informal Action by Shareholders: Any action which may be taken at a meeting of the shareholders may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all of the persons who would be entitled to vote upon such action at a meeting and is delivered to the Corporation to be included in the minutes or to be kept as part of the corporate records. SECTION 12. Corporation's Acceptance of Votes: If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the Corporation is entitled to accept the vote, consent, waiver, or proxy appointment and to give it effect as the act of the shareholder. If the name signed on a vote, consent, waiver, or proxy appointment does not correspond to the name of its shareholder, the Corporation is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and to give it effect as the act of the shareholder if: (i) the shareholder is an entity and the name signed purports to be that of an officer or agent of the entity; (ii) the name signed purports to be that of an administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (iii) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of its status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment; (iv) the name signed purports to be that of a beneficial owner or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; or (v) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners. The Corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the secretary or other officer or agent authorized to tabulate votes has a reasonable basis for doubt about the validity of the signature on it or about the signatory's authority to sign for the shareholder. SECTION 13. Number of Shareholders: The following persons or entities identified as a shareholder in the Corporation's current record of shareholders constitute one shareholder for purposes of these bylaws: (i) all co-owners of the same shares; (ii) a corporation, partnership, trust, estate, or other entity; (iii) the trustees, guardians, custodians, or other fiduciaries of a single trust, estate, or account. Shareholdings registered in substantially similar names constitute one shareholder if it is reasonable to believe that the names represent the same person. ARTICLE IV BOARD OF DIRECTORS SECTION 1. General Powers: All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of, its board of directors. The board of directors may delegate powers as provided in these bylaws. SECTION 2. Number, Term and Qualifications: The number constituting the board of directors shall be not less than one (1) nor more than twenty-five (25). The number of directors within this variable range may be fixed or changed from time to time by the shareholders or the board of directors. So long as the number of directors is at least nine (9), the board of directors shall be divided into three (3) classes as provided for in the articles of incorporation. Each director shall hold office until his death, resignation, retirement, removal, disqualification, or until his successor is elected and qualified. Directors need not be residents of the State of North Carolina or shareholders of the Corporation. SECTION 3. Election of Directors: Except as provided in Section 6 of this Article and in the articles of incorporation, the directors shall be elected at the annual meeting of shareholders, and those persons who receive the highest number of votes shall be deemed to have been elected. If any shareholder so demands, the election of directors shall be by ballot. SECTION 4. No Cumulative Voting: The shareholders of the Corporation shall have no right to cumulate their votes for the election of directors. SECTION 5. Removal: Any director, or the entire board of directors, may be removed from office at any time, with or without cause, but only if the number of votes cast to remove him exceeds the number of votes cast not to remove him. If a director is elected by a voting group of shareholders, only members of that voting group may participate in the vote to remove him. A director may not be removed by the shareholders at a meeting unless the notice of the meeting specifies such removal as one of its purposes. If any directors are removed, new directors may be elected at the same meeting. SECTION 6. Vacancies: Any vacancy occurring in the board of directors, including, without limitation, a vacancy resulting from an increase in the number of directors or from the failure by the shareholders to elect the full authorized number of directors, shall be filled by the shareholders or the board of directors. If such vacancy is to be filled by the board of directors, and if the directors remaining in office constitute fewer than a quorum of the board, such vacancy may be filled by the affirmative vote of a majority of the remaining directors or by the sole remaining director. If the vacant office was held by a director elected by a voting group of shareholders, only the remaining director or directors elected by that voting group or the holders of shares of that voting group are entitled to fill the vacancy. The term of a director elected to fill a vacancy shall expire at the next shareholders' meeting at which directors (or directors of that class, if the directors have been divided into Classes as described in Article IV, Section 2 above) are elected. SECTION 7. Chairman of the Board: There may be a chairman of the board of directors elected by the directors from their number at any meeting of the board. The chairman shall preside at all meetings of the board of directors and perform such other duties as may be directed by the board. SECTION 8. Compensation: The board of directors may compensate directors for their services as such and may provide for the payment of all expenses incurred by directors in attending regular and special meetings of the board. SECTION 9. Committees: The board of directors may create an executive committee and other committees of the board, each of which shall have at least two (2) members, all of whom shall be directors. The creation of a committee and the appointment of members to it must be approved by a majority of all the directors in office when the action is taken. Each committee may, as specified by the board of directors, exercise some or all of the authority of the board except that a committee may not: (i) authorize distributions; (ii) approve or propose to shareholders action that the Act requires be approved by shareholders; (iii) fill vacancies on the board of directors or on any of its committees; (iv) amend the articles of incorporation pursuant to N.C. Gen. Stat. Section 55-10-02 or its successor; (v) adopt, amend, or repeal bylaws; (vi) approve a plan of merger not requiring shareholder approval; (vii) authorize or approve a reacquisition of shares, except according to a formula or method prescribed by the board of directors; or (viii) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the board of directors may authorize a committee to do so within limits specifically prescribed by the board of directors. The provisions of Article V, which govern meetings of the board of directors, shall likewise apply to meetings of any committee of the board. ARTICLE V MEETINGS OF DIRECTORS SECTION 1. Regular Meetings: A regular meeting of the board of directors shall be held immediately before or after, and at the same place as, the annual meeting of the shareholders, or at another place that may be designated in advance of the meeting by the chairman of the board or the chief executive officer. In addition, the board of directors may provide, by resolution, the time and place, either within or without the State of North Carolina, for the holding of additional regular meetings. SECTION 2. Special Meetings: Special meetings of the board of directors may be called by or at the request of the chairman of the board or the chief executive officer. Such meetings may be held either within or without the State of North Carolina, as fixed by the person or persons calling the meeting. SECTION 3. Notice of Meetings: Regular meetings of the board of directors may be held without notice. The person or persons calling a special meeting of the board of directors shall, at least two (2) days before the meeting, give notice of the meeting by any usual means of communication, including by telephone, telegraph, teletype, mail, private carrier, facsimile transmission, or other form of wire or wireless communication. Such notice may be oral and need not specify the purpose for which the meeting is called. SECTION 4. Waiver of Notice: Any director may waive notice of any meeting either before or after such meeting. Such waiver shall be in writing, signed by the director, and filed with the minutes or corporate records; provided, however, that a director's attendance at or participation in a meeting waives any required notice to him unless the director at the beginning of the meeting (or promptly upon his arrival) objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. SECTION 5. Quorum: A majority of the directors fixed by or pursuant to these bylaws shall constitute a quorum for the transaction of business at any meeting of the board of directors, or if no number is so fixed, a majority of directors in office immediately before the meeting begins shall constitute a quorum. SECTION 6. Manner of Acting: The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is required by the articles of incorporation or these bylaws. SECTION 7. Presumption of Assent: A director of the Corporation who is present at a meeting of the board of directors or a committee of the board of directors when corporate action is taken is deemed to have assented to the action taken unless: (i) he objects at the beginning of the meeting (or promptly upon his arrival) to holding it or transacting business at the meeting; (ii) his dissent or abstention from the action taken is entered in the minutes of the meeting; or (iii) he files written notice of his dissent or abstention with the presiding officer of the meeting before its adjournment or with the Corporation immediately after adjournment of the meeting. This right of dissent or abstention is not available to a director who votes in favor of the action taken. SECTION 8. Participation in Meetings: Any or all of the directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting. SECTION 9. Action Without Meeting: Action which may be taken at a board of directors meeting may be taken without a meeting if the action is taken by all members of the board and is evidenced by one or more written consents signed by each director before or after such action, which describes the action taken and is included in the minutes or filed with the corporate records. Such action is effective when the last director signs the consent, unless the consent specifies a different effective date. ARTICLE VI OFFICERS SECTION 1. Officers of the Corporation: The officers of the Corporation may consist of a chief executive officer, president, secretary, treasurer, and such vice presidents, assistant secretaries, assistant treasurers, and other officers as the board of directors may from time to time appoint. Any two or more offices may be held by the same person, but no officer may act in more than one capacity where action of two or more officers is required. SECTION 2. Appointment and Term: The officers of the Corporation shall be appointed by the board of directors. A duly appointed officer may appoint one or more officers or assistant officers if authorized by the board of directors. Each officer shall hold office until his or her death, resignation, retirement, removal, disqualification or until his or her successor is appointed and qualifies. The appointment of an officer does not itself create contract rights for either the officer or the Corporation. SECTION 3. Compensation of Officers: The compensation of officers of the Corporation shall be fixed by the board of directors. No officer shall receive compensation for serving the Corporation in any other capacity unless such additional compensation be authorized by the board of directors. SECTION 4. Resignation and Removal: An officer may resign at any time by communicating his or her resignation to the Corporation. A resignation is effective when it is communicated unless it specifies in writing a later date. If a resignation is made effective as of a later date and the Corporation accepts the future effective date, the board of directors may fill the pending vacancy before the effective date if the board provides that the successor does not take office until the effective date. An officer's resignation does not affect the Corporation's contract rights, if any, with the officer. Any officer or agent appointed by the board of directors may be removed by the board at any time, with or without cause, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. SECTION 5. Bonds: The board of directors may by resolution require any officer, agent, or employee of the Corporation to give bond to the Corporation, with sufficient sureties, conditioned on the faithful performance of the duties of his respective office or position, and to comply with such other conditions as may from time to time be required by the board of directors. SECTION 6. Chief Executive Officer: The chief executive officer shall be the chief executive officer of the Corporation and, subject to the control of the board of directors, shall supervise and control the management of the Corporation in accordance with these bylaws. The chief executive officer shall sign, with any other proper officer, certificates for shares of the Corporation and any deeds, mortgages, bonds, contracts, or other instruments which may be lawfully executed on behalf of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be delegated by the board of directors to some other officer or agent; and, in general shall perform all duties incident to the office of chief executive officer and such other duties as may be prescribed by the board of directors from time to time. In addition, the chief executive officer may perform all of the duties of treasurer if at the time of performance, the Corporation does not have a treasurer. SECTION 7. President: The authority and powers of the president in respect to the execution of contracts or instruments pertaining to assets of the Corporation shall be the same as the authority and powers of the chief executive officer except as otherwise provided by statute or limited by the board of directors or by the chief executive officer. The president shall have such other authority and shall perform such other duties as may from time to time be conferred upon him or her by the board of directors or by the chief executive officer. SECTION 8. Vice President: Vice presidents shall be designated as senior executive vice president, executive vice presidents, senior vice presidents and vice presidents, or otherwise as specified by the board of directors. In the absence of the president or in the event of his or her death, inability, or refusal to act, the senior executive vice president or in the event of his or her death, inability, or refusal to act, the vice presidents in the order determined by the board of directors, or in the absence thereof, in the order of seniority of executive vice presidents, senior vice presidents, and vice presidents, respectively, shall perform the duties of the president, and when so acting shall have all the powers of and be subject to all the restrictions upon the president. Any vice president may sign, with the secretary or an assistant secretary, certificates for shares of the Corporation; and shall perform such other duties as from time to time may be assigned to him or her by the chief executive officer, the president, or board of directors. SECTION 9. Secretary: The secretary shall: (i) keep the minutes of the meetings of shareholders, of the board of directors, and of all committees of the board in one or more books provided for that purpose; (ii) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (iii) be custodian of the seal of the Corporation and see that the seal of the Corporation is affixed to all documents the execution of which on behalf of the Corporation under its seal is duly authorized; (iv) keep a register of the mailing address of each shareholder which shall be furnished to the secretary by such shareholder; (v) sign, with the chief executive officer, the president, or a vice president, certificates for shares, the issuance of which shall have been authorized by resolution of the board of directors; (vi) have general charge of the stock transfer books of the Corporation; (vii) keep or cause to be kept in the State of North Carolina at the Corporation's principal office a record of the Corporation's shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each, and prepare or cause to be prepared a shareholder list prior to each meeting of shareholders as required by the Act; (viii) maintain and authenticate the books and records of the Corporation; (ix) with the assistance of the treasurer and other officers, prepare and deliver to the Corporation's shareholders such financial statements, notices, and reports as may be required by N.C. Gen. Stat.ss.ss.55-16-20 and 55-16-21 (or their successors); (x) prepare and file with the North Carolina Secretary of State the annual report required by N.C. Gen. Stat.ss. 55-16-22 (or its successor); and (xi) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or the board of directors. SECTION 10. Assistant Secretaries: In the absence of the secretary or in the event of his or her death, inability, or refusal to act, the assistant secretaries in the order of their length of service as assistant secretary, unless otherwise determined by the board of directors, shall perform the duties of the secretary, and when so acting shall have all the powers of and be subject to all the restrictions upon the secretary. They shall perform such other duties as may be assigned to them by the secretary, the chief executive officer, the president, or the board of directors. Any assistant secretary may sign, with the chief executive officer, president, or a vice president, certificates for shares. SECTION 11. Treasurer: The treasurer shall: (i) have charge and custody of and be responsible for all funds and securities of the Corporation; (ii) receive and give receipts for monies due and payable to the Corporation from any source whatsoever, and deposit all such monies in accordance with the provisions of Section 4 of Article VII; (iii) prepare, or cause to be prepared, an annual financial statement in accordance with Section 3 of Article IX; and (iv) in general, perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him or her by the chief executive officer, the president, or the board of directors, or by these bylaws. The treasurer may sign, with the chief executive officer, president, or a vice president, certificates for shares. SECTION 12. Assistant Treasurer: In the absence of the treasurer or in the event of his or her death, inability, or refusal to act, the assistant treasurers, in the order of their length of service as assistant treasurer, unless otherwise determined by the board of directors, shall perform the duties of the treasurer, and when so acting shall have all the powers of and be subject to all the restrictions upon the treasurer. They shall perform such other duties as may be assigned to them by the treasurer, the chief executive officer, the president, or the board of directors. Any assistant treasurer may sign, with the chief executive officer, president, or a vice president, certificates for shares. ARTICLE VII CONTRACTS, CHECKS, AND DEPOSITS SECTION 1. Contracts: The board of directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument on behalf of the Corporation, and such authority may be general or confined to specific instances. SECTION 2. Loans: No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the board of directors. Such authority may be general or confined to specific instances. SECTION 3. Checks and Drafts: All checks, drafts, or other orders for payment of money issued in the name of the Corporation shall be signed by such officers or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the board of directors. SECTION 4. Deposits: All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such depositories as the board of directors shall direct. ARTICLE VIII CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. Certificates for Shares: Shares may, but need not, be represented by certificates. If certificates are issued, they shall be in such form as the board of directors shall determine; provided that, at a minimum, each certificate shall state on its face: (i) the name of the Corporation and that it is organized under the laws of North Carolina; (ii) the name of the person to whom issued; and (iii) the number and class of shares and the designation of the series, if any, the certificate represents. If the Corporation issues certificates for shares of preferred stock, the designations, relative rights, preferences, and limitations applicable to that class, and the variations in rights, preferences, and limitations for each series within that class (and the authority of the board of directors to determine variations for future series) must be summarized on the front or back of each certificate; alternatively, each certificate may state conspicuously on its front or back that the Corporation will furnish the shareholder this information in writing and without charge. These certificates shall be signed, either manually or in facsimile, by the chief executive officer, president, or any vice president, and the secretary or any assistant secretary, the treasurer or any assistant treasurer. They shall be consecutively numbered or otherwise identified and the name and address of the persons to whom they are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation. SECTION 2. Transfer of Shares: Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation by the holder of record, by his legal representative (who shall furnish proper evidence of authority to transfer), or by his attorney (whose authority shall be evidenced by a power of attorney duly executed and filed with the secretary), and only upon surrender for cancellation of the certificates for such shares. SECTION 3. Fixing Record Date: For the purpose of determining shareholders entitled to receive notice of a meeting of shareholders, to demand a special meeting, to vote, to take any other action, or to receive payment, or for any other purpose, the board of directors may fix in advance a date as the record date for any such determination of shareholders, such record date in any case to be not more than seventy (70) days, and, in case of a meeting of shareholders, not less than ten (10) days, before the date on which the particular action requiring such determination of shareholders is to be taken. When a determination of shareholders entitled to notice of or to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment of such meeting unless the board of directors fixes a new record date, which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. SECTION 4. Lost Certificates: The board of directors may authorize the issuance of a new share certificate in place of a certificate claimed to have been lost or destroyed, upon receipt of an affidavit of such fact from the person claiming the loss or destruction. When authorizing the issuance of a new certificate, the board of directors may require the claimant to give the Corporation a bond in such sum as it may direct to indemnify the Corporation against loss from any claim with respect to the certificate claimed to have been lost or destroyed; or the board of directors may, by resolution reciting that the circumstances justify such action, authorize the issuance of the new certificate without requiring such a bond. SECTION 5. Reacquired Shares: The Corporation may acquire its own shares and shares so acquired constitute authorized but unissued shares. ARTICLE IX GENERAL PROVISIONS SECTION 1. Distributions: The board of directors may from time to time declare, and the Corporation may make, distributions on its outstanding shares in the manner and subject to the terms and conditions provided by the Act and by the articles of incorporation. SECTION 2. Seal: The corporate seal of the Corporation shall consist of two concentric circles between which is the name of the Corporation and in the center of which is inscribed "CORPORATE SEAL" or "SEAL," and which shall have such other characteristics as the board of directors may determine. SECTION 3. Records and Reports: All of the Corporation's records shall be maintained in written form or in another form capable of conversion into written form within a reasonable time. The Corporation shall keep as permanent records minutes of all meetings of its incorporators, shareholders, and board of directors, a record of all actions taken by the shareholders or board of directors without a meeting, and a record of all actions taken by a committee of the board of directors in place of the board of directors. The Corporation shall keep a copy of the following records at its principal office: (i) the articles of incorporation and all amendments to them currently in effect; (ii) these bylaws and all amendments to them currently in effect; (iii) resolutions adopted by its board of directors creating one or more classes or series of shares and fixing their relative rights, preferences, and limitations (if shares issued pursuant to those resolutions are outstanding); (iv) the minutes of all meetings of shareholders and records of all actions taken by shareholders without a meeting during the past three (3) years; (v) all written communications to shareholders generally within the past three (3) years; (vi) the annual financial statements described below, prepared during the past three (3) years; (vii) a list of the names and business addresses of its current directors and officers; and (viii) its most recent annual report delivered to the North Carolina Secretary of State. The Corporation shall prepare and make available to its shareholders annual financial statements for the Corporation and its subsidiaries that: (i) include a balance sheet as of the end of the fiscal year, an income statement for that year, and a statement of cash flows for the year; and (ii) is accompanied by either (x) a report of a public accountant on the annual financial statements, or (y) a statement by the treasurer stating his reasonable belief whether the annual financial statements were prepared on the basis of generally accepted accounting principles (and, if not, describing the basis of preparation) and describing any respects in which the statements were not prepared on a basis of accounting consistent with the statements prepared for the preceding year. These annual financial statements, or a written notice of their availability, shall be mailed to each shareholder within 120 days after the close of each fiscal year of the Corporation. On written request from a shareholder who was not mailed the annual financial statements, the Corporation shall mail to him the latest such statements. The Corporation shall also prepare and file with the North Carolina Secretary of State an annual report in such form as required by N.C. Gen. Stat.ss.55-16-22, or its successor. SECTION 4. Indemnification: Any person who at any time serves or has served as a director or officer of the Corporation, or at the request of the Corporation is or was serving as an officer, director, agent, partner, trustee, administrator, or employee for any other foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise, shall be indemnified by the Corporation to the fullest extent from time to time permitted by law in the event he is made, or is threatened to be made, a party to any threatened, pending or completed civil, criminal, administrative, investigative or arbitrative action, suit or proceeding and any appeal therein (and any inquiry or investigation that could lead to such action, suit or proceeding), whether or not brought by or on behalf of the Corporation, seeking to hold him liable by reason of the fact that he is or was acting in such capacity. In addition, the board may provide such indemnification for the employees and agents of the Corporation as it deems appropriate. The rights of those receiving indemnification hereunder shall, to the fullest extent from time to time permitted by law, cover (i) reasonable expenses, including without limitation all attorneys' fees actually and necessarily incurred by him in connection with any such action, suit or proceeding, (ii) all reasonable payments made by him in satisfaction of any judgment, money decree, fine (including an excise tax assessed with respect to an employee benefit plan), penalty, or settlement for which he may have become liable in such action, suit, or proceeding; and (iii) all reasonable expenses incurred in enforcing the indemnification rights provided herein. Expenses incurred by anyone entitled to receive indemnification under this section in defending a proceeding may be paid by the Corporation in advance of the final disposition of such proceeding as authorized by the board of directors in the specific case or as authorized or required under any provisions in the bylaws or by any applicable resolution or contract upon receipt of an undertaking by or on behalf of the director to repay such amount unless it shall ultimately be determined that he is entitled to be indemnified by the Corporation against such expenses. The board of directors of the Corporation shall take all such action as may be necessary and appropriate to authorize the Corporation to pay the indemnification required by this bylaw, including without limitation, to the extent needed, making a good faith evaluation of the manner in which the claimant for indemnity acted and of the reasonable amount of indemnity due him. Any person who at any time serves or has served in any of the aforesaid capacities for or on behalf of the Corporation shall be deemed to be doing or to have done so in reliance upon, and as consideration for, the right of indemnification provided herein. Any repeal or modification of these indemnification provisions shall not affect any rights or obligations existing at the time of such repeal or modification. The rights provided for herein shall inure to the benefit of the legal representatives of any such person and shall not be exclusive of any other rights to which such person may be entitled apart from the provisions of this bylaw. The rights granted herein shall not be limited by the provisions contained in N.C. Gen. Stat.ss.55-8-51 (or its successor). SECTION 5. Fiscal Year: The fiscal year of the Corporation shall be fixed by the board of directors. SECTION 6. Amendments: (a) The board of directors may amend or repeal these bylaws, except to the extent otherwise provided in the articles of incorporation, a bylaw adopted by the shareholders, or the Act, and except that a bylaw adopted, amended, or repealed by the shareholders may not be readopted, amended, or repealed by the board of directors if neither of the articles of incorporation nor a bylaw adopted by the shareholders authorizes the board of directors to adopt, amend, or repeal that particular bylaw or the bylaws generally. (b) The Corporation's shareholders may adopt, amend, alter, change, or repeal any of these bylaws consistent with the provisions of Section 10 of Article III. (c) A bylaw that fixes a greater quorum or voting requirement for the board of directors may be amended or repealed: (i) if originally adopted by the shareholders, only by the shareholders, unless the bylaw permits amendment or repeal by the board of directors; or (ii) if originally adopted by the board of directors, either by the shareholders or by the board of directors. (d) A bylaw referred to in Subsection (c) above: (i) may not be adopted by the board of directors by a vote of less than a majority of the directors then in office; and (ii) may not itself be amended by a quorum or vote of the directors less than the quorum or vote therein prescribed or prescribed by a bylaw adopted or amended by the shareholders. (e) A bylaw adopted or amended by the shareholders that fixes a greater voting or quorum requirement for the board of directors may provide that it may be amended or repealed only by a specified vote of either the shareholders or the board of directors. SECTION 7. Emergencies: In anticipation of or during an emergency, the board of directors may: (i) modify lines of succession to accommodate the incapacity of any director, officer, employee, or agent; and (ii) relocate the principal office or designate alternative principal or regional offices, or authorize the officers to do so. During an emergency: (i) notice of a meeting of the board of directors need be given only to those directors whom it is practicable to reach and may be given in any practicable manner, including by publication and radio; and (ii) one or more officers present at a meeting of the board of directors may be deemed to be directors for the meeting, in order of rank and within the same rank in order of seniority, as necessary to achieve a quorum. SECTION 8. Severability: Should any provision of these bylaws become ineffective or be declared to be invalid for any reason, such provision shall be severable from the remainder of these bylaws and all other provisions of these bylaws shall continue to be in full force and effect. ATTESTED: /s/ Allen T. Nelson, Jr. Date: August 11, 1998 - ------------------------ Secretary CONSENT OF SOLE SHAREHOLDER OF CAPITAL BANK CORPORATION TO ACTION WITHOUT MEETING The undersigned, being the sole shareholder of Capital Bank Corporation, a North Carolina corporation (the "Corporation"), does hereby adopt the following resolutions by signing his written consent hereto, pursuant to the provisions of Section 55-7-04 of the North Carolina Business Corporation Act. WHEREAS, the sole shareholder of the Corporation desires to ratify and affirm the actions taken in his capacity as the sole director of the Corporation, pursuant to a Consent effective October 13, 1998, regarding the appointment of directors of the Corporation; and WHEREAS, the sole shareholder of the Corporation desires to amend the Corporation's Bylaws as set forth herein. NOW, THEREFORE, BE IT RESOLVED, that the appointment of directors pursuant to the Consent of Board of Directors of the Corporation effective October 13, 1998 is hereby ratified and affirmed by the sole shareholder of the Corporation and the seventeen (17) individuals appointed to the board of directors pursuant to that Consent shall be deemed to have been elected by the sole shareholder of the Corporation as of that date for the terms of office described therein; and it is FURTHER RESOLVED, that the last sentence of Article IV, Section 6 of the Corporation's Bylaws is hereby amended to read in its entirety as follows: "The term of a director elected to fill a vacancy shall expire at the next shareholders' meeting at which directors are elected. " This action is effective as of the 1st day of March, 1999. /s/ James A. Beck ----------------- James A. Beck CAPITAL BANK CORPORATION Board Resolutions for Bylaws Amendment February 21, 2002 WHEREAS, the Company has applied to the Nasdaq Stock Market to have its shares of common stock, currently listed on the Nasdaq SmallCap Market, listed on the Nasdaq National Market; and WHEREAS, Nasdaq has reviewed the Company's application and believes that the Company's Bylaws are unclear as to the requirement of a quorum for purposes of a shareholders' meeting; and WHEREAS, pursuant to the authority of the Board of Directors of the Company contained in Article IX, Section of the Bylaws of the Company, the Company has agreed to amend the Bylaws to respond to Nasdaq's request; NOW, THEREFORE, BE IT RESOLVED, that Article III, Section 8 of the Bylaws of the Company is hereby amended such that the first sentence of the first paragraph of such section shall be deleted and replaced in its entirety with the following: "A majority of the shares entitled to be voted on a matter by any voting group, represented in person or by proxy, shall constitute a quorum of that voting group for action on the matter." FURTHER RESOLVED, that except to the extent expressly set forth above, the Board hereby ratifies, confirms and approves the terms and provisions of the Bylaws as they existed prior to the effective date hereof; FURTHER RESOLVED, the officers of the Company are hereby directed to file these resolutions with the corporate records of the Company. The foregoing resolutions were duly adopted by the Board on February 21, 2002. /s/ Allen T. Nelson - ------------------- Secretary EX-10.08 4 exhibit10-08.txt EXHIBIT 10.08* Agreement Number: AGREEMENT between FISERV SOLUTIONS, INC. 255 Fiserv Drive Brookfield, WI 53045-5815 and CAPITAL BANK P. O. Box 18949 Raleigh, NC 27619-8949 Date: November 2001 [LOGO - FISERV] - ----------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2. Complete copies of the entire exhibit have been filed separately with the Commission and marked "CONFIDENTIAL TREATMENT". AGREEMENT dated as of November 1, 2001 ("Agreement") between FISERV SOLUTIONS, INC., a Wisconsin corporation ("Fiserv"), and Capital Bank, a North Carolina financial institution ("Client"). - -------------------------------------------------------------------------------- Fiserv and Client hereby agree as follows: 1. Term. The initial term of this Agreement shall be 48 months and, unless written notice of non-renewal is provided by either party at least 180 days prior to expiration of the initial term or any renewal term, this Agreement shall automatically renew for a renewal term of 12 months. This Agreement shall commence on the earliest of the day Fiserv Services (as defined below) are first used by Client or January 1, 2002 . 2. Services. (a) Services Generally. Fiserv, itself and through its affiliates, agrees to provide Client, and Client agrees to obtain from Fiserv services ("Services") and products ("Products") (collectively, "Fiserv Services") described in the attached Exhibits: Exhibit A - Account Processing Services Exhibit B - Item Processing Services Exhibit H - Additional Services (Disaster Recovery) Exhibit O - Internet Banking Services The Exhibits set forth specific terms and conditions applicable to the Services and/or Products, and, where applicable, the Fiserv affiliate so performing. Client may select additional services and products from time to time by incorporating an appropriate Exhibit to this Agreement. (b) Conversion Services. Fiserv will convert Client's existing applicable data and/or information to the Fiserv Services. Those activities designed to transfer the processing from Client's present servicer to the Fiserv Services are referred to as "Conversion Services". Client agrees to cooperate with Fiserv in connection with Fiserv's provision of Conversion Services and to provide all necessary information and assistance to facilitate the conversion. Client is responsible for all out-of-pocket expenses associated with the Conversion Services. Fiserv will provide Conversion Services as required in connection with Fiserv Services. (c) Training Services. Fiserv shall provide training, training aids, user manuals, and other documentation for Client's use as Fiserv finds necessary to enable Client personnel to become familiar with Fiserv Services. If requested by Client, classroom training in the use and operation of Fiserv Services will be provided at a training facility designated by Fiserv. All such training aids and manuals remain Fiserv's property. 3. Fees for Fiserv Services. (a) General. Client agrees to pay Fiserv: (i) estimated fees for Fiserv Services for the following month as specified in the Exhibits; (ii) estimated out-of-pocket charges for the following month payable by Fiserv for the account of Client; and (iii) estimated Taxes (as defined below) thereon (collectively, "Estimated Fees"). Fiserv shall timely reconcile Estimated Fees paid by Client for the Fiserv Services for the month and the fees and charges actually due Fiserv based on Client's actual use of Fiserv Services for such month. Fiserv shall either issue a credit to Client or provide Client with an invoice for any additional fees or other charges owed. Fiserv may change the amount of Estimated Fees billed to reflect appropriate changes in actual use of Fiserv Services. Estimated Fees may be increased from time to time as set forth in the Exhibits. Upon notification to and acceptance by Client, Fiserv may increase its fees in excess of amounts listed in the Exhibits in the event that Fiserv implements major system enhancements to comply with changes in law, government regulation, or industry practices. (b) Additional Charges. Fees for out-of-pocket expenses, such as telephone, microfiche, courier, and other charges incurred by Fiserv for goods or services obtained by Fiserv on Client's behalf shall be billed to Client at cost plus the applicable Fiserv administrative fee. Such out-of-pocket expenses may be changed from time to time upon notification of a fee change from a vendor/provider. 39 (c) Taxes. Fiserv shall add to each invoice any sales, use, excise, value added, and other taxes and duties however designated that are levied by any taxing authority relating to the Fiserv Services ("Taxes"). In no event shall "Taxes" include taxes based upon the net income of Fiserv. (d) Exclusions. The Estimated Fees do not include, and Client shall be responsible for, furnishing transportation or transmission of information between Fiserv's service center(s), Client's site(s), and any applicable clearing house, regulatory agency, or Federal Reserve Bank. (e) Payment Terms. Estimated Fees are due and payable monthly upon receipt of invoice. Client shall pay Fiserv through the Automated Clearing House. In the event any amounts due remain unpaid beyond the 30th day after payment is due, Client shall pay a late charge of 1.5% per month. Client agrees that it shall neither make nor assert any right of deduction or set-off from Estimated Fees on invoices submitted by Fiserv for Fiserv Services. 4. Access to Fiserv Services. (a) Procedures. Client agrees to comply with applicable regulatory requirements and procedures for use of Services established by Fiserv. (b) Changes. Fiserv continually reviews and modifies Fiserv systems used in the delivery of Services (the "Fiserv System") to improve service and comply with government regulations, if any, applicable to the data and information utilized in providing Services. Fiserv reserves the right to make changes in Services, including but not limited to operating procedures, type of equipment or software resident at, and the location of Fiserv's service center(s). Fiserv will notify Client of any material change that affects Client's normal operating procedures, reporting, or service costs prior to implementation of such change. (c) Communications Lines. Fiserv shall order the installation of appropriate communication lines and equipment to facilitate Client's access to Services. Client understands and agrees to pay charges relating to the installation and use of such lines and equipment as set forth in the Exhibits. (d) Terminals and Related Equipment. Client shall obtain necessary and sufficient terminals and other equipment, approved by Fiserv and compatible with the Fiserv System, to transmit and receive data and information between Client's location(s), Fiserv's service center(s), and/or other necessary location(s). Fiserv and Client may mutually agree to change the type(s) of terminal and equipment used by Client. 5. Client Obligations. (a) Input. Client shall be solely responsible for the input, transmission, or delivery to and from Fiserv of all information and data required by Fiserv to perform Services unless Client has retained Fiserv to handle such responsibilities, as specifically set forth in the Exhibits. The information and data shall be provided in a format and manner approved by Fiserv. Client will provide at its own expense or procure from Fiserv all equipment, computer software, communication lines, and interface devices required to access the Fiserv System. If Client has elected to provide such items itself, Fiserv shall provide Client with a list of compatible equipment and software; Client agrees to pay Fiserv's standard fee for recertification of the Fiserv System resulting therefrom. (b) Client Personnel. Client shall designate appropriate Client personnel for training in the use of the Fiserv System, shall supply Fiserv with reasonable access to Client's site during normal business hours for Conversion Services and shall cooperate with Fiserv personnel in their performance of Services, including Conversion Services. (c) Use of Fiserv System. Client shall (i) comply with any operating instructions on the use of the Fiserv System provided by Fiserv; (ii) review all reports furnished by Fiserv for accuracy; and (iii) work with Fiserv to reconcile any out of balance conditions. Client shall determine and be responsible for the authenticity and accuracy of all information and data submitted to Fiserv. (d) Client's Systems. Client shall be responsible for ensuring that its systems are Year 2000 compliant and capable of passing and/or accepting date formats from and/or to the Fiserv System. 6. Ownership and Confidentiality. (a) Definition. (i) Client Information. "Client Information" means: (A) confidential plans, customer lists, information, and other proprietary material of Client that is marked with a restrictive legend, or if not so marked with such legend or is disclosed orally, is identified as confidential at the time of disclosure (and written confirmation thereof is promptly provided to Fiserv); and (B) any 40 information and data concerning the business and financial records of Client's customers prepared by or for Fiserv, or used in any way by Fiserv in connection with the provision of Fiserv Services (whether or not any such information is marked with a restrictive legend). (ii) Fiserv Information. "Fiserv Information" means: (A) confidential plans, information, research, development, trade secrets, business affairs (including that of any Fiserv client, supplier, or affiliate), and other proprietary material of Fiserv that is marked with a restrictive legend, or if not so marked with such legend or is disclosed orally, is identified as confidential at the time of disclosure (and written confirmation thereof is promptly provided to Client); and (B) Fiserv's proprietary computer programs, including custom software modifications, software documentation and training aids, and all data, code, techniques, algorithms, methods, logic, architecture, and designs embodied or incorporated therein (whether or not any such information is marked with a restrictive legend). (iii) Information. "Information" means Client Information and Fiserv Information. No obligation of confidentiality applies to any Information that the receiving party ("Recipient") (A) already possesses without obligation of confidentiality; (B) develops independently; or (C) rightfully receives without obligation of confidentiality from a third party. No obligation of confidentiality applies to any Information that is, or becomes, publicly available without breach of this Agreement. (b) Obligations. Recipient agrees to hold as confidential all Information it receives from the disclosing party ("Discloser"). All Information shall remain the property of Discloser or its suppliers and licensors. Information will be returned to Discloser at the termination or expiration of this Agreement. Fiserv specifically agrees that it will not use any non-public personal information about Client's customers in any manner prohibited by Title V of the Gramm-Leach-Bliley Act. Recipient will use the same care and discretion to avoid disclosure of Information as it uses with its own similar information that it does not wish disclosed, but in no event less than a reasonable standard of care. Recipient may only use Information in accordance with the purpose of this Agreement. Recipient may disclose Information to (i) employees and employees of affiliates who have a need to know; and (ii) any other party with Discloser's written consent. Before disclosure to any of the above parties, Recipient will have a written agreement with such party sufficient to require that party to treat Information in accordance with this Agreement. Recipient may disclose Information to the extent required by law. However, Recipient agrees to give Discloser prompt notice so that it may seek a protective order. The provisions of this sub-section survive any termination or expiration of this Agreement. (c) Residuals. Nothing contained in this Agreement shall restrict Recipient from the use of any ideas, concepts, know-how, or techniques contained in Information that are related to Recipient's business activities ("Residuals"), provided that in so doing, Recipient does not breach its obligations under this Section. However, this does not give Recipient the right to disclose the Residuals except as set forth elsewhere in this Agreement. (d) Fiserv System. The Fiserv System contains information and computer software that are proprietary and confidential information of Fiserv, its suppliers, and licensors. Client agrees not to attempt to circumvent the devices employed by Fiserv to prevent unauthorized access to the Fiserv System, including, but not limited to, alterations, decompiling, disassembling, modifications, and reverse engineering thereof. (e) Information Security. Fiserv shall implement and maintain appropriate measures designed to meet the objectives of the guidelines establishing standards for safeguarding non-public Client customer information as adopted by any federal or state regulatory agencies having jurisdiction over Client's affairs. (f) Confidentiality of this Agreement. Fiserv and Client agree to keep confidential the prices, terms and conditions of this Agreement, without disclosure to third parties. 7. Regulatory Agencies, Regulations and Legal Requirements. (a) Client Files. Records maintained and produced for Client ("Client Files") may be subject to examination by such Federal, State, or other governmental regulatory agencies as may have jurisdiction over Client's business to the same extent as such records would be subject if maintained by Client on its own premises. Client agrees that Fiserv is authorized to give all reports, summaries, or information contained in or derived from the data or information in Fiserv's possession relating to Client when formally requested to do so by an authorized regulatory or government agency. (b) Compliance with Regulatory Requirements. Client agrees to comply with applicable regulatory and legal requirements, including without limitation: 41 (i) submitting a copy of this Agreement to the appropriate regulatory agencies prior to the date Services commence; (ii) providing adequate notice to the appropriate regulatory agencies of the termination of this Agreement or any material changes in Services; (iii) retaining records of its accounts as required by regulatory authorities; (iv) obtaining and maintaining, at its own expense, any Fidelity Bond required by any regulatory or governmental agency; and (v) maintaining, at its own expense, such casualty and business interruption insurance coverage for loss of records from fire, disaster, or other causes, and taking such precautions regarding the same, as may be required by regulatory authorities. 8. Warranties. (a) Fiserv Warranties. Fiserv represents and warrants that: (i)(A) Services will conform to the specifications set forth in the Exhibits; (B) Fiserv will perform Client's work accurately provided that Client supplies accurate data and information, and follows the procedures described in all Fiserv documentation, notices, and advices; (C) Fiserv personnel will exercise due care in provision of Services; (D) the Fiserv System will comply in all material respects with all applicable Federal and State regulations governing Services; and (E) the Fiserv System is or will be Year 2000 compliant. In the event of an error or other default caused by Fiserv personnel, systems, or equipment, Fiserv shall correct the data or information and/or reprocess the affected item or report at no additional cost to Client. Client agrees to supply Fiserv with a written request for correction of the error within 30 days after Client's receipt of the work containing the error. Work reprocessed due to errors in data supplied by Client, on Client's behalf by a third party, or by Client's failure to follow procedures set forth by Fiserv shall be billed to Client at Fiserv's then current time and material rates; and (ii) it owns or has a license to furnish all equipment or software comprising the Fiserv System. Fiserv shall indemnify Client and hold it harmless against any claim or action that alleges that the Fiserv System use infringes a United States patent, copyright, or other proprietary right of a third party. Client agrees to notify Fiserv promptly of any such claim and grants Fiserv the sole right to control the defense and disposition of all such claims. Client shall provide Fiserv with reasonable cooperation and assistance in the defense of any such claim. THE WARRANTIES STATED ABOVE ARE LIMITED WARRANTIES AND ARE THE ONLY WARRANTIES MADE BY FISERV. FISERV DOES NOT MAKE, AND CLIENT HEREBY EXPRESSLY WAIVES, ALL OTHER WARRANTIES, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE STATED EXPRESS WARRANTIES ARE IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF FISERV FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE DELIVERY, USE, OR PERFORMANCE OF FISERV SERVICES. (b) Client Warranties. Client represents and warrants that: (A) no contractual obligations exist that would prevent Client from entering into this Agreement; (B) it has complied with all applicable regulatory requirements; and (C) Client has requisite authority to execute, deliver, and perform this Agreement. Client shall indemnify and hold harmless Fiserv, its officers, directors, employees, and affiliates against any claims or actions arising out of (X) the use by Client of the Fiserv System in a manner other than that provided in this Agreement; and (Y) any and all claims by third parties through Client arising out of the performance and non-performance of Fiserv Services by Fiserv, provided that the indemnity listed in clause (Y) hereof shall not preclude Client's recovery of direct damages pursuant to the terms and subject to the limitations of this Agreement. 9. Limitation of Liability. (a) General. IN NO EVENT SHALL FISERV BE LIABLE FOR LOSS OF GOODWILL, OR FOR SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES ARISING FROM CLIENT'S USE OF FISERV SERVICES, OR FISERV'S SUPPLY OF EQUIPMENT OR SOFTWARE, REGARDLESS OF WHETHER SUCH CLAIM ARISES IN TORT OR IN CONTRACT. CLIENT MAY NOT ASSERT ANY CLAIM AGAINST FISERV MORE THAN 2 YEARS AFTER SUCH CLAIM ACCRUED. FISERV'S AGGREGATE LIABILITY FOR ANY AND ALL CAUSES OF ACTION RELATING TO SERVICES SHALL BE LIMITED TO THE TOTAL FEES PAID BY CLIENT TO FISERV FOR SERVICES RESULTING IN SUCH LIABILITY IN THE 4 MONTH PERIOD PRECEDING THE DATE THE CLAIM ACCRUED. FISERV'S AGGREGATE LIABILITY FOR A DEFAULT RELATING TO EQUIPMENT OR SOFTWARE SHALL BE LIMITED TO THE AMOUNT PAID BY CLIENT FOR THE EQUIPMENT OR SOFTWARE. (b) Lost Records. If Client's records or other data submitted for processing are lost or damaged as a result of any failure by Fiserv, its employees, or agents to exercise reasonable care to prevent such loss or damage, Fiserv's liability on account of such loss or damages shall not exceed the reasonable cost of reproducing such records or data from exact duplicates thereof in Client's possession. 42 10. Disaster Recovery. (a) General. Fiserv maintains a disaster recovery plan ("Disaster Recovery Plan") for each Service. A "Disaster" shall mean any unplanned interruption of the operations of or inaccessibility to Fiserv's service center in which Fiserv, using reasonable judgment, requires relocation of processing to a recovery location. Fiserv shall notify Client as soon as possible after Fiserv deems a service outage to be a Disaster. Fiserv shall move the processing of Client's standard services to a recovery location as expeditiously as possible and shall coordinate the cut-over to back-up telecommunication facilities with the appropriate carriers. Client shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist Fiserv in implementing the switchover to the recovery location. During a Disaster, optional or on-request services shall be provided by Fiserv only to the extent adequate capacity exists at the recovery location and only after stabilizing the provision of base services. (b) Communications. Fiserv shall work with Client to establish a plan for alternative communications in the event of a Disaster. (c) Disaster Recovery Test. Fiserv shall test the Disaster Recovery Plan periodically. Client agrees to participate in and assist Fiserv with such test, if requested by Fiserv. Upon Client request, test results will be made available to Client's management, regulators, auditors, and insurance underwriters. (d) Client Plans. Fiserv agrees to release information necessary to allow Client's development of a disaster recovery plan that operates in concert with the Disaster Recovery Plan. (e) No Warranty. Client understands and agrees that the Disaster Recovery Plan is designed to minimize, but not eliminate, risks associated with a Disaster affecting Fiserv's service center(s). Fiserv does not warrant that Fiserv Services will be uninterrupted or error free in the event of a Disaster; no performance standards shall be applicable for the duration of a Disaster. Client maintains responsibility for adopting a disaster recovery plan relating to disasters affecting Client's facilities and for securing business interruption insurance or other insurance necessary for Client's protection. 11. Termination. (a) Material Breach. Except as provided elsewhere in this Section 11, either party may terminate this Agreement in the event of a material breach by the other party not cured within 90 days following written notice stating, with particularity and in reasonable detail, the nature of the claimed breach. (b) Failure to Pay. In the event any invoice remains unpaid by Client 30 days after due, or Client deconverts any data or information from the Fiserv System without prior written consent of Fiserv, Fiserv, at its sole option, may terminate this Agreement and/or Client's access to and use of Fiserv Services. Any invoice submitted by Fiserv shall be deemed correct unless Client provides written notice to Fiserv within 30 days of the invoice date specifying the nature of the disagreement. (c) Remedies. Remedies contained in this Section 11 are cumulative and are in addition to the other rights and remedies available to Fiserv under this Agreement, by law or otherwise. (d) Defaults. If Client: (i) defaults in the payment of any sum of money due; (ii) breaches this Agreement in any material respect or otherwise defaults in any material respect in the performance of any of its obligations; or (iii) commits an act of bankruptcy or becomes the subject of any proceeding under the Bankruptcy Code or becomes insolvent or if any substantial part of Client's property becomes subject to any levy, seizure, assignment, application, or sale for or by any creditor or governmental agency; then, in any such event, Fiserv may, upon written notice, terminate this Agreement and be entitled to recover from Client as liquidated damages an amount equal to the present value of all payments remaining to be made hereunder for the remainder of the initial term or any renewal term of this Agreement. For purposes of the preceding sentence, present value shall be computed using the "prime" rate (as published in The Wall Street Journal) in effect at the date of termination and "all payments remaining to be made" shall be calculated based on the average bills for the 3 months immediately preceding the date of termination. Client agrees to reimburse Fiserv for any expenses Fiserv may incur, including reasonable attorneys' fees, in taking any of the foregoing actions. (e) Convenience. Client may terminate this Agreement during any term by paying a termination fee based on the remaining unused term of this Agreement, the amount to be determined by multiplying Client's largest monthly invoice for each Fiserv Service received by Client during the term (or if no monthly invoice 43 has been received, the sum of the estimated monthly billing for each Fiserv Service to be received hereunder) by 80% times the remaining months of the term, plus any unamortized conversion fees or third party costs existing on Fiserv's books on the date of termination. Client understands and agrees that Fiserv losses incurred as a result of early termination of the Agreement would be difficult or impossible to calculate as of the effective date of termination since they will vary based on, among other things, the number of clients using the Fiserv System on the date the Agreement terminates. Accordingly, the amount set forth in the first sentence of this subsection represents Client's agreement to pay and Fiserv's agreement to accept as liquidated damages (and not as a penalty) such amount for any such Client termination. (f) Merger. In the event of a merger between Client and another organization in which Client is not the surviving organization and where the other organization was not previously a user of Fiserv services similar to the Services, Fiserv will allow an early termination of this Agreement upon the following terms and conditions: (i) written notice must be given 3 months in advance, specifying the termination date; (ii) Fiserv may specify a deconversion date based on its previous commitments and work loads; and (iii) Fiserv may charge a termination fee in accordance with subsection (e) above. (g) Return of Data Files. Upon expiration or termination of this Agreement, Fiserv shall furnish to Client such copies of Client Files as Client may request in Fiserv's standard machine readable format along with such information and assistance as is reasonable and customary to enable Client to deconvert from the Fiserv System, provided, however, that Client consents and agrees and authorizes Fiserv to retain Client Files until (i) Fiserv is paid in full for (A) all Services provided through the date such Client Files are returned to Client; and (B) any and all other amounts that are due or will become due under this Agreement; (ii) Fiserv is paid its then standard rates for the services necessary to return such Client Files; (iii) if this Agreement is being terminated, Fiserv is paid any applicable termination fee pursuant to subsection (d), (e), or (f) above; and (iv) Client has returned to Fiserv all Fiserv Information. Unless directed by Client in writing to the contrary, Fiserv shall be permitted to destroy Client Files any time after 30 days from the final use of Client Files for processing. (h) Miscellaneous. Client understands and agrees that Client is responsible for the deinstallation and return shipping of any Fiserv-owned equipment located on Client's premises. 12. Arbitration. (a) General. Except with respect to disputes arising from a misappropriation or misuse of either party's proprietary rights, any dispute or controversy arising out of this Agreement, or its interpretation, shall be submitted to and resolved exclusively by arbitration under the rules then prevailing of the American Arbitration Association, upon written notice of demand for arbitration by the party seeking arbitration, setting forth the specifics of the matter in controversy or the claim being made. The arbitration shall be heard before an arbitrator mutually agreeable to the parties; provided, that if the parties cannot agree on the choice of arbitrator within 10 days after the first party seeking arbitration has given written notice, then the arbitration shall be heard by three arbitrators, one chosen by each party, and the third chosen by those two arbitrators. The arbitrators will be selected from a panel of persons having experience with and knowledge of information technology and at least one of the arbitrators selected will be an attorney. A hearing on the merits of all claims for which arbitration is sought by either party shall be commenced not later than 60 days from the date demand for arbitration is made by the first party seeking arbitration. The arbitrator(s) must render a decision within 10 days after the conclusion of such hearing. Any award in such arbitration shall be final and binding upon the parties and the judgment thereon may be entered in any court of competent jurisdiction. (b) Applicable Law. The arbitration shall be governed by the United States Arbitration Act, 9 U.S.C. 1-16. The arbitrators shall apply the substantive law of the State of Wisconsin, without reference to provisions relating to conflict of laws. The arbitrators shall not have the power to alter, modify, amend, add to, or subtract from any term or provision of this Agreement, nor to rule upon or grant any extension, renewal, or continuance of this Agreement. The arbitrators shall have the authority to grant any legal remedy available had the parties submitted the dispute to a judicial proceeding. (c) Situs. If arbitration is required to resolve any disputes between the parties, the proceedings to resolve the first such dispute shall be held in Atlanta, Georgia, the proceedings to resolve the second such dispute shall be held in Raleigh, North Carolina, and the proceedings to resolve any subsequent disputes shall alternate between Atlanta, Georgia and Raleigh, North Carolina. 13. Insurance. Fiserv carries the following types of insurance policies: 44 (i) Comprehensive General Liability in an amount not less than $1 million per occurrence for claims arising out of bodily injury and property damage; (ii) Commercial Crime covering employee dishonesty in an amount not less than $5 million; (iii) All-risk property coverage including Extra Expense and Business Income coverage; and (iv) Workers Compensation as mandated or allowed by the laws of the state in which Services are being performed, including $500,000 coverage for Employer's Liability. 14. Audit. Fiserv employs an internal auditor responsible for ensuring the integrity of its processing environments and internal controls. In addition, Fiserv provides for periodic independent audits of its operations. Fiserv shall provide Client with a copy of the audit of the Fiserv service center providing Services within a reasonable time after its completion and shall charge each client a fee based on the pro rata cost of such audit. Fiserv shall also provide a copy of such audit to the appropriate regulatory agencies, if any, having jurisdiction over Fiserv's provision of Services. 15. General. (a) Binding Agreement. This Agreement is binding upon the parties and their respective successors and permitted assigns. Neither this Agreement nor any interest may be sold, assigned, transferred, pledged, or otherwise disposed of by Client, whether pursuant to change of control or otherwise, without Fiserv's prior written consent. Client agrees that Fiserv may subcontract any Services to be performed hereunder. Any such subcontractors shall be required to comply with all applicable terms and conditions. (b) Entire Agreement. This Agreement, including its Exhibits, which are expressly incorporated herein by reference, constitutes the complete and exclusive statement of the agreement between the parties as to the subject matter hereof and supersedes all previous agreements with respect thereto. Modifications of this Agreement must be in writing and signed by duly authorized representatives of the parties. Each party hereby acknowledges that it has not entered into this Agreement in reliance upon any representation made by the other party not embodied herein. In the event any of the provisions of any Exhibit are in conflict with any of the provisions of this Agreement, the terms and provisions of this Agreement shall control unless the Exhibit in question expressly provides that its terms and provisions shall control. (c) Severability. If any provision of this Agreement is held to be unenforceable or invalid, the other provisions shall continue in full force and effect. (d) Governing Law. This Agreement will be governed by the substantive laws of the State of Wisconsin, without reference to provisions relating to conflict of laws. The United Nations Convention of Contracts for the International Sale of Goods shall not apply to this Agreement. (e) Force Majeure. Neither party shall be responsible for delays or failures in performance resulting from acts reasonably beyond the control of that party. (f) Notices. Any written notice required or permitted to be given hereunder shall be given by: (i) Registered or Certified Mail, Return Receipt Requested, postage prepaid; (ii) confirmed facsimile; or (iii) nationally recognized courier service to the other party at the addresses listed on the cover page or to such other address or person as a party may designate in writing. All such notices shall be effective upon receipt. (g) No Waiver. The failure of either party to insist on strict performance of any of the provisions hereunder shall not be construed as the waiver of any subsequent default of a similar nature. (h) Financial Statements. Fiserv shall provide Client and the appropriate regulatory agencies so requiring a copy of Fiserv, Inc.'s audited consolidated financial statements. (i) Prevailing Party. The prevailing party in any arbitration, suit, or action brought against the other party to enforce the terms of this Agreement or any rights or obligations hereunder, shall be entitled to receive its reasonable costs, expenses, and attorneys' fees of bringing such arbitration, suit, or action. (j) Survival. All rights and obligations of the parties under this Agreement that, by their nature, do not terminate with the expiration or termination of this Agreement shall survive the expiration or termination of this Agreement. 45 (k) Exclusivity. Client agrees that Fiserv shall be the sole and exclusive provider of the services that are the subject matter of this Agreement. For purposes of the foregoing, the term "Client" shall include Client affiliates. During the term of this Agreement, Client agrees not to enter into an agreement with any other entity to provide these services (or similar services) without Fiserv's prior written consent. If Client acquires another entity, the exclusivity provided to Fiserv hereunder shall take effect with respect to such acquired entity as soon as practicable after termination of such acquired entity's previously existing arrangement for these services. If Client is acquired by another entity, the exclusivity provided to Fiserv hereunder shall apply with respect to the level or volume of these services provided immediately prior to the signing of the definitive acquisition agreement relating to such acquisition and shall continue with respect to the level or volume of these services until any termination or expiration of this Agreement. (l) Recruitment of Employees. Client agrees not to hire Fiserv's employees during the term of this Agreement and for a period of 6 months after any termination or expiration thereof, except with Fiserv's prior written consent. - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives as of the date indicated below.
For Client: For Fiserv: CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
46 Exhibit A Account Processing Services Client agrees with Fiserv as follows: 1. Services. Fiserv will provide Client the Account Processing Services ("Account Processing Services") specified in Exhibit A - 1. 2. Fees. Client shall pay Fiserv fees and other charges for Account Processing Services specified in Exhibit A - 2. 3. Responsibility for Accounts. Client shall be responsible for balancing its accounts each business day and notifying Fiserv immediately of any errors or discrepancies. Provided that Client immediately notifies Fiserv of any discrepancy in Client's accounts, Fiserv shall, at its expense, promptly recompute accounts affected by discrepancies solely caused by the Fiserv Systems or provide for another mutually agreeable resolution. Fiserv will use its commercially reasonable efforts to correct errors attributable to Client or Client's other third party servicers. Reconstruction of error conditions attributable to Client or to third parties acting on Client's behalf will be done at prevailing rates as set forth in Exhibit A - 2. 4. Annual Histories. Fiserv currently maintains annual histories, where applicable, for its clients. These histories can be used to reconstruct Client Files in an emergency. However, in order to permit prompt and accurate reconstruction of accounts, Client agrees to retain at all times and make available to Fiserv upon request the most recent data printout(s) received from Fiserv, together with copies or other accurate and retrievable records of all transactions to be reflected on the next consecutive printout(s). 5. Hours of Operation. Account Processing Services will be available for use by Client during standard Fiserv business hours, excluding holidays, as specified in Exhibit A - 3. Account Processing Services may be available during additional hours, during which time Client may use Services at its option and subject to additional charges. 6. Protection of Data. (a) For the purpose of compliance with applicable government regulations, Fiserv has an operations backup center, for which Client agrees to pay the charges indicated in Exhibit A - 2. Copies of transaction files are maintained by Fiserv off premises in secured vaults. (b) Upon Client providing access to Client Files through Client's customers' personal computers or voice response system, Client agrees to indemnify and hold harmless Fiserv, its officers, directors, employees, and affiliates against any claims or actions arising out of such access to Client Files or any Fiserv files (including the files of other Fiserv clients) or the Fiserv System or other Fiserv systems. 7. Processing Priority. Fiserv does not subscribe to any processing priority; all users receive equal processing consideration. 8. Forms and Supplies. Client assumes and will pay the charges for all customized forms, supplies, and delivery charges. Custom forms ordered through Fiserv will be subject to a 15% administrative fee for warehousing and inventory control. Forms ordered by Client and warehoused at Fiserv will be subject to the administrative fee set forth in Exhibit A - 2. 9. Regulatory Supervision. By entering into this Agreement, Fiserv agrees that the Office of Thrift Supervision, FDIC, or other regulatory agencies having authority over Client's operations shall have the authority and responsibility provided to the regulatory agencies pursuant to the Bank Service Corporation Act, 12 U.S.C. 1867(C) relating to services performed by contract or otherwise. - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have caused this Exhibit A to the Agreement to be executed by their duly authorized representatives as of the date indicated below.
For Client: For Fiserv: CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
47 Exhibit A-1 Account Processing Services Fiserv will provide Client with the following Account Processing Services: I. Services and/or functions to be performed by Fiserv: A. Maintain the necessary computer equipment in order to provide Client with complete electronic bookkeeping service for Deposit Accounts, Certificate Accounts, Loan Accounts, Central Information System, Account Analysis, ACH (Receiving), General Ledger, and On-Line Documentation five (5) days per week. The Information Technology, Inc. (ITI) Premier II Banking System will be used for Client's application processing. B. Provide necessary assistance to Client for the initial set-up to convert to the Fiserv system. Customer Service is provided by toll-free telephone as follows: (1) Full Customer Service specialists for all applications, Monday through Friday - 8:00 a.m. to 5:00 p.m. (EST) (2) Limited telephone coverage, Monday through Friday - 5:00 p.m. to 7:00 p.m. (EST) (3) Emergency after hours Customer Service, via Beeper - 24 hours/day, 7 day/week C. Receive transmitted transaction data from Client at Fiserv by 7:00 p.m. (EST) daily or receive transaction input at a Fiserv center at mutually agreed time. If transaction data is not received by this appropriate time, assurance cannot be made for meeting the Client's scheduled needs the following day. D. Reconcile Client's balancing totals. E. Exercise reasonable care in handling data submitted to Fiserv and hold all information received by Fiserv in strictest confidence. F. Calculate and provide figures for the daily accrual of interest earned, late charges due, and service charges. G. Transmit selected reports to Client's remote print facility or Fiserv facility for printing. II. Services, functions and requirements to be performed by Client for participation in this agreement: A. Purchase/lease all equipment required in the bank to utilize the services provided by Fiserv. B. Provide transmitted data to Fiserv's Computer Center daily by 7:00 p.m. EST, or provide input data to a Fiserv center by mutually agreed times, records containing the necessary information to process the applications. C. Provide information on new accounts, change of address, changes of title and status change through the on-line data entry system. D. Repair and re-enter for reprocessing all rejected items, handle return items and reconcile controls. E. Verify signatures and stop payments, cancel and file checks, microfilm, assemble and mail statements, handle return items and reconcile controls. F. Balance work daily to General Ledger Controls, verify new and re-issued coupon books, and mail notices. G. Print and distribute reports selected by Client. H. Provide necessary transportation and Content Insurance coverage To and From Fiserv facility. III. Fiserv will provide the following ancillary support services included in the monthly processing fee. Refer to Ancillary Module Current Fees Schedule, Exhibit A-5. 48 Exhibit A-2 Account Processing Services Fiserv will provide Client with the following Account Processing Services at the fees and prices indicated: I. Fees to be paid monthly by Client to Fiserv for performance of the services outlined in Section I: A. Monthly Processing Fees The Client will be charged a monthly fee per below schedule for listed services: DDA/Savings/COD's/Loans/ Telebanc General Ledger Premier eCom PIM Receiving/Origination Accounts Payable EIM/Decision Plan Safe Deposit Box On-Line Documentation Check Reconciliation Credit Bureau (1) Qualified Teller Interface RRM Qualified Deposit & Loan Platform Interfaces 100 SMART Reports Director Interface Disaster Recovery On-Line Devices Total Deposit/Loan Accounts on File: 1 - 20,000 Accounts @ * 20,001 - 40,000 Accounts @ * 40,001 - 80,000 Accounts @ * 80,001 - 120,000 Accounts @ * > 120,000 Accounts @ * B. Loan Coupon Books* $ * Each (Postage Additional) C. Furnished by Client * Postage/Courier Fees Telephone Lines Modems and Annual Modem Maintenance In-Bank Terminal Equipment/Software In-Bank Equipment/Software Maintenance D. Conversion/Installation Fees $ * A flat fee of $ * will be charged to convert to Premier II plus travel and related expenses. E. Supplies All forms necessary to the daily operations of Fiserv's System can be purchased through Fiserv at prices quoted at the time of purchase. F. Miscellaneous Services 100 Smart Reports will be provided and included in Base Monthly Processing Fee. Additional services provided per Exhibit A-4. G. Platform/Teller Interfaces $ * - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 49 H. ATM/EFT Service Installation Fees: One-Time Charge $ * Per ATM Connect Fee $ * Per Network $ * Surcharge Set-Up $ * Surcharge Set-Up Per ATM $ * Communication Install Fee * Monthly Charges Fiserv Support $ * Network Support per Network $ * Card Base Record $ * Per Card $ * Minimum Per ATM Connect Fee $ * Per Device Per ATM 7 X 24 Monitoring Fee $ * Per Device Communication Line Cost $ * Per Transaction Fees ON/US Transaction Fees $ * Foreign Transaction Fees $ * Surcharge Transaction Fees $ * In Addition to Above Transaction Fees ATM Cards Plastic Stock * New Card Order $ * Per Card PIN Mailer $ * Per Mailer Postage * Visa Debit Processing Per Separate Quote I. End of Year Processing Per fee schedule published annually. J. On-Line Terminal Support On-Line devices included. K. Special Processing Computer Time $ * Per Hour L. Programming/Consulting $ * Per Hour M. On-Site Support/Training $ * Per Person Per Day Plus Travel and Related Expenses. N. Deconversion Fees File formats and magnetic tapes in Fiserv format will be provided to designated processor as requested in writing providing the Client has no outstanding payments to Fiserv. Charges for the creation and delivery of these files will be computer run time or * per application per request, whichever is greater. All consulting interpretation and computer time required for the deconversion will be billed at per hour current rates. - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 50 Exhibit A-2 O. Charges for Services All processing fees defined may be changed annually beginning with the second anniversary of this Agreement. Each change shall be limited to the lesser of three percent (3%) or the change in the U.S. Department of Labor, Consumer Price Index for the twelve (12) month period preceding the anniversary date. Processing fees shall not be adjusted for the first twenty-four (24) months of the Agreement. P. Training Premier II Classroom Training in the Fiserv Atlanta facility will be provided for one (1) Deposit and one (1) Loan attendee in each class, with standard classroom fees waived. On-site training at Capital Bank of five (5) days per year will be provided at no charge by Fiserv Atlanta resources of Deposit and Loan applications, with a mutual agreed upon agenda and scheduling. On-site training days may be substituted for classroom session days in Atlanta, GA. * All third party fees are subject to change without notice. 51 Exhibit A-3 Hours of Operation The Fiserv Account Processing Center will be in operation for On-Line Accounting Processing Services in accordance with the following: Monday 8:00 A.M. - 7:00 P.M. Tuesday 8:00 A.M. - 7:00 P.M. Wednesday 8:00 A.M. - 7:00 P.M. Thursday 8:00 A.M. - 7:00 P.M. Friday 8:00 A.M. - 7:00 P.M. Saturday 8:00 A.M. - 4:00 P.M. All times stated are in accordance with prevailing local times for the Fiserv Account Processing Center. The Fiserv Account Processing Center will observe national holidays, and will be closed for on-line operations. 52 Exhibit A-4 MISCELLANEOUS SERVICES Request Fee - ------- --- PRM SMART Reports & Pull Files * CIS/6110/CIS/6030 * Safe Deposit Box Billing Safe Deposit Box Trial and Past Due Reports CIS/6040 * Debit Card Reference Journal CIS/6111 * Debit Card Billing DDA/3000 * "On-Demand" Statement Cycles DDA/3800 * DDA Month End Account Profitability Analysis DDA/6000 * DDA Balance Range Report DDA/6100 * Audit Confirmations - DDA DDA/6002 * Account Code/Cycle Distribution Report DDA/6003 * DDA Holds Report DDA/6004 * Report Errors Concerning DDA Stmts. SAV/6000 * SAV Balance Range Report SAV/6100 * Audit Confirmations - SAV SAV/6002 * Account Code/Cycle Distribution Report SAV/6003 * Report of SAV Holds - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 53 Exhibit A-4 SAV/6007 * Automatic Transfers to DDA Report SAV/6006 * Savings Balances Subject to Rate Change COD/6006 * CD Analysis Reports COD/6100 * Audit Confirmations - CD COD/6002 * Account Code/Cycle Distribution Report COD/6003 * Report of CD Holds LAS/6013 * Loan Status Report - Reports by Period LAS/6012 * FHA Title I Home Improvement Loan Reporting LAS/5202 * Escrow Addenda Reference Journal LAS/5203 * Escrow Review Conversion LAS/6007 * Loan Analysis Report LAS/6100 * Audit Confirmations - Loans LAS/6008 * Dealer, Source or Participated Report LAS/6200 * Line Transcript Statement Report LAS/6201 * Note Transcript Statement Report LAS/6202 * Note Statement - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 54 Exhibit 4-a LAS/6009 * Direct/Indirect Liability Reporting LAS/6010 * Extracts Source ID Numbers Updates Market Prices LAS/6011 * HMDA Reporting Code Analysis Reports TTM/5511, TTM/5512 * CIS/6401 * Cross Application Processing SMART CIS/6300 * Specifications Reports FMS/8200 * Move Projected Budget to Current Budget ADS/0900 * Mass Maintenance Specification Changes * Special Programming or Consulting * Computer Time for Special Client Request * Reshipping of Print Files * - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 55 PAPERLESS ITEM MODULE (PIM) SERVICES Fiserv will provide PIM Services per the fees outlined below: [ ] ACH Formatted File Input Service Implementation Fee * Per Input Formatted File * [ ] ACH Origination Service Implementation Fee * Per Monthly Fee * Miscellaneous Service Fees subject to change. - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 56 Exhibit A-5 ANCILLARY MODULES One-Time Description Fee Monthly Fee General Ledger Accounting System with Cost Center Accounting * * Asset Liability Management System * * Bond Account System * * Check Reconciliation * * Fixed Asset System * * Stockholder Accounting System * * Accounts Payable System * * Loan Custodial Module * * Automated Collateral Insurance Reporting Module * * Automated Credit Reporting Module * * (1 Per Month Included) Holding Company Reporting Module * * Federal Call Reporting Module * * Safe Deposit Box Accounting System * * On-Line Loan Collection Module * * Telebanc * * EIM Decision Plan * * Director - In-House Interface * * Signature Management Module * * (Workstation Software @ $100 each) (Appropriate Scanner(s) additional) Prime Data Warehousing * * Workstation Software Per Separate Quote Third Party Training Additional * * Note 1) Third Party provided training in numerous U.S. locations - 3 days @ * - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 57 2) Fiserv Application Training in Atlanta - 1 day @ * 3) Workstation Software -- * - Administrative; * User 4) SQL Client Software on every workstation necessary - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 58 Exhibit A-5 One-Time Description Fee Monthly Fee Premier eCom (Internet Banking) * Premier II Teller Interface * * PII Platform (Deposit) * * Bankers Systems Deposit & Loan Interfaces * * Ancillary Module One-Time Fees and Monthly Fees subject to change. Implementation travel and related expenses additional. - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 59 Exhibit A-6 ACCOUNT PROCESSING PERFORMANCE STANDARDS 1. Performance Standards; Remedy. The Fiserv standard of performance with respect to any Service provided hereunder shall be set forth in the applicable Exhibit for the Service being provided. In the event that Fiserv fails to meet the standards set forth in the applicable Exhibit or other service commitment standards as may be agreed upon between Fiserv and Client, and such failure is not the result of Client's error or omission, Client's remedy for such default shall be set forth in applicable Exhibit. In the event that Fiserv fails to achieve any performance standard, alone or in combination, during any 3 of 6 measurement periods, Client, may at its option, notify Fiserv of its intent to terminate this Agreement. Fiserv, upon receipt of notice, shall advise Client promptly upon correction of the system deficiencies (in no event shall corrective action exceed sixty (60) days from the notice date) and shall begin an additional measurement period. Should Fiserv fail to achieve the required performance standard during the remeasurement period, Client may terminate this Agreement without termination fees. 60 EXHIBIT A-6 TABLE I PERFORMANCE STANDARDS
- ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- Schedule Availability Critical Application Wt. Minimum Service Level Performance Standard - ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- 07:00-19:00 M-F Online Uptime 20 98% 99.7% 07:00-16:00 Sat. All Applications (Exceeding 15 Minutes) - ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- 7:30 T-Sat Batch Reports* 5 98% 99.7% Remote Print - ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- 12:00 PM T - Sat. End of Month Batch 20 Remote Print - ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- Monday Following EOM Special EOM 20 SMARTS/Requests/ Analysis - ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- 07:00 - 19:00 M-F Image Retrieval Uptime 10 98% 99.7% 07:00 - 16:00 Sat. (Exceeding 15 minutes) - ----------------------------- ----------------------------- ----------- ------------------------------ -------------------------- Five (5) Business Days Fiserv Planned/ Scheduled 20 Downtime Notification** - ----------------------------- ----------------------------- ----------- ------------------------------ --------------------------
Definitions: Uptime: The specified hour in which the Critical Application is actually available for use by End Users. Minimum Service Level: The lowest level of service which is maintained during any month before penalties are assessed. Performance Standard: The expected level of service to be maintained in any month. * Excludes SMART Reports, Special Requests and Statements ** Does not include Unplanned/Unscheduled downtimes in order to maintenance hardware and/or software that necessitates immediate action. 61 EXHIBIT A-6 TABLE II PERFORMANCE CREDIT FORMULA The number of days during a month in which a "Critical Application" falls below "Minimum Standards" as an average for that day (shown herein as "N"), divided by the number of business days in the month (shown herein as "D"), Equals the percentage of below minimum standard time (shown herein as "P"). N divided by D = P The "Weight" (shown herein as "W") divided by 100, times "P", times "N" would be the credit percentage of that month's Account Processing invoice. W/100 x P x N = CP or "Credit Percentage" EXAMPLE: N (Number of days in a month below minimum standards) = 5 -------------------------------------------------------------------- D (Number of business days in a month) = 20 P (N/D) = .25 W (Weight for downtime exceeding 15 minutes - from Table I) = 20 Equation: W/100 x P x N = Credit Percentage Sample Solution: 20/100 x .25 x 5 = 25% credit percentage of that months invoice for Account Processing (Exhibit A-2, 1.A.). 62 Exhibit A-7 Visa Debit Processing Fee Schedule I. SYSTEM INSTALLATION Setup Fee $ * II. MONTHLY PROCESSOR FEES $ * (All items listed in Section II are included in the monthly minimum) Authorization Support $ * (each authorized transaction) Settlement Support (each settlement transaction) $ * $ * File Residency Support (each card on file) $ * Lost/Stolen Card Reporting $ * (after hours) CWB/Negative File Updates $ * III. SNS FULL CARDHOLDERS SERVICING (Optional) $ * $ * IV. FILE TRANSMISSIONS (CMF/OPC/ACH) SUPPORT $ * V. REPORTING ACCESS $ * VI. CARD PRODUCTION (includes embossing/encoding, card carrier, envelopes, and PIN reminder/not including postage) $ * $ * VII. PREPARATION OF VISA QUARTERLY REPORTING (VISA Associate Members Only) $ * VIII. VISA FEES AND OTHER SERVICES The client will be responsible for all VISA fees, dues and assessments, the cost of plastics, communications costs, all equipment expenses and any other costs not specified above. ACCEPTED BY:
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 63 Exhibit B Item Processing Services Client agrees with Fiserv as follows: 1. Services. Fiserv will provide Client the Item Processing Services ("Item Processing Services") specified in Exhibit B - 1. 2. Due Diligence. All necessary information concerning Client's requirements for Item Processing Services shall be set forth in a business assumptions list (the "IP Business Assumptions List"), which Client shall complete prior to Fiserv rendering Item Processing Services hereunder. Client acknowledges that Fiserv has relied on the information contained in the IP Business Assumptions List in determining pricing and performance levels for the Item Processing Services. In the event of material change(s) in the actual volumes, types of items, and delivery times for work received from Client, as compared to the IP Business Assumptions List, Fiserv shall have the right to adjust its fees and/or performance standards accordingly upon 30 days' notice to Client. Any increase in fees resulting from this due diligence process shall not be subject to the CPI limitations as set forth in Section 3 below. 3. Fees. Client shall pay Fiserv the fees and other charges for the Item Processing Services specified in Exhibit B - 1. Fees listed in Exhibit B - 2 are valid for item processing services and locations that Client contracts for as of the date of the Agreement. If Client wishes to obtain additional services and/or use additional locations from Fiserv during the term of the Agreement, Fiserv fees and services available, therefor will be quoted to Client upon request. Fiserv agrees to give at least 30 days' notice to Client of any changes in the rules and procedures established for processing items, unless such changes are caused by changes made by the Federal Reserve System or otherwise beyond the control of Fiserv, not permitting Fiserv to give such advance notice. Fiserv reserves the right to make such changes to the Exhibits without notice as may be necessary to cover any increases in Federal Reserve System costs and charges or in other costs and charges beyond Fiserv's control, including changes required by applicable law or regulatory activity. The fees listed in Exhibit B - - 2 may be changed annually effective each January 1 beginning in the year 2004 upon 30 days notice to Client. Each change shall be limited to the change in the U.S. Department of Labor, Consumer Price Index for All Urban Households ("CPI") for the 12-month period preceding each January 1, or three percent (3%), whichever is the lesser. Fiserv will deliver to Client the notification of the fee change. 4. Performance Standards. Fiserv will perform the Item Processing Services in accordance with the performance standards specified in Exhibit B - 3 (the "Performance Standards"), subject to Client meeting its performance obligations as set forth in Exhibits B - 1 and B - 3. Fiserv shall not be liable for any damages or losses to Client for errors occurring within the limits of the Performance Standards. 5. No Fiduciary Relationship. Fiserv shall perform such Item Processing Services for which Fiserv shall subscribe as agent of Client, and Fiserv shall not have by reason of this Agreement a fiduciary relationship with respect to Client. 6. Lost, Destroyed, and Misplaced Items. Fiserv assumes no liability for any item lost, destroyed, or misplaced while in transit before the item physically arrives at the premises of Fiserv and is received by Fiserv. In the event any items are lost, destroyed, or misplaced, and such event is not due to gross negligence or intentional misconduct by Fiserv, Client shall be solely responsible for the costs and expenses incurred by Fiserv in reconstructing any such items and for any damages or other losses that may be incurred by Fiserv due to the collection of such items. In the event Fiserv loses, destroys, or misplaces deposited items as a result of gross negligence or intentional misconduct after acceptance of said deposit, Fiserv shall be liable only for reasonable reconstruction costs of the deposit. Reasonable reconstruction costs shall be only those costs that arise from reconstruction of a microfilmed deposit. Fiserv shall not be liable for reconstruction costs associated with a deposit for which Client cannot provide a microfilmed record of such item(s) contained in the deposit. In no event shall Fiserv be liable for the face value of any lost or missing item(s). 7. Governmental Regulation. This Exhibit shall be governed by and is subject to: the applicable laws, regulations, rules, terms and conditions, as presently in effect or hereafter amended or adopted, of the United States of America, Federal Reserve Board, Federal Reserve Banks, Federal Housing Finance Board, and any other governmental agency or instrumentality having jurisdiction over the subject matter of this Exhibit. Client agrees to abide by such requirements and to execute and deliver such agreements, documents, or other forms as may be necessary to comply with the provisions hereof, including, without limitation, agreements to establish Fiserv as Client's Agent for purposes of delivery of items processed hereunder from or to the Federal Reserve Banks. Any such agreements shall be made a part of this Agreement and are incorporated herein. A change or termination of such laws, regulations, rules, 64 Exhibit B terms, conditions, and agreements shall constitute, respectively, a change or termination as to this Exhibit. Client data and records shall be subject to regulation and examination by government supervisory agencies to the same extent as if such information were on Client's premises. 8. Client Responsibilities. Client shall submit all items to Fiserv and otherwise comply with all Client obligations in accordance with the requirements set forth in Exhibit B - 1. Client shall maintain adequate supporting materials (i.e. exact copies of items, records, and other data supplied to Fiserv) in connection with the provision of Item Processing Services. Client shall provide written notice of confirmation and/or verification of any instructions given by Client, its agents, employees, officers, or directors to Fiserv in connection with Fiserv's provision of Item Processing Services. Client shall be responsible for balancing its accounts each business day and notifying Fiserv, within 7 business days, of any errors or discrepancies. In the event Fiserv discovers an error or defect (it being understood that Fiserv shall be under no duty to discover any such error or defect), Fiserv is authorized, in its sole discretion, to correct any such error or defect and to make any adjustments in order to correct such error or defect. 9. Definition of Item. An item is defined as all checks and other documents presented to Fiserv for processing, transactional entries generated by Client, such as teller cash tickets, general ledger entries, loan entries and all control documents such as batch tickets. - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the parties hereto have caused this Exhibit B to the Agreement to be executed by their duly authorized representatives as of the date indicated below.
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
65 Exhibit B-1 Item Processing Description of Services 1. Proof: On each business day (excluding Saturdays, Sundays, and holidays), Client will deliver to Fiserv Processing Center, checks and other items deposited to accounts with Client. Client will provide extra deliveries in support of proof operations for peak day processing. Peak day processing is defined as any day when Client's volume is expected to exceed twenty percent of daily average volume of the previous months volume divided by the number of business days in the previous month. a. Client will contract with and pay for a courier, to pick up and deliver all work between Client and Fiserv. Both parties will mutually agree upon the times of pick-up and delivery. If Fiserv has not received the items from Client locations by the agreed upon delivery times, Fiserv may, in its sole discretion and without liability, delay the processing of such items until the next business day. Fiserv will contact Client's after-hours contact and apprise said contact of the situation. Client agrees to provide an after-hours contact and update that contact should there be any change in Client personnel. b. Client agrees to MICR encode documents to meet Fiserv requirements (ABA and Account Numbers and Tran-codes). c. Client is responsible for microfilming all items submitted to Fiserv. d. Client agrees that all transactional entries, involving tellers' cash tickets, general ledger entries, or loan entries shall be in balance, and that Fiserv may return to Client, unprocessed, any transactional entries that are not in balance. e. Client agrees to segregate all over-the-counter items into batches not to exceed three inches (3") in depth and to identify each such batch with an appropriate batch header, which batch header shall meet written requirements provided by Fiserv. Client further agrees to segregate all items by type (i.e., single deposit items will be batched separately from multiple deposit items), and to provide a total for each single batch. f. Client agrees to include a batch manifest for each bag of work submitted to Fiserv. g. Client authorizes Fiserv to create ledger holdover entries, deposit corrections, or such other entries to balance transactions, except for those transactions outlined in subsection 1.d. above, as may be necessary to the efficient processing of the items. h. All items drawn against Client and those items internally generated shall be returned to Client or held by Fiserv in accordance with Client's written instructions. i. Client will report encoding errors to Fiserv. Fiserv will monitor errors to determine issues creating/causing the proof errors and take appropriate action. 2. Encoding: Fiserv will encode the dollar amount on all items needing encoding and presented to Fiserv as part of the Proof function described above. Fiserv may encode additional fields, such as account numbers, deposit ticket totals, or other items as specified by Client. Any such encoding will be according to terms agreed to by Fiserv. In no event will Fiserv be liable for losses to Client due to encoding errors if Client has not satisfied all of its obligations set forth in Section 1 above. Should Fiserv's encoding services fail to meet the performance standard for proof of deposit set forth in the Proof Encoding Performance Standards/Procedures, and Client incurs a potential loss due to an encoding error, Client shall use its best efforts to collect the amount in question from its customer (including without limitation, commencing legal action against the customer, obtaining a judgment, and attempting collection efforts based on said judgment) prior to submitting a claim for damages to Fiserv. 3. Exception Item Processing: Fiserv will either reject or pay items listed on the appropriate report, in accordance with written instructions, by Client's authorized officer or employee. The name of Client's officer or employee giving such instruction shall be noted on the item or on such other record as Fiserv may establish, together with the nature of the instruction. If Client has not instructed Fiserv regarding the disposition of any exception item drawn against Client by the agreed upon time each day, then Fiserv shall return it through the presentment chain to the depository bank or institution. Instructions to Fiserv on disposition of items that are received after the agreed upon deadline or are changed can result in a late charge. Should Fiserv's exception item processing fail to meet the performance standard for exception item processing set forth in Exhibit B-3, and Client incurs a potential loss due to an error, Client shall use its best efforts to collect the amount in question from its customer (including without limitation, commencing legal action against the customer, obtaining a judgment, and attempting collection efforts based on said judgment) prior to submitting a claim for damages to Fiserv. 66 4. Statement Rendition: All checks, drafts, and other orders for the payment of money drawn against accounts at Client which are to be stored by Fiserv, will be retained by Fiserv until the end of each Client's checking account cycle. The items will be sorted, filed with the monthly statement, and mailed to the depositor. Client agrees to have statements printed according to predefined cycles and print classes. Statement enclosure counts will be accurately and clearly reported in the top fold of the statement. If required, Client agrees to expedite the return of any paid exception items to Fiserv in order to facilitate timely statement processing. Fiserv will apply proper postage, which will be pre- paid monthly (or as agreed upon by Client and Fiserv) on an estimated basis by Client. 5. Inclearings: Client authorizes Fiserv to receive its inclearing items daily from the Federal Reserve Bank. Fiserv will balance the inclearing items to their cash letters, capture the items on magnetic media, microfilm or image scan and transmit the account information to Client's data processor. Fiserv will also pull out for further handling the appropriate items for exception handling or scrutinizing, and deliver the items to bulk file storage or to Client for further processing. 6. Courier Service: The parties hereto acknowledge that it will be necessary to make arrangements for the transport of items, records, and other data from Client to Fiserv and from the Federal Reserve or Correspondent bank to Fiserv. After Fiserv has provided the Item Processing Services, selected items, records, and data must be transported from Fiserv to Client and the Federal Reserve. The parties further acknowledge that the cost of such transportation shall be the sole responsibility of Client. a. Client has the right to make provision for its own courier service to provide the needed transportation as set forth in subsection 1.a. above. Should Client not make provision for such courier service, or should Client request that Fiserv make arrangements for such courier service, then Fiserv, for the benefit of Client, shall make arrangements for such a courier service. Client must notify Fiserv to provide such courier service no less than thirty (30) days prior to the date that Fiserv is to begin providing Item Processing Services. b. Client shall pay Fiserv for any and all charges, expenses, or costs incurred by Fiserv in contracting for said courier service, as set forth in Exhibit B-2. c. It is understood and agreed that Fiserv shall not have, or assume, any liability or responsibility for such items, records, or data until they have reached Fiserv premises and shall have no further responsibility or liability for them after they leave Fiserv premises. d. The courier service shall at all times be deemed the independent contractor of Client, and shall not, at any time or under any circumstances, be deemed the agent or employee of Fiserv, regardless of whether said courier service, at any pertinent time herein, is affiliated with or employed by Fiserv. e. Fiserv will monitor and track deliveries for Client. Should a delivery be missing, Fiserv will notify Client through appropriate channels. Should there be any dispute as to the proper delivery of any records, Fiserv's records of delivery will be accepted as the undisputed record of delivery. 7. Conversion Services: Fiserv will provide conversion services based on the information provided by Client during the due diligence process. Following Client's initial conversion to Fiserv Services, any additional requests will be submitted to Fiserv at least 90 days prior to the required implementation date. An estimate for the additional conversion services will be provided. The implementation time for the conversion will be delayed if Client requires more than three days to approve or decline the conversion estimate. Client also acknowledges that Fiserv must approve any changes to the MICR line and/or Account Number structure for Client prior to proceeding with a conversion. Fiserv will make every reasonable attempt to convert new MICR line and/or Account Number structures. Client agrees to eliminate any non-standard MICR line and/or Account number structure as identified during the due diligence process from its daily capture service within 120 days after the initial conversion date. Client acknowledges that Fiserv may elect to charge a fee such as the Special Statements Fee listed in Exhibit B-2, for all non-standard items processed in the service. Client acknowledges that Fiserv may not be able to achieve the stated service level agreements on accounts, transactions, or services involving non-standard MICR lines and/or Account Number structures. In the event that the Account Number appearing on the statement does not equal the Account Number on the MICR line, Fiserv will not be responsible for any service level agreements relating to statement preparation and rendition. Initial Client conversion is based on the results obtained during the due diligence process. This work would include an inclearings, POD and bulk file sort pattern. In addition, it would include a single extraction program to support the transmission of a daily inclearings and POD file to a host site for 67 Exhibit B-1 processing. Sort specifications will be developed in support of statement rendition services. Standard reporting will be provided to Client to include a daily transaction report sorted in transaction and account order, recaps of transmissions and cash letters, and a daily cash report if required. 8. Research Services: Fiserv will provide research and photocopy services upon request by Client. Upon receipt from Client of a request for subpoena work or other significant or voluminous research work, Fiserv will attempt to provide Client with an estimate of the time required and corresponding cost to complete the request prior to commencing the research services. 9. Data Transmission: Client and Fiserv acknowledge and agree that Client has separately contracted with Client's data processor to provide data processing services for Client and that Fiserv shall have no responsibility for the timeliness or quality of the service provided by Client's data processor. Client's data processor shall deliver directly to Client all reports generated from the data transmitted by Fiserv. Fiserv shall have no responsibility for the timeliness of such delivery or for the adequacy or accuracy of the reports supplied by Client's data processor, except for errors caused by Fiserv failure to transmit information. 10. Image Services: Fiserv will provide CD-ROM containing retrievable images of processed checks to Clients courier as agreed. Weekly and Daily CD's are dispatched the next business day. EOM CD's are dispatched within four business days. Fiserv will provide Client with remote research availability or exception item decision support via a work station from 8:00 AM Eastern Time to 12:00 AM Eastern Time Monday through Friday, excluding holidays, and on weekends and holidays from 8:00 AM Eastern Time to Noon Eastern Time. a. Fiserv will image capture Inclearings and POD through item capture. b. Re-enter transit all rejects. c. Fiserv will retain items sent to Fiserv for processing for up to 60 days at the fee stated in Schedule B-2 and will maintain the ability to furnish such items to a customer upon request during such period. d. After 60 days, Fiserv will destroy items sent to it for processing. e. Fiserv will create and render the image statements for the designated accounts. Images of the front and if specified by Client for an account, the back, or each ITEM shall be included with each statement. f. Archive services are 0-60 calendar days on RAID, with a response time of less than 10 seconds. Days 61 through Seven Years is stored in the tape silo, response time for items that are from 61 calendar days through 24 months for a single query is two minutes or less. Response time for items that are stored from the 25th month through 84th month are available the next day. 68 Exhibit B-2 Item Processing Services Fees Fiserv will provide Client with the Item Processing Services for the following fees and prices indicated:
I. Item Handling - Sorter - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Service Volume/Range Unit Fee Description / Information - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- In-Clearing Capture 1-100,000 * Per item. High-speed capture of MICR data, balancing to 100,001-200,000 * Inclearing Totals and extracts. A sequence number is spray 200,001-300,000 * endorsed on the items. Inclearings, Same Day Capture. 300,001-400,000 * 400,001-500,000 * Over 500,000 * - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- In-Clearing Re- * Correcting of MICR via on-line terminal entry OVER 1% - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- * 1-100,000 * MICR encoding of all On-Us and Transit items received by Fiserv 100,001-200,000 * from Client. All transactions are balanced. POD, Transit, GL, Proof Encoding 200,001-300,000 * Savings, Loans, Lock Box, Counter Items. 300,001-400,000 * 400,001-500,000 * Over 500,000 - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Proof/Deposit * Corrections of Client deposit/teller errors. Photocopy charges Corrections are extra. - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- * 1-100,000 * 100,001-200,000 * High-speed capture of MICR data, balancing to proof totals, out POD/Transit Capture 200,001-300,000 * sorting of other On-Us Items (Sav, GL, Loan, etc.) creation of 300,001-400,000 * various Cash Letters and extraction. A sequence number is 400,001-500,000 * spray endorsed on the items. Over 500,000 - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Reject Repair * Client required stripping and re-qualification of items. - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Image Item Scan 1-100,000 Scanning of items for the purpose of Image Statements, Image * 100,001-200,000 * 200,001-300,000 * 300,001-400,000 * 400,001-500,000 * Archive and Retrieval. Over 500,000 * - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Exception Item 1-250,000 Pass * * Single pass of On-Us items for the purpose of pulling items for 250,001-500,000 * review/return to Client. Statement Cycles are also pulled at Over 500,000 this time. - ---------------------- --------------------- -------------------- -----------------------------------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 69 Exhibit B-2
- ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Service Volume/Range Unit Fee Description / Information - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Fine Sorting High speed sorting of items into account number order. * 1-250,000 * 250,001-500,000 * Inclearings, GL, Savings, Loans, On-Us, Cycle Sorting, Bulk Over 500,000 file Sort, Daily Fine Sort. - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Serial Sorts * High-speed sorting of items into check number order per Client Request. - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- Nulls * High-speed rejects without valid document information. - ---------------------- --------------------- -------------------- ----------------------------------------------------------------- * Item Storage & 1-250,000 * Destruction 250,001-500,000 * Truncated/Imaged items housed in Fiserv facility pending Over 500,000 destruction after 60 days. - ---------------------- --------------------- -------------------- -----------------------------------------------------------------
II. Bookkeeping Services - --------------------------- ---------------- ------------------------------------------------------------------------------------- Service Unit Fee Description / Information - --------------------------- ---------------- ------------------------------------------------------------------------------------- Manual pulling of return items upon Client timely return decision. Fiserv balances Return Items the items, stamps the return reason, prepares the Return Cash Letter advice and * delivers to the FRB. - --------------------------- --------------- -------------------------------------------------------------------------------------- Return item processing that exceeds the normal 24-hour FRB window for regular Late Return Items * returns or is past the established deadline for the return decision. Late Returns are subject to collection rules and procedures. - --------------------------- --------------- -------------------------------------------------------------------------------------- Fax Requests * Copying and faxing; as requested and defined by Client. - --------------------------- --------------- -------------------------------------------------------------------------------------- Large Dollar Notification * Client notifies Fiserv of the large items to be returned. Fiserv notifies the bank of first deposit of the return. - --------------------------- --------------- -------------------------------------------------------------------------------------- Chargeback Forwarding * Fiserv forwarding of chargebacks via the next scheduled courier delivery to the Client or re-deposit to the Fed. ($50.00 monthly minimum.) - --------------------------- --------------- -------------------------------------------------------------------------------------- Photo Copies / Searches * Upon Client request, Fiserv creates a copy of a processed item from microfilm and provides via fax, mail, or both. Turn around within a 24-hour timeframe. - --------------------------- --------------- -------------------------------------------------------------------------------------- Photo Copies - Expedited * Upon Client request, Fiserv creates a copy of a processed item from microfilm and provides via fax, mail or both. Turn around within a 4-hour timeframe. - --------------------------- --------------- -------------------------------------------------------------------------------------- Research Work * Any client requested research other than a Center created error. Billed in1/2hour increments. - --------------------------- ---------------- -------------------------------------------------------------------------------------- Original Item Retrieval * Upon Client request, Fiserv pulls an original item for forwarding via fax, mail or both to the Client or FRB. - --------------------------- --------------- -------------------------------------------------------------------------------------- Fed or Correspondent * Research of outages. (Plus Research time if over1/2hour). Adjustments - --------------------------- --------------- -------------------------------------------------------------------------------------- - --------------------------- --------------- --------------------------------------------------------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 70 Exhibit B-2
II. Image Archive - --------------------------------- --------------------- -------------------------------------------------------------------- Service Unit Fee Description / Information - --------------------------------- --------------------- -------------------------------------------------------------------- Seven Year Image Storage * Storage of images for seven years using the Fiserv migrated media storage capability. - --------------------------------- --------------------- -------------------------------------------------------------------- Retrieval of image items within the first 60 days of scanning with On- Line Image Retrieval - or without the Seven-Year Image Storage service. For the first first 60 days (Queries) * 60 days of an item, Client may have unlimited queries into the image archive. - --------------------------------- --------------------- -------------------------------------------------------------------- Retrieval of image items during the time span of 61 days to two On- Line Image Retrieval - * years of storage following scanning with Seven-Year Image Storage 61-days- two years (Queries) service. - --------------------------------- --------------------- -------------------------------------------------------------------- On- Line Image Retrieval - over * Retrieval of image items after two years of storage following the two years (Queries) scanning with Seven-Year Image Storage service. - --------------------------------- --------------------- -------------------------------------------------------------------- Image Library Software * Software for the viewing of images on CD-ROM. - --------------------------------- --------------------- -------------------------------------------------------------------- Image Library Software * - --------------------------------- --------------------- -------------------------------------------------------------------- Annual Maintenance on Image * Annual fee for software. Library Software - --------------------------------- --------------------- --------------------------------------------------------------------
IV. Image Distribution - --------------------------------- --------------------- -------------------------------------------------------------------- Service Unit Fee Description / Information - --------------------------------- --------------------- -------------------------------------------------------------------- CD ROM Distribution * Creation of CD containing imaged items. - --------------------------------- --------------------- --------------------------------------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 71 Exhibit B-2
V. Image Statements - -------------------------- -------------------- ------------------ ----------------------------------------------------------------- Service Volume/Range Unit Fee Description / Information - -------------------------- -------------------- ------------------ ----------------------------------------------------------------- Scan Marketing Image * Scanning of a promotional marketing insert to be printed on the Image Statement. - -------------------------- -------------------- ------------------ ----------------------------------------------------------------- Special Statement Cuts * Creation of Image Statement not at a normal cycle date. - -------------------------- -------------------- ------------------ ----------------------------------------------------------------- Image statements, front of items only, includes five sides of print, composition, insertion and rendition, cycles during the Image Statement * month. Fee includes a rendition fee of $ * per statement. Composition 1-5,000 * Turn around - Statements will be mailed no later than the 3rd Non End of Month 5,001-10,000 * business day from the receipt of the statement print. Saturday 10,001-15,000 * considered a business day for rendering services but not Over 15,000 considered to be available for mailing statements. - -------------------------- -------------------- ------------------ ----------------------------------------------------------------- Image Statement 1-5,000 Image statements, front of items only, includes five sides of print, composition, insertion and rendition, cycles at month end. Fee includes a rendition fee of $ * per statement. Turn Composition * around - Statements will be mailed no later than the 4rd End of Month 5,001-10,000 * business day from the receipt of the statement print. Saturday 10,001-15,000 * considered a business day for rendering services but not Over 15,000 * considered to be available for mailing statements. - -------------------------- -------------------- ------------------ ----------------------------------------------------------------- Image Statement Print - * Additional sides of print on Image Statements. Per side - -------------------------- -------------------- ------------------ -----------------------------------------------------------------
VI. Set up / Other Fees - --------------------------- ------------------ ------------------------------------------------------------------------------------- Service Unit Fee Description / Information - --------------------------- ------------------ ------------------------------------------------------------------------------------- Image Processing Set Up * Minimum. Bid provided. Fee - --------------------------- ------------------ ------------------------------------------------------------------------------------- Image Processing Minimum * If a combination of traditional services plus Imaging, the monthly minimum is $ * Per Month (Center discretion). Pass-through charges are excluded from minimum. - --------------------------- ------------------ ------------------------------------------------------------------------------------- Processing Minimum Per * Traditional Item Processing Services. Pass-through charges are excluded from minimum. Month - --------------------------- ------------------ ------------------------------------------------------------------------------------- Programming * Bid provided. Special requests that require detailed programming. - --------------------------- ------------------ ------------------------------------------------------------------------------------- Training * Bid provided. - --------------------------- ------------------ ------------------------------------------------------------------------------------- Conversions / * For merger of items of another Fiserv IP processed Client. Implementation Fee - --------------------------- ------------------ -------------------------------------------------------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 72 Exhibit B-2
- -------------------------- ------------------- ------------------ ----------------------------------------------------------------- Service Volume/Range Unit Fee Description / Information - -------------------------- ------------------- ------------------ ----------------------------------------------------------------- Statement Rendering - * Manual rendering of check return statements that cycle Traditional 1-5,000 * during the month. DDA Non End 5,001-10,000 * of Month 10,001-15,000 * Over 15,000 - -------------------------- ------------------- ------------------ ----------------------------------------------------------------- * Statement Rendering - 1-5,000 * Traditional 5,001-10,000 * Manual rendering of check return statements that cycle at month DDA End of Month 10,001-15,000 * end. Over 15,000 - -------------------------- ------------------- ------------------ ----------------------------------------------------------------- - -------------------------- ------------------- ------------------ ----------------------------------------------------------------- Statement Rendering - Rendering of non enclosure statements (Savings, Loan, Analysis, * 1-5,000 * Non Enclosure/Truncated 5,001-10,000 * 10,001-15,000 * CD, Notices, Forms etc.) Over 15,000 - -------------------------- ------------------- ------------------------------------------------------------------------------------ Statements that do not conform to general bulk file procedures - daily, weekly, Special and Hold BI-weekly cycles, conversion cycles, one-time requests, differences in enclosure Statements * counts. - -------------------------- ------------------- ------------------------------------------------------------------------------------ Statement Items Inserted * Items are matched to corresponding Statements and prepared for mailing. This is also used for inserting promotional items, stuffers, and additional pages. - -------------------------- ------------------- ------------------------------------------------------------------------------------ Reformatting from Print * Creation of reformatted print file upon receipt of statement file. file - -------------------------- ------------------- ------------------------------------------------------------------------------------ Other Mailings * Bid provided. - -------------------------- ------------------- ------------------------------------------------------------------------------------ Statement Printing Non * Bid provided if service available. Image - -------------------------- ------------------- ------------------------------------------------------------------------------------
VIII. Miscellaneous - ---------------------------- ------------- --------------------------------------------------------------------------------------- Service Unit Fee Description / Information - ---------------------------- ------------- --------------------------------------------------------------------------------------- Subpoena Requests/Research * Research requested by subpoena. Billed in1/2hour increments plus Photocopy fee. Bid provided - ---------------------------- ------------- --------------------------------------------------------------------------------------- Special Handling - Account Bid provided. Number Formats - ---------------------------- ------------- --------------------------------------------------------------------------------------- Special Handling - Bid provided. Multiple R/T Numbers - ---------------------------- ------------- --------------------------------------------------------------------------------------- Data Entry Bid provided. - ---------------------------- ------------- --------------------------------------------------------------------------------------- Transmission * Transmitting of MICR data to a Client application processor (non-Fiserv host). Also for the receipt of Exception Item Files/Statement File/Print File. - ---------------------------- ------------- ---------------------------------------------------------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 73 Exhibit B-2 Pass - through charges: Envelopes and custom forms Postage / Airborne Courier Data Communications PROCESSING CREDIT Client shall receive a credit not to exceed * to Item Processing Services at any time during the term of the initial Agreement upon thirty (30) days prior notification to Fiserv. - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 74 Exhibit B-3 Item Processing Performance Standards 1) Presentation and Delivery of Work a. DESCRIPTION: - Client will deliver items to Fiserv by mutually agreed upon delivery schedule - Credits come before debits - Customer deposit is the first credit - Items are encoded with route/transit number, account number and proper trancode - If multiple amounts, correct amount is circled - Currency not to be included b. PROCEDURE: - Fiserv will notify Client of specific non-performance issues as required. 2) Batches/Bundles a. DESCRIPTION: - Multiple item transactions batched - Bundles or Batches are limited to 3" or 300 items, whichever limit is reached first. - Client should count the number of bundles and list on the Client Bag/Fiserv FAX form (see attached) and fax the form to Fiserv. - Insert the items and a copy of the Fiserv FAX form into the carrier/bag/box for delivery to Fiserv. Client should retain a copy for their records. b. PROCEDURE: - Upon receipt, Fiserv will verify the number of bundles listed on the Fiserv FAX form, initial and file the form in our daily processing documentation. - If Fiserv's count does not equal the number of bundles listed on the Fiserv FAX form, Fiserv will contact the Client to discuss the discrepancy. 3) Single Item Batches/Bundles a. DESCRIPTION: - Single items (one-on-ones) batched - Single item deposits should be batched and have a single tape attached per batch by Client prior to submission to Fiserv for encoding b. PROCEDURE: - Fiserv will verify that encoding balances to the tape submitted with the single items by Client. Fiserv will notify Client of specific non-performance issues as required. 4) Fiserv proof and balancing of work received from Client for processing a. SUBJECT: Proof of Deposit for dollar amount encoding b. DESCRIPTION: - Dollar encoding errors to meet service goals - Corrections made with accepted medium - Customer Corrections are legible and complete - Customer Corrections have the correct reason listed - All Customer Corrections over $100.00 are documented with accompanying copies as required. - Items are endorsed with the proper bank stamp in proper Regulation CC position - Transaction Corrections using G/L debits and credits contain the correct information - Suspense documentation is legible and complete - Items placed into holdovers by Fiserv will be documented 75 Exhibit B-3 - Differences of under $10.00 will be charged to a General Ledger account c. SERVICE GOAL: 99.997 % d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with accompanying documentation to Client Services. e. MEASUREMENT: Percent of Proof Encoding Volume 5) Fiserv modification of MICR rejects a. SUBJECT: Reject Re-entry/ Reconciling or Balancing b. DESCRIPTION: - Modified MICR reject errors to meet service goals - Transaction Corrections using G/L debits and credits contain the correct information - Suspense documentation is legible and complete - Items placed into suspense by Fiserv will be documented - Differences of under $10.00 will be charged to a General Ledger account c. SERVICE GOAL: 99.7% d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with accompanying documentation to Client Services. e. MEASUREMENT: Percent of Volume (Based on total rejects) 6) Fiserv preparation of outgoing transit items a. SUBJECT: Transit Cash Letter Processing b. DESCRIPTION: - Cash Letters are sent out with correct total(s) - Cash Letters are sent with complete bundle count(s) - Cash Letter differences are explained - Cash Letters for proper bank are used - Cash Letters for the correct correspondent are used - Cash Letters sent out in timely manner - Low speed cash letters will be sent out within 24 hours of stated deadlines - On-us items will not be sent out in transit cash letters c. SERVICE GOAL: Not to exceed one error per cash letter endpoint per month - Cash Letters Items sent out 99.4% of the time on time d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with appropriate documentation to Client Services. e. MEASUREMENT: Record of Occurrence based on cash letter endpoints 7) Fiserv capture and transmission of work from proof department a. SUBJECT: Second Shift Transmissions b. DESCRIPTION: - All transmissions are sent in the approved Fiserv format - All transmissions are sent to Fiserv in such time to insure that posting can be completed timely. - Transmission deadlines will not be earlier than 11:00 p.m. Mon. - Thurs. or 12:00 a.m. Friday c. SERVICE GOAL: Transmission errors or delays are not to exceed two per month that are within Fiserv's control. d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with accompanying documentation to Client Services. e. MEASUREMENTS: Record of Occurrences 76 Exhibit B-3 8) Fiserv preparation of statements and check filing requirements a. SUBJECT: Statement Preparation b. DESCRIPTION: - End of the month statements are sent no later than the 4th business day from receipt of the printed statements from Client and/or Agent and completion/receipt of paid exception items. - Non end of the month statements are sent no later than the 3rd business day from receipt of the printed statements from Client and/or Agent and completion/receipt of paid exception items. - Saturday considered a business day for rendering services but not considered to be available for mailing statements. - Special account statements are sent out no later than the 3rd business day from receipt of the printed statements from Client and/or Agent and completion/receipt of paid exception items. - Crippled statements will be mailed out within two additional days. - There will be only one statement per envelope. - The correct customer's checks will accompany the statement. - Hold statements that are properly labeled will be sent to Client for handling. - Zip codes and addresses will be eliminated on all hold accounts. - The correct number of statement pages are in the envelope. - Client will submit statement stuffers to center with appropriate instructions noted on the Stuffer Instruction Form. Stuffers must arrive two days prior to cycle date to insure proper handling. - The correct statement stuffer(s) will be included in the statement. - Notice of missing item(s) will be included in the statement if the statement is missing 3 or fewer enclosures. - Fiserv will monitor and report delays for receipt of statement print to Client within 24 hours of the expected time of receipt. c. SERVICE GOAL: 99.9% (10 errors per 10,000 Statements) - Fiserv will also manage statements with incorrect item counts to no more than 3% mailed with incorrect enclosure counts. d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiesrv with accompanying documentation to Client Services. e. MEASUREMENT: Percent of Total Statements Rendered. Reimbursement for not meeting service agreement on statement preparation is the refunding of the rendition portion of the service fee, which equals $.11 per statement. This applies to the volume of statements that miss the turn around dead line. 9) Fiserv processing of exception items (Outgoing Return Items) when Client has submitted final return decisions by 12:30 p.m. daily a. SUBJECT: Returned Items b. DESCRIPTION: - The correct items will be returned - All returned items are stamped with the correct return reason - The items Client wants returned are returned on the day they are listed as exceptions - The T-186 balances to the Fed return total daily - G/L entries made for all check reversals - Rejected debit totals balance - Large items notified through EARNS - Items are returned within specified Regulation CC. time requirements - Items are paid using correct account number and trancode - Proper bank's T-186 forms are used c. SERVICE GOAL: 99.94% (6 errors per 10,000 return items) d. PROCEDURE: 77 Exhibit B-3 - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with accompanying documentation to Client Services. e. MEASUREMENT: Percent of Total Qualified Return Items 10) Fiserv research of items, photocopy production a. SUBJECT:Research b. DESCRIPTION: - The turn-around time for a research request will be 48 hours from the time of receipt (unless Fiserv otherwise notifies Client, as in the case of subpoena research or other significant or voluminous research requests). - For subpoena research or other significant or voluminous research requests, Fiserv will provide a completion commitment estimate to Client within 48 hours of receipt. - Best effort will be made to produce quality photocopies - Trace reports will be delivered to Client within 2 business days c. SERVICE GOAL: 99.0% (1 error per 100 requests) d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with accompanying documentation to Client Services. e. MEASUREMENT: Percent of Total Research Request and Photocopies Serviced 11) Fiserv processing of FRB adjustment items a. SUBJECT: Adjustment items b. DESCRIPTION: - The turn-around time for an adjustment to be created and submitted into the FRB system will be 48 hours from the time of receipt/notification from the Client (unless Fiserv otherwise notifies Client). - Fiserv will not be held responsible for delays in receiving appropriate FRB credits/debits. c. SERVICE GOAL: 99.0% (1 error per 100 requests) d. PROCEDURE: - Client will notify Fiserv of specific non-performance issues by submitting a service incident report in the form approved by Fiserv with accompanying documentation to Client Services. e. MEASUREMENT: Percent of Total Adjustment Requests Serviced NOTE - Fiserv is not liable for errors that result when Service Level Agreements are not followed by Client. Any errors that occur by Fiserv when the performance standards are being followed by Client will result and be mutually resolved using the limitation of liabilities clause in the agreement. 78 Exhibit H-1 FISERV ATLANTA DISASTER RECOVERY AGREEMENT ON-LINE SERVICES I. A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to Fiserv's data center which appears in Fiserv's reasonable judgment to require relocation of processing to a primary recovery location. Fiserv shall notify Client as soon as possible after it deems a service outage to be a Disaster. Fiserv shall move the processing of Client's standard on-line services to a primary recovery location as expeditiously as possible and shall coordinate the cut-over to back-up data lines with the appropriate carriers. Client shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist Fiserv in implementing the switchover to the primary recovery location. During a Disaster, optional or on-request services shall be provided by Fiserv only to the extent that there is adequate capacity at the primary recovery location and only after stabilizing the provision of base on-line services. II. Fiserv shall work with Client to establish a plan for alternative data communications in the event of a Disaster. III. Fiserv shall test its Disaster Recovery Services Plan by conducting an annual test. Client agrees to participate in and assist Fiserv with such testing. Test results will be made available to Client's management, regulators, internal and external auditors, and (upon request) to Client's insurance underwriters. IV. Client understands and agrees that the Fiserv Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a Disaster affecting Fiserv's data center. Fiserv does not warrant that service will be uninterrupted or error free in the event of a Disaster. Client maintains responsibility for adopting a disaster recovery plan relating to disasters affecting Client's facilities and for securing business interruption insurance or other insurance as necessary to properly protect Client's revenues in the event of a disaster. V. Monthly subscription fee included.
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
79 Exhibit H-1 FISERV SOLUTIONS, INC. DISASTER RECOVERY AGREEMENT EFT/ATM SERVICES (Atlanta Stratus Support Only) I. A Disaster shall mean any unplanned interruption of the operations of or inaccessibility to Fiserv's data center which appears in Fiserv's reasonable judgment to require relocation of processing to a primary recovery location. Fiserv shall notify Client as soon as possible after it deems a service outage to be a Disaster. Fiserv shall move the processing of Client's standard on-line services to a primary recovery location as expeditiously as possible and shall coordinate the cut-over to back-up data lines with the appropriate carriers. Client shall maintain adequate records of all transactions during the period of service interruption and shall have personnel available to assist Fiserv in implementing the switchover to the primary recovery location. During a Disaster, optional or on-request services shall be provided by Fiserv only to the extent that there is adequate capacity at the primary recovery location and only after stabilizing the provision of base on-line services. II. Fiserv shall work with Client to establish a plan for alternative data communications in the event of a Disaster. III. Fiserv shall test its Disaster Recovery Services Plan by conducting an annual test. Client agrees to participate in and assist Fiserv with such testing. Test results will be made available to Client's management, regulators, internal and external auditors, and (upon request) to Client's insurance underwriters. IV. Client understands and agrees that the Fiserv Disaster Recovery Plan is designed to minimize but not eliminate risks associated with a Disaster affecting Fiserv's data center. Fiserv does not warrant that service will be uninterrupted or error free in the event of a Disaster. Client maintains responsibility for adopting a disaster recovery plan relating to disasters affecting Client's facilities and for securing business interruption insurance or other insurance as necessary to properly protect Client's revenues in the event of a disaster. V. Monthly subscription fee included.
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
80 Exhibit O Internet Banking Services Client agrees with Fiserv as follows: 1. Services. Fiserv will provide Client the Internet Banking Services specified in Exhibit O - 1, Client Web Site Branding specified in Exhibit O - 3, and the Internet Web Hosting Services specified in Exhibit O - 4 (collectively, "Internet Banking Services"). 2. Fees. Client shall pay Fiserv the fees and other charges for Internet Banking Services specified in Exhibits O - 2, and O - 4. Fiserv shall invoice Client monthly in advance for fixed fees and recurring monthly fees and on a current basis for all transaction and customer fees and third party services. 3. Equipment and Supplies. Client shall obtain and maintain at its own expense such equipment as may be necessary or appropriate to facilitate the proper use and receipt of Internet Banking Services. Client shall be responsible for paying for all supplies to be used in connection with Internet Banking Services. 4. Service Modifications. In connection with Fiserv's provision of Internet Banking Services, (a) Fiserv may, at any time, withdraw Internet Banking Services, or any part thereof, upon 6 months prior written notice; and (b) either party may terminate Internet Banking Services, or any part thereof, immediately upon notice to the other party of any legislative, regulatory, or judicial (i) impairment of the provision thereof; and/or (ii) restrictions or conditions that would materially affect the integrity thereof. 5. Effect of Termination. Upon any termination or expiration of this Exhibit, Client shall continue to be responsible for fees related to Internet Banking Services unless Fiserv receives written notice to delete Client Files from the Fiserv System. Client shall continue to be responsible for all data communications and modem fees until (i) all circuits are disconnected and the telecommunications company ceases invoicing Fiserv; and (ii) Fiserv receives back all equipment supplied to Client by Fiserv. 6. Trademark License. Client hereby grants to Fiserv a non-exclusive, non-assignable right to use Client's trademarks, trade names, service marks, and service names (collectively, "Trademarks") in connection with Fiserv's provision of Internet Banking Services. Client will indemnify and hold harmless Fiserv, its officers, directors, employees, and affiliates against any claims or actions arising out of Fiserv's use of Trademarks. 7. Regulatory Compliance. Client shall use Internet Banking Services only in conjunction with lawful purposes. Client agrees not to use Internet Banking Services for any activities in violation of any laws or regulations, including, but not limited to, wrongful transmission of copyrighted material, sending of threatening or obscene materials, or misappropriation of exportation of trade or national secrets. 8. Client Warranties. Client represents and warrants that (a) any work, content, or information ("Content") provided to Fiserv is either original or that Client has the legal right to provide such Content; and (b) Content doesn't impair or violate any intellectual property or other rights of Fiserv or any third party. Client will indemnify and hold harmless Fiserv, its officers, directors, employees, and affiliates against any claims or actions arising out of any breaches of the foregoing. Client acknowledges that Fiserv shall not monitor, review, or approve any Content. Client acknowledges that access to Internet Banking Services shall be across public and private lines and that Fiserv has no control over such lines or the information available from non-Fiserv sources. 81 Exhibit O-1 Internet Banking Services 1. Fiserv will provide Client access to Internet Banking Services via the Premier eCom solution. Client's customers may access and conduct certain business transactions to their enabled accounts from this access solution. 2. Fiserv will provide the following functions for the fees identified in Exhibit 0 - 2: ------------------------------------------------------------------------ Internet Functions Sign on Authorization Statement Review Bill Payment - optional Transaction History View E-mail interface from customer to Client - optional Account Summary Funds Transfer Reports ------------------------------------------------------------------------ 3. Fiserv shall provide Internet Banking Services that Fiserv controls in a 7 x 24 environment, subject to reasonable downtime for maintenance. Fiserv will attempt to limit its downtime to those hours of operation least impacted by customer usage. 4. Client acknowledges and understands that Internet Banking Services may be subject to unavailability due to congestion or overload on public circuits supplied by third parties or due to downtime by such third parties. 5. Fiserv agrees to provide second level customer support to Client in the event Client is unable to resolve customer support issues related to the normal operation of Internet Banking Services adequately during normal business hours. Fiserv's sole obligation is to provide timely response to Client for requests for support. In no event is Fiserv obligated to contact Client's customers to provide support for Internet Banking Services. 6. Fiserv will provide 1 day of training, comprised of a general system overview, administration, and end user training in the use of Internet Banking Services. Client acknowledges and agrees to reimburse Fiserv for reasonable travel, boarding, and meal expenses incurred for such training. Client further acknowledges that additional training, project management, and consulting may be obtained from Fiserv at the rates specified in Exhibit O - 2. 7. Fiserv will provide Client with Bill Payment Support Service Procedures in accordance with the procedures of Fiserv's designated remittance processor ("Remittance Processor"). 8. Implementation Services will include Development of the basic Internet page to be attached to Client's Internet home page. Fiserv will brand the page with Client's Trademarks and use reasonable efforts to match the look of the transaction page with the home page. 9. Check images are available but require both Director (in-house or service bureau) and check images being captured (either in-house on an appropriately configured system or via Fiserv ImageSoft product). Additional software may be required depending upon Client configuration. 10. Portal services are available on a request basis. 82 Exhibit O-1 Internet Banking Services Client Responsibilities 1. Client will facilitate timely cooperation between any necessary third parties in order for Fiserv to provide Internet Banking Services. 2. Client will provide Fiserv the applicable domain name for Internet Banking Services, if applicable. 3. Client will establish a web site using Client's vendor of choice using a Client designated operable domain name. 4. Client will obtain from each customer with access to Internet Banking Services (a) a written application, the form of which will be provided to Fiserv; and (b) a written agreement sufficient to enable Client to comply with its obligations under this Exhibit, the form of which will be approved by Fiserv, with such agreement specifying the Internet Banking Services to be provided and customers' obligations in using Internet Banking Services. 5. Client will review and approve all applications for use of Internet Banking Services, using any validation procedures Client determines, in its sole discretion, are necessary to ensure the financial integrity of a participating customer. 6. Client is, and shall remain, solely and exclusively responsible for any and all financial risks, including, without limitation, insufficient funds, associated with each customer accessing Internet Banking Services. Fiserv shall not be liable in any manner for such risk unless (a) the customer follows the procedures described in the written agreement referenced above; and (b) customer is assessed a penalty or late fee due to Fiserv's wrongful act or omission. In no event shall Fiserv's responsibilities for such penalties or late fees exceed $100.00. 7. Client will use, and will instruct its customers to use, Internet Banking Services in accordance with such reasonable rules as may be established by Fiserv from time to time as set forth in any materials furnished by Fiserv to Client. 8. Client assumes exclusive responsibility for the consequences of any instructions it may give to Fiserv, for Client's or its customers failures to access Internet Banking Services properly in a manner prescribed by Fiserv, and for Client's failure to supply accurate input information, including, without limitation, any information contained in an application. 11. Client will designate a bank settlement account to be used for the purposes of settling, in aggregate, the financial transactions requested via Internet Banking Services. Fiserv shall provide Client with details of the specific transactions, reported similarly as other transactions may be done, that were a result of access to Internet Banking Services. Client shall be responsible for auditing and balancing of any settlement accounts. 12. This Exhibit assumes a guaranteed or"good funds" environment for Bill Payment processing in which Client agrees to settle directly with Remittance Processor for bill payment transactions. Bill payment transactions for client are settled on the processing day after the bill payment instruction was sent to Remittance Processor. Client will receive a transmitted Payment Response File during the morning of each processing day. This file shows the dollar amounts for payments processed from the prior day's transmission. This file will also include a listing of any payment items that did not process and should not be settled. Client must transfer the total dollar amount of the payments processed to Remittance Processor's designated bank account by 11:00 a.m. Eastern Time or within a reasonable amount of time following the receipt of the Payment Response File and no later than the end of the business day at 5:00 p.m. Eastern Time. Remittance Processor will verify this wire transfer, and upon verification, will proceed with the processing for Client 11. Client will verify and reconcile any out-of-balance condition, and promptly notify Fiserv of any errors in the foregoing within 24 hours (exclusive of weekends and applicable holidays) after receipt of the applicable detail report(s) from Fiserv. If notified within such period, Fiserv shall correct and resubmit all erroneous files, reports, and other data at Fiserv's then standard charges, or at no charge, if the erroneous report or other data directly resulted from Fiserv's error. 12. Client is expressly prohibited from extending any warranty or warranties on Fiserv's behalf to any person. 83 Exhibit O-1 Internet Banking Services 13. Client appoints Fiserv as its agent with the sole discretion for Remittance Processor selection for Fiserv's use in providing bill payment services and other similar third party services, which may, from time to time, become available or be offered to Client as additional services. 14. Client agrees to purchase any necessary equipment or software needed to provide Internet Banking Services from Fiserv or a Fiserv-approved alternative, and shall be responsible for maintaining such equipment or software in an operating condition, including any mandatory maintenance service programs prescribed by Fiserv. Fiserv will provide minimum specifications for all such equipment or software. 15. Premier eCom is a 32-bit application which requires ITI Connect 32 and Desktop 32 software. ITI Connect 32 is a separate item that must reside on each workstation and is acquired directly from ITI. The bank is responsible for the acquisition and installation of these two products. 16. Client agrees to provide first level customer support for Internet Banking Services with its customers. 17. Client will be responsible for the payment of all telecommunications expenses associated with Internet Banking Services. 18. Client acknowledges and understands disaster recovery is excluded. Client acknowledges and understands its responsibility and liability as they relate to Client's access to the Internet. Fiserv assumes no liability or control over the Internet access of its on-site systems and remote employee or affiliate access. Client is contracting for these services: Premier eCom Internet Services Yes____ No____ Bill Payment Services Yes____ No____ If Bill Payment Services are to be provided, indicate which company below: CheckFree _____ Princeton eCom _____
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
84 Exhibit O-2 Internet Banking Services Fees
- ---------------------------------------------------------------------- --------------------- Implementation One-time Fees - ---------------------------------------------------------------------- --------------------- Implementation Fees: Total Number of Accounts < 10,000 (Deposit and Loan Accounts) * Total Number of Accounts > 10,000 (Deposit and Loan Accounts) * CheckFree Bill Payment: Total Number of Accounts < 10,000 * Total Number of Accounts > 10,000 * - ---------------------------------------------------------------------- --------------------- Initial Set-up and Training: * 1 Day Training Included plus T&E * - ---------------------------------------------------------------------- ---------------------
Recurring Monthly Fees1 Number of Customers - --------------------------------- ------------------------------------------ ---------------------- Monthly Fees - --------------------------------- ------------------------------------------ ---------------------- Recurring Fees: Monthly Base Fee: Includes 1 hour maintenance per month** * Per Account Fee: * CheckFree Bill Payment: Monthly Base Fee: * Per CheckFree Account Fee: * CheckFree Special Services Fees: Stop Pay or Re-Issue * Overnight Deliver * ROLA Station * - --------------------------------- ------------------------------------------ ----------------------
Transaction Based Fees - ----------------------------------------------------------------------------- --------------------- Transaction Fees: All Transactions (Includes Inquiries, transfers, etc.) * - ----------------------------------------------------------------------------- --------------------- CheckFree Bill Pay Transactions * - ----------------------------------------------------------------------------- --------------------- New CheckFree Customer Setup * - ----------------------------------------------------------------------------- --------------------- Statement View Downloads - ----------------------------------------------------------------------------- ---------------------
*Monthly minimum of * for the aggregate of these CheckFree Fees. **Additional maintenance * per hour, billed in 15 minute increments. Additional Training: * Programming/Consulting Services: * Internet audit fee allocated based on number of clients. - ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". All processing fees defined may be changed annually beginning with the second anniversary of this Agreement. Each change shall be limited to the lesser of three percent (3%) or the change in the U.S. Department of Labor, Consumer Price Index for the twelve (12) month period preceding the anniversary date. Processing fees shall not be adjusted for the first twenty-four (24) months of the Agreement. New or replacement services that may be made available to Client subsequent to the Effective Date shall be priced by Fiserv at levels Fiserv deems appropriate. Exhibit O-3 Internet Banking Services Client Web Site Branding. Client Branding Services will include the following: o Customized background textures and colors o Customized button design and colors o Customized Login Screen o Customized Welcome page including picture, logo, text o Customized font selections o Customized Optional Buttons - maximum of four (4) o Hyperlink to Client's Web page for Email o Display of Industry Bugs (Member FDIC, Equal Housing Lender, etc.) Completion of Web Branding Services: Based on a final review by Client of the pre-live Client Web Site including text, graphic, and navigation content and other authorized content, Client will provide written approval thereof, which approval will not be unreasonably withheld or delayed. Such approval will constitute authorization to implement the Client Web site on Fiserv's Internet System. Implementation of the Client Web Site on Fiserv's Internet System will occur within 5 business days of Fiserv's receipt of Client's approval. 86 Internet Banking Services Internet Web Hosting Services: Basic Service: The Internet Web Hosting Services includes a Client directory with Fiserv Atlanta's domain name or under Client's domain name if Client has a registered domain name. Fiserv agrees that Web Hosting Services will provide a hosting site for the Client Web Site and shall be available for access on a 7 day, 24 hour basis, with an uptime of 90% other than required maintenance and upgrade periods. Fiserv will make commercially reasonable efforts to minimize these downtime periods so that they are of as short as duration as possible, and at the least active times. Fiserv will submit Client's Web Site Universal Resource Locator (URL) address to mutually agreed upon database search and retrieval services (such as Yahoo) and listing service (such as COOL) on the Internet for the purposes of listing the Web Site. These listing services are billed to Client. Client agrees to (i) pay for any such fees or for any other listing or advertising services Client may elect, or (ii) cancel such listing services. Unless otherwise agreed to in writing, Client is responsible for notifying Fiserv of updates to Client's Web Site on an as needed basis. Fiserv shall incorporate such change to the Fiserv Internet System on a periodic basis as mutually agreed. It is the client's responsibility to monitor and contact Fiserv should there be a problem with the home page. Fiserv will not be liable for any changes made by an unauthorized person.
- --------------------------------- -------------------------------------------------- ----------------------- Description Fees - --------------------------------- -------------------------------------------------- ----------------------- Implementation: One-Time Implementation Fee * - --------------------------------- -------------------------------------------------- ----------------------- Recurring : Monthly Base Fee * Includes 1 Hour of Changes Per Month* - --------------------------------- -------------------------------------------------- ----------------------- Optional Enhancements: Per Hour, Billed in 15 Minute Increments * - --------------------------------- -------------------------------------------------- -----------------------
Note: * Unused Time Cannot Be Carried Forward. Client is contracting for Web Site Hosting Services: Yes___ No___
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". 85 ADDENDUM TO DATA PROCESSING SERVICE AGREEMENT BETWEEN CAPITAL BANK RALEIGH, NORTH CAROLINA AND FISERV SOLUTIONS, INC. ATLANTA, GEORGIA 1. In-House Processing. Client may terminate the Agreement for Account Processing for the sole purpose of installing either the ITI Premier Banking System or the Fiserv Comprehensive Banking System (CBS) in an In-House environment after a minimum of thirty-nine (39) months processing of the Agreement and avoid early termination Liquidated Damages charges. Deconversion fees would remain as stated in Exhibit A-2. All services in this Agreement must convert to an In-House system processed by Capital Bank. If any of the services convert to another servicer or another bank, the termination fees in Section 11- Termination would apply. Customer must notify Fiserv in writing with a termination date at least one hundred eighty (180) days in advance of deconversion in order to exercise this option. Deconversion may not take place prior to the fortieth (40th) month of this Agreement. Client may terminate the Agreement for Item Processing services for the sole purpose of installing an in-house solution of their choice that is compatible with Fiserv Atlanta after thirty-six (36) months and avoid early termination Liquidated Damages charges for Item Processing. 2. Acquired Business. Should Client acquire other Fiserv Atlanta ITI System and/or Fiserv Item Processing Clients, the following conditions would apply: a) Acquisition and processing merge or separate institution addition to Capital Bank Corporation that occurs between January 1, 2002 and March 31, 2004, (27 months of term) early termination fees of the acquired Client will be waived. b) Acquisition and processing merge or separate institution addition to Capital Bank Corporation that occurs after March 31, 2004, early termination fees of the acquired Client will be calculated based on the remaining term less the number of months remaining on the Agreement of Capital Bank (initial expiration date of December 31, 2005). Capital Bank may elect to extend the Agreement past then current expiration date by the term necessary for Fiserv to realize the projected contract value of the acquired business in order to avoid the early termination fees of the acquired business. c) Should Capital Bank choose to install either ITI or CBS solutions in an in-house environment after 39 months and before 48 months and acquired business activities have occurred, early termination fees of acquired Client contracts will be recalculated based on the month of deconversion prior to the 48th month of the Agreement. d) Acquired business conversion fees: o Account Processing - * per total Deposit and Loan Accounts with a maximum of * per institution converted/merged. o Item Processing - * per institution. o Out-of-pocket travel related expenses paid by Client. e) Acquired business activities/volumes will be combined with Capital Bank Corporation fee structure then in place effective the first day of the month after one full month from the effective merger date. A monthly consolidated invoice will be presented to Capital Bank Corporation for all institutions within the corporation. (Community Savings Bank, Burlington, N.C. will continue to be invoiced based on the current contract Agreement until April 1, 2002 and be combined with Capital Bank Corporation on April 1, 2002.)
CAPITAL BANK FISERV SOLUTIONS, INC. By: /s/ Allen T. Nelson, Jr. By: /s/ William W. Bryant ------------------------------ ----------------------------------------- Name: Allen T. Nelson, Jr. Name: William W. Bryant ------------------------------ ----------------------------------------- Title: Executive Vice President & CFO Title: Executive Vice President - Fiserv Atlanta ------------------------------ ----------------------------------------- Date: December 3, 2001 Date: December 10, 2001 ------------------------------ -----------------------------------------
- ------------------------------- * Selected portions have been deleted as confidential pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended ("Rule 24b-2"). Complete copies of the entire exhibit have been filed separately with the Securities and Exchange Commission (the "Commission") and marked "CONFIDENTIAL TREATMENT". EX-13 5 exhibit13.txt CAPITAL BANK LOGO 2001 ANNUAL REPORT TABLE OF CONTENTS Selected Financial Data 1 Letter to Shareholders 2 to 5 Management's Discussion and Analysis 6 to 16 Consolidated Balance Sheets 17 Consolidated Statements of Operations 18 Consolidated Statements of Changes in Shareholders' Equity 19 Consolidated Statements of Cash Flows 20 to 21 Notes to Consolidated Financial Statements 22 to 40 Report of Independent Accountants 41 Corporate Information 42 to 44 SELECTED FINANCIAL DATA CAPITAL BANK CORPORATION
(In thousands except share and per share data) As of and for the Years Ended December 31 (1) - ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Selected Balance Sheet Data Cash and Due From Banks $ 15,173 $ 27,676 $ 9,702 $ 10,365 $ 3,559 Federal Funds Sold 944 750 1,960 16,400 26,487 Securities 73,702 61,947 46,581 37,626 34,345 Gross Loans 306,891 242,275 159,329 110,779 58,894 Allowance for Loan Losses 4,286 3,463 2,328 1,457 705 Total Assets 406,741 343,620 222,337 179,993 126,934 Deposits 304,443 279,094 163,245 137,343 90,358 Borrowings 50,000 15,000 20,000 5,066 194 Repurchase Agreements 11,167 9,804 4,818 2,501 -- Shareholders' Equity 36,983 35,015 31,126 33,507 34,305 Summary of Operations Interest Income $ 26,173 $ 23,751 $ 14,553 $ 10,530 $ 5,717 Interest Expense 14,701 13,101 7,656 5,527 2,952 ----------------------------------------------------------------------------- Net Interest Income 11,472 10,650 6,897 5,003 2,765 Provision for Loan Losses 1,215 1,110 924 792 270 ----------------------------------------------------------------------------- Net Interest Income After Provision For Loan Losses 10,257 9,540 5,973 4,211 2,495 Non-interest Income 4,490 2,193 1,260 716 235 Non-interest Expense Excluding Non-recurring Merger Related Costs 11,847 9,506 6,477 5,525 2,983 ----------------------------------------------------------------------------- Pre-tax Net Income (Loss) before Non-recurring Merger Related Costs 2,900 2,227 756 (598) (253) Non-recurring Merger Related Costs -- 90 1,647 288 -- Income Tax Expense (Benefit) 480 (36) (40) 10 557 ----------------------------------------------------------------------------- Net Income (Loss) $ 2,420 $ 2,173 $ (851) $ (896) $ (810) ============================================================================= Per Share Data Net Income (Loss) Before Non-recurring Merger Related Costs $ .65 $ .61 $ .22 $ (.17) $ (.33) Net Income (Loss) .65 .59 (.23) (.25) (.33) Book Value 10.28 9.57 8.51 9.19 9.38 Number of Common Shares Outstanding 3,597,339 3,658,689 3,658,689 3,658,689 3,658,689 Selected Ratios Return On Average Assets .65% .73% (0.42)% (0.60)% (0.98)% Return on Average Shareholders' Equity 6.69% 6.21% (2.68)% (2.62)% (3.65)% Average Shareholders' Equity to Average Total Assets 9.69% 11.83% 15.81% 23.08% 26.91% Net Interest Margin 3.26% 3.78% 3.61% 3.55% 3.52%
(1) Capital Bank opened for business on June 20, 1997. Capital Bank Corporation was formed on March 31, 1999. Balances for years ended December 31, 1998 and 1997 have been restated to reflect the combined balances of Capital Bank and Home Savings Bank of Siler City for those periods. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION The following discussion and analysis is intended to aid the reader in understanding and evaluating the results of operations and financial condition of Capital Bank Corporation ("the Company") and its subsidiaries, Capital Bank (the "Bank") and Capital Bank Investment Services, Inc. This discussion is designed to provide more comprehensive information about the major components of the Company's results of operations and financial condition, liquidity, and capital resources than could be obtained from reading the financial statements alone. This discussion should be read in conjunction with the Company's consolidated financial statements, the related notes and the selected financial data presented elsewhere in this report. Overview - -------------------------------------------------------------------------------- Capital Bank is a full-service state chartered community bank conducting business primarily in the Research Triangle region and surrounding areas of North Carolina. The Bank was incorporated on May 30, 1997 and opened its first branch in June of that same year in Raleigh. On June 23, 1997, two branches in Sanford, North Carolina were acquired from another financial institution. During 1998, the Bank opened branches in two Cary, North Carolina locations. During 1999, the Bank added a branch in Siler City, North Carolina through a merger transaction as described below and opened a de novo branch in Sanford. In April, 2000, the Bank purchased 5 branches in the eastern part of North Carolina including Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1) from another financial institution. In June 2000, the Bank moved into a new corporate headquarters building on Glenwood Avenue in Raleigh, North Carolina and opened a new branch in the same facility. In January, 2001 the Bank opened an additional branch in Raleigh, making 14 full service branches in the Capital Bank branch network. In 1999, the shareholders of Capital Bank approved the reorganization of Capital Bank into a bank holding company named "Capital Bank Corporation". In addition, on March 31, 1999 the Company completed its acquisition of Home Savings Bank of Siler City SSB, Inc. ("Home Savings Bank") in a stock-for-stock exchange. On July 16, 1999, Home Savings Bank merged with Capital Bank to form one subsidiary under Capital Bank Corporation. In conjunction with the merger, the common stock of Home Savings Bank was retired. On March 1, 2001, Capital Bank Corporation announced that it had formed Capital Bank Investment Services, Inc. ("CBIS"), an investment services subsidiary and agreed to acquire an independent branch brokerage office located in Raleigh, North Carolina. CBIS makes available a full range of non-deposit investment services to individuals and corporations, including the customers of the Bank. These investment services include full-service securities brokerage, asset management, financial planning and retirement services, such as 401(k) plans, all provided exclusively through a strategic alliance with Raymond James Financial Services, Inc. ("Raymond James"). These services are available in the offices of Capital Bank through registered investment representatives. On April 23, 2001, the Company received approval to become a financial holding company. On October 5, 2001, the Company entered into a definitive agreement to acquire First Community Financial Corporation ("First Community") in Burlington, NC. First Community was incorporated on October 7, 1998 to serve as the holding company for Community Savings Bank, Inc. ("Community Savings Bank"), upon Community Savings Bank's conversion from a state chartered mutual savings bank to a state chartered stock savings bank. First Community completed the conversion on June 21, 1999. Since the conversion, First Community's significant assets were the investment in Community Savings Bank, a portion of the net proceeds of the conversion which it has invested, and a promissory note evidencing a loan made by First Community to the Community Savings Bank's employee stock ownership plan. Community Savings Bank was originally chartered in 1934, and its market area consists of the communities in Alamance County, North Carolina. Community Savings Bank operates four full service branches and is primarily engaged in soliciting deposit accounts from businesses and the general public and making commercial loans, construction loans, residential real estate loans, home equity line of credit loans, consumer loans and various investments. The merger was approved by the shareholders in a special meeting on January 17, 2002, subsequent to the year ended December 31, 2001. As a result of the reorganization, acquisition, and subsequent merger of Home Savings Bank, which was accounted for as a pooling-of-interests transaction, all 1999 amounts in these financial statements are restated to reflect a consolidated basis as if the current organization had been in place during all operating periods. As of December 31, 2001 the holding company conducted no business other than holding stock in Capital Bank and Capital Bank Investment Services, Inc. As a community bank, the Bank's profitability depends primarily upon its levels of net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. The Bank's operations are also affected by its provision for loan losses, non-interest income, and non-interest expenses. As an investment company, the profitability of CBIS is fully dependant on the amount of commissions generated from the sales of various investment products. Results of Operations - -------------------------------------------------------------------------------- Capital Bank Corporation reported net income of $2.4 million and $2.2 million for the years ended December 31, 2001 and 2000, respectively, and net losses of $851,000 for year ended December 31, 1999. On a per share basis, net income for 2001 and 2000 was $.65 and $.59, respectively, and net losses for 1999 were $.23. Excluding nonrecurring merger related costs associated with the merger with Home Savings Bank, the Company recorded net income for 1999 of $796,000, or $.22 per share. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION Net Interest Income. Net interest income is the difference between total interest income and total interest expense and is the Company's principal source of earnings. The amount of net interest income is determined by the volume of interest-earning assets, the level of rates earned on those assets, and the volume and cost of supporting funds. Net interest income increased from $10.7 million in 2000 to $11.5 million in 2001, an increase of $822,000 or 8%. Net interest income increased between 1999 and 2000 by $3.7 million or 54% from the 1999 amount of $6.9 million. Increases during both periods are primarily due to significant increases in the volume of interest-bearing assets and liabilities as the Bank has experienced rapid growth. The increase for 2001 was negatively affected by a rapid and significant decline in market rates during the year. During 2001, the prime rate dropped from 9.00% in January to 4.75% in December with a decline in rates of at least 25 basis points in every month of 2001 except July as the Federal Reserve made 11 separate moves to reduce interest rates and stimulate the economy. Since the Bank's loan portfolio adjusted with prime at a faster rate than the deposit portfolio, the rapidly declining rate environment had a negative effect on net interest spread and net interest margin. 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 earning assets in 2001 were $352.2 million, up 25% when compared to $281.6 million for 2000. The net interest margin was 3.26% in 2001, down 52 basis points from the 2000 net interest margin of 3.78%. Net interest spread was 2.67% and 3.04% for 2001 and 2000, respectively. Interest income increased 10% in 2001 to $26.2 million, after a 63% increase in 2000 to $23.8 million from the $14.6 million earned in 1999. For each year, this increase is primarily due to the significant growth in the loan portfolio. The average yield on interest-earning assets for 2001 was 7.43%, a decline of 100 basis points from the 2000 yield of 8.43%. The average yield for 2000 was up 82 basis points from 7.61% in 1999 as interest rates were rising during the 2000 calendar year. The decrease during 2001 was primarily attributable to overall decline in market rates as explained above. This was partially offset by an increase in higher yielding loans as a percentage of total interest-earning assets during 2001. The average loan portfolio as a percent of earning assets was 76% in 2001 compared to 74% in 2000. The average balances of federal funds and other short-term investments, which had lower yields of 3.91% and 6.33% for 2001 and 2000, respectively, declined from $20.0 million in 2000 to $13.2 million in 2001. The average balances of loans, which had higher yields of 7.85% and 9.16% for 2001 and 2000, respectively, increased from $208 million in 2000 to $267 million in 2001. In addition, an increase in the yield on investments helped to offset the decline in overall yield. Investment yield increased from 6.39% in 2000 to 6.51% in 2001. This increase was attributable to a large number of federal agency bonds with high yields that were purchased at discounts in previous years being called by the various agencies associated with the investment. When those bonds were called, the associated discounts were taken in to income as yield adjustments. During 2001, investments with a par value of $28.0 million were called with $243,000 in discounts remaining at call date, all of which was taken into income as yield adjustments. The increase in interest income during 2000 from 1999 was primarily attributable to overall increases in market interest rates and to a portfolio shift from lower yielding short-term investments and investment securities to higher yielding loans. The average loan portfolio as a percent of total earning assets in 2000 increased to 74% from 69% in 1999. Interest expense increased 12% in 2001 to $14.7 million, after a 71% increase in 2000 to $13.1 million from the $7.7 million expensed in 1999. This increase is primarily due to a significant increase in average interest-bearing deposits, which went from $138.5 million in 1999 to $221.7 million in 2000 to $267.3 million in 2001. The average rates on interest-bearing liabilities decreased from 5.39% in 2000 to 4.76% in 2001. The decrease in average rates during 2001 is reflective of the overall decrease in market rates offered during 2001 as compared to the previous year. In addition, there was a significant change in mix as the Company implemented a pricing strategy designed to change the mix of deposits focusing on growth of low cost deposits such as money market and interest checking products. This shift from higher rate certificates to lower rate deposits helped to decrease the overall cost of funds. Time deposits with an average rate of 5.56% represented 61% of all interest bearing liabilities during 2001 as compared to 68% with an average rate of 5.93% during 2000. The average rates on interest-bearing liabilities increased from 4.86% in 1999 to 5.39% in 2000. The increase during 2000 is reflective of Federal Reserve actions to raise interest rates during 2000 when compared to the previous year. In addition, during 2000 the Company funded loan growth primarily with higher rate time deposits. Time deposits with an average rate of 5.29% represented 64% of all interest bearing liabilities during 1999. The following two tables set forth certain information regarding the Company's yield on interest-earning assets and cost of interest-bearing liabilities and the component changes in net interest income. The first table reflects the Company's effective yield on earning assets and cost of funds. Yields and costs are computed by dividing income or expense for the year by the respective daily average asset or liability balance. Changes in net interest income from year to year can be explained in terms of fluctuations in volume and rate. The second table presents information on those changes. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION Average Balances, Interest Earned or Paid, and Interest Yields/Rates (Dollars in thousands) Average Balances, Interest Earned or Paid, and Interest Yields/Rates
(Dollars in thousands) Year Ended December 31, 2001 Year Ended December 31, 2000 Year Ended December 31, 1999 --------------------------------------------------------------------------------------- Average Amount Average Average Amount Average Average Amount Average Balance Earned Rate Balance Earned Rate Balance Earned Rate --------------------------------------------------------------------------------------- Assets Loans receivable: (1) Commercial $191,215 $ 14,772 7.73% $140,319 $ 13,111 9.34% $ 79,413 $ 6,767 8.52% Consumer 25,467 2,267 8.90% 18,170 1,781 9.80% 9,979 924 9.26% Home equity 26,323 2,012 7.64% 19,019 1,703 8.95% 10,566 857 8.11% Residential mortgages 24,280 1,931 7.95% 30,598 2,474 8.09% 31,301 2,472 7.90% ---------------------------- -------------------------- ---------------------------- Total loans 267,285 20,982 7.85% 208,106 19,069 9.16% 131,259 11,020 8.40% Investment securities 71,748 4,674 6.51% 53,541 3,419 6.39% 47,664 2,898 6.08% Federal funds sold and other interest on short term investments 13,207 517 3.91% 19,954 1,263 6.33% 12,255 635 5.18% ---------------------------- -------------------------- ---------------------------- Total interest earning assets 352,240 $ 26,173 7.43% 281,601 $ 23,751 8.43% 191,178 $ 14,553 7.61% Cash and due from banks 9,679 4,946 4,946 Other assets 15,409 12,478 6,360 Reserve for loan losses (3,980) (2,993) (1,850) Total assets $373,348 $296,032 $200,634 ======== ======== ======== Liabilities and Equity Savings deposits $ 6,283 $ 92 1.46% $ 6,826 $ 172 2.52% $ 5,466 $ 160 2.93% Interest-bearing demand deposits 77,872 2,417 3.10% 50,295 1,934 3.85% 31,851 1,160 3.64% Time deposits 187,207 10,416 5.56% 164,612 9,763 5.93% 101,178 5,356 5.29% ---------------------------- -------------------------- ---------------------------- Total interest bearing deposits 271,362 12,925 4.76% 221,733 11,869 5.35% 138,495 6,676 4.82% Borrowed funds 26,288 1,427 5.43% 13,861 861 6.21% 15,261 821 5.38% Repurchase agreements 10,966 349 3.18% 7,346 371 5.05% 3,802 159 4.18% ---------------------------- -------------------------- ---------------------------- Total interest-bearing liabilities 308,616 $ 14,701 4.76% 242,940 $ 13,101 5.39% 157,558 $ 7,656 4.86% ================ ================ ================ Non-interest bearing deposits 24,312 16,458 8,757 Other liabilities 4,231 4,499 2,607 Total liabilities 337,159 263,897 168,921 Shareholders' equity 36,189 32,135 31,713 -------- -------- -------- Total liabilities and equity $373,348 $296,032 $200,634 ======== ======== ======== Net interest spread (2) 2.67% 3.04% 2.75% Net interest income and net interest margin (3) $ 11,472 3.26% $ 10,650 3.78% $ 6,897 3.61%
(1) Loans receivable include nonaccrual loans for which accrual of interest has not been recorded. See Note 1 of the Financial Statements, "Income Recognition on Impaired and Nonaccrual Loans". (2) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (3) Net interest margin represents the net interest income divided by average interest-earning assets. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION
Rate & Volume Variance Analysis Years Ended Years Ended December 31, 2001 December 31, 2000 (In thousands) vs. 2000 vs. 1999 - --------------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total Variance Variance Variance Variance Variance Variance - --------------------------------------------------------------------------------------------------------- Interest Income: Loans receivable $ 3,857 $(1,944) $ 1,913 $ 6,962 $ 1,087 $ 8,049 Investment securities 1,185 70 1,255 370 151 521 Federal funds sold (350) (396) (746) 464 164 628 -------------------------------------------------------------- Total interest income 4,692 (2,270) 2,422 7,796 1,402 9,198 -------------------------------------------------------------- Interest Expense: Savings and interest-bearing demand deposits and other 676 (273) 403 728 58 786 Time deposits 1,189 (536) 653 3,697 710 4,407 Borrowed funds 659 (93) 566 (58) 98 40 Repurchase agreements (88) 66 (22) 173 39 212 Total interest expense 2,436 (836) 1,600 4,540 905 5,445 -------------------------------------------------------------- Increase (decrease) in net interest income $ 2,256 $(1,434) $ 822 $ 3,256 $ 497 $ 3,753 ==============================================================
Note: The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Provision for Loan Losses. The provision for loan losses is the amount charged against earnings for the purpose of establishing an adequate allowance for probable loan losses. Loan losses are, in turn, charged to this allowance rather than being reported as a direct expense. In 2001, 2000 and 1999, amounts expensed as loan loss provisions were $1.2 million, $1.1 million, and $924,000, respectively. In addition, the Company added $387,000 to the loan loss allowance for loans acquired as part of an acquisition of branches that occurred in April, 2000. The amount of the allowance for loan losses is established based on management's estimate of the inherent risks associated with lending activities, estimated fair value of collateral, past experience and present indicators such as delinquency rates and current market conditions. In addition, the Company uses an outside loan review service to occasionally review the adequacy of the loan loss allowance. Loans of $250,000 or more are subject to specific review for impairment per FAS 114. This estimate is regularly reviewed and modified, as necessary. The allowance for loan losses was $4.3 million and $3.5 million on December 31, 2001 and 2000, respectively, and represented approximately 1.40% and 1.43% of total loans outstanding on those dates. During 2001, the Company charged off $392,000 in loans, net of $25,000 in recoveries. During 2000, the Company charged off $362,000 in loans, net of $1,000 in recoveries. Charge-offs in 1999 amounted to $53,000, net of $19,000 in recoveries. Management has allocated the allowance for loan losses by category. This allocation is based on management's assessment of the risk associated with the different types of lending activities. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION
At December 31, (In thousands) 2001 2000 - ------------------------------------------------------------------------------------ Allowance % of Loans to Allowance % of Loans to Amount Total Loans Amount Total Loans - ------------------------------------------------------------------------------------ Commercial $3,261 75% $1,687 68% Consumer 438 9 510 10 Residential mortgages 98 7 220 11 Equity lines 373 9 350 11 Unallocated 116 -- 696 -- -------------------------------------------------------- $4,286 100% $3,463 100% ========================================================
The following table shows changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category and additions to the allowance which have been charged to operating expenses. Analysis of Reserve for Loan Losses As of and For the Years Ended December 31, - ---------------------------------------------------------------------- (In thousands) 2001 2000 1999 - ---------------------------------------------------------------------- Average amount of loans outstanding, net of unearned income $267,285 $208,106 $131,259 Amount of loans outstanding at year end, net of unearned income 306,891 242,275 159,329 Reserve for loan losses: Balance at beginning of period $ 3,463 $ 2,328 $ 1,457 Adjustment for loans acquired -- 387 -- Loans charged off: Commercial 273 249 39 Consumer 144 114 33 ----------------------------------- Total charge-offs 417 363 72 ----------------------------------- Recoveries of loans previously charged off: Commercial 17 -- -- Consumer 8 1 19 ----------------------------------- Total recoveries 25 1 19 ----------------------------------- Net loans charged off 392 362 53 ----------------------------------- Provision for loan losses 1,215 1,110 924 ----------------------------------- Balance at December 31 $ 4,286 $ 3,463 $ 2,328 =================================== Ratio of net chargeoffs to average loans outstanding during the year 0.15% 0.17% 0.04% =================================== The following table shows the total of the nonperforming assets in the Company's portfolio as of December 31, 2001 and 2000. Loans deemed to be impaired at December 31, 2001 amounted to $1.8 million. Average impaired loans during 2001 were $722,000. There were no impaired loans during 2000. (In thousands) 2001 2000 - --------------------------------------------------------------------- Nonperforming assets: Nonaccrual loans - Commercial $2,380 $ 221 Nonaccrual loans - Consumer 590 11 Nonaccrual loans - Mortgage 81 149 Nonaccrual loans - Equity lines 19 -- -------------------- Total Nonaccrual loans $3,070 $ 381 ==================== Nonperforming assets to: Loans outstanding at end of year 1.00% 0.16% Total assets at end of year 0.75% 0.11% Non-interest Income. Non-interest income was $4.5 million, $2.2 million, and $1.3 million for years ended December 31, 2001, 2000, and 1999, respectively. The increases for those periods as a percentage of the prior year's amounts are 105% for 2001 and 74% for 2000. The increase in non-interest income for 2001 is primarily attributable to increases in fees associated with deposit accounts and a large increase in fees associated with the Company's mortgage loan origination activities. The large increase in these fees was a direct result of attractive mortgage rates during 2001 due to the lower interest rate environment. In addition, the Company started a new overdraft checking privilege program called Bounce Free checking during the second quarter of 2001 which has substantially increased fee income during the period. The increase for 2000 is attributable primarily to the increase in deposit and loan volume on which fees were charged and to the increase in fees earned on mortgage loans brokered to other financial institutions. Mortgage loan origination fees increased from $635,000 in 1999 to $989,000 during 2000 to $2.0 million for 2001. In addition, fees for non-sufficient funds which include the new Bounce Free checking program income added during 2001 have increased from $255,000 in 1999 to $520,000 in 2000 to $1.1 million in 2001. Total fees associated with deposit service charges increased from $461,000 in 1999 to $925,000 in 2000 to $1.7 million in 2001. In addition, the Company realized a gain of $190,000 on the sale of investment securities during 2001. There were no securities gains or losses taken in 2000 or 1999. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION Non-interest Expense. Non-interest expense represents the overhead expenses of the Company. Management monitors all categories of non-interest expense in an attempt to improve productivity and operating performance. Non-interest expense increased 23% to $11.8 million in 2001 from $9.6 million in 2000. The expense recorded during 2000 was 18% higher than the $8.1 million amount recorded in 1999. The increase in 2001 reflects the additional operating costs associated with growth as the Bank added more staff to handle increases in volume of business, opened an additional branch and established an investment subsidiary during the year. In addition, the Bank purchased five branches and opened one branch during 2000 which had expenses recorded for only part of that year. During 2000, the Bank grew in size from 7 branches and 73 full time equivalent employees to 13 branches and 117 full time equivalent employees. At December 31, 2001 there were 14 branches and 127 full time equivalent employees. During 2001, the Bank added an additional branch, a Government Lending unit, expanded both the commercial lending area and the mortgage origination group, and had an overall increase in the volume of transactions processed and the number of customers. The year ended December 31, 2000 also included $90,000 in nonrecurring costs associated with the purchase of 5 branches from another area financial institution. The increase in 1999 included certain nonrecurring expenses of approximately $1,647,000 associated with the acquisition of Home Savings Bank and the formation of the holding company. See Note 2 to the Financial Statements for additional information. Specific categories of expenses and related causes for increases are discussed as follows: Salary and benefit expense for the years ended December 31, 2001, 2000, and 1999 were $6.3 million, $4.9 million, and $3.2 million, respectively. Increases each year were the result of additional personnel hired as new branches and departments were added each year as discussed above. Occupancy expense increased from $503,000 in 1999 to $800,000 in 2000 and to $1.2 million in 2001. The increases were primarily a result of lease expenses associated with new locations and additional space needed for expansion of existing departments. Furniture and equipment expense increased from $301,000 in 1999 to $508,000 in 2000 and to $703,000 in 2001 due to the increase in these assets needed for the new locations and general expansion. Other operating expenses increased from $945,000 in 1999 to $1.4 million in 2000 and $1.5 million in 2001, also as a result of the growth of the Company. Included in the 2000 amount were the costs of operating six additional branches, which increased the number of existing branches by 85%. The increases in other operating expenses from 2000 to 2001 included a 32% increase in telephone expenses from $95,000 to $125,000, a 68% increase in postage from $106,000 to $178,000, a 62% increase in consulting costs from $114,000 to $185,000, and a 44% increase in legal costs from $64,000 to $92,000. In addition, courier costs, or those costs associated with getting customer work to the Bank's outside processing center, increased due to the additional branches being serviced by the couriers. All such increases were a direct result of the new branches or expansion of existing departments and were within expected ranges. Provision for Income Taxes. Current federal and state income tax expenses resulting from operations during 2000 and 1999 were offset by the reversal of valuation allowances on deferred tax assets for that same amount during those same periods. Accordingly, total income tax benefits recorded on the Consolidated Statements of Operations during 2000 and 1999 reflect only the actual amounts received back from the federal and state taxing authorities for refunds of prior year over payments. During 2001, the Company reversed all of the remaining valuation allowances and the reserved deferred tax assets were recorded on the consolidated financial statements of the Company, resulting in a one-time net tax benefit of $356,000. That benefit has since been offset by tax expense as the Company is now a fully taxable entity. Total income tax expense for 2001 net of the reversal of the deferred tax valuation allowance was $480,000. Financial Condition - -------------------------------------------------------------------------------- The Company's financial condition is measured in terms of its asset and liability composition, asset quality, capital resources, and liquidity. The growth and composition of assets and liabilities during 2001 and 2000 reflected generally favorable economic conditions and the Company's business development activities. The Company has not engaged in investment strategies involving derivative financial instruments. Asset and liability management is conducted without the use of forward-based contracts, options, 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION swap agreements, or other synthetic financial instruments derived from the value of an underlying asset, reference rate, or index. Total assets were $406.7 million and $343.6 million at December 31, 2001 and 2000, respectively. The increase in total assets of $63.1 million, or 18%, reflects the results of the strong growth trend of the Bank since its incorporation in 1997. The largest component of asset growth was the increase in loans. Total liabilities increased from $308.6 million in 2000 to $369.8 million in 2001. The primary cause for the increase between the periods is an increase in deposits as a result of internal growth and an increase in borrowings. Increases in these liabilities were used to fund loan growth. Stockholders' equity increased from $35.0 million in 2000 to $37.0 million in 2001. The increase is due primarily to the increase in retained earnings as a result of the current period net income of $2.4 million offset in part by a reduction of equity as a result of a stock buyback program whereby the Company acquired $696,000 worth of treasury stock. In addition, the market value of the Company's investment portfolio increased $245,000 as a result of the changing interest rate environment. These unrealized gains are included net of taxes in stockholders' equity. Assets - -------------------------------------------------------------------------------- Cash and Cash Equivalents. Cash and cash equivalents, including non-interest-bearing and interest-bearing cash and federal funds sold, decreased from $28.4 million in 2000 to $16.1 million in 2001. The decrease is primarily the result of loan growth during the year of $64.6 million, which exceeded deposit growth of $25.3 million. The slower growth in deposits was a direct result of management's efforts to reduce the dependency on higher cost funds. The reduced dependency on high cost deposits was offset by an increase in borrowings during the year. Loan Portfolio. Total loans were $306.9 million and $242.3 million as of December 31, 2001 and 2000, respectively. Economic growth in the greater Raleigh (including Wake County), Siler City, and Sanford areas, additional branch facilities added in the Raleigh area, low interest rates during 2001, and the Company's business development activities were key factors in the growth of the loan portfolio during those periods. At December 31, 2001, commercial loans, mortgage loans, consumer loans, and equity lines were $229.3 million, $20.9 million, $28.2 million, and $28.4 million, respectively. At December 31, 2000, commercial loans, mortgage loans, consumer loans, and equity lines were $165.0 million, $27.4 million, $24.4 million, and $25.6 million, respectively. The commercial loan portfolio is comprised mainly of loans to small businesses and mid sized businesses with sales up to $25 million. There were no significant concentrations of credit to any one industry, class, or category. The following tables reflects the maturities of the commercial loan portfolio and the mix of the commercial loans that mature greater than one year in the loan portfolio between fixed rate and adjustable rate notes. (In thousands) Commercial loans: Due within one year $ 84,157 Due one through five year 122,864 Due after five years 22,283 -------- $229,304 ======== Commercial loans due after 1 year: Fixed rate $ 82,290 Variable rate 62,857 -------- $145,147 ======== Although there were no large concentrations of credit to any particular industry, the economic trends of the area served by the Company are influenced by the significant industries within the region. Virtually all the Company's business activity is with customers located in the Research Triangle area of North Carolina (Raleigh, Durham, and Chapel Hill) and it's surrounding counties. The ultimate collectibility of the Company 's loan portfolio is susceptible to changes in the market conditions of this geographic region. The Company uses a centralized risk management process to ensure uniform credit underwriting that adheres to Company policy. Lending policies are reviewed on a regular basis to confirm that the Company is prudent in setting its underwriting criteria. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION Credit risk is managed through a number of methods including loan grading of commercial loans, committee approval of larger loans, and class and purpose coding of loans. Management believes that early detection of credit problems through regular contact with the Company's clients coupled with consistent reviews of the borrowers' financial condition are important factors in overall credit risk management. Management charged off loans totaling $392,000, $362,000, and $53,000, net of recoveries, as uncollectible during 2001, 2000 and 1999, respectively. The large increase in the 2000 amount was the result of a $250,000 charge off on one commercial loan. The amount in 2001 is primarily the result of a recent softening in the economy and isolated instances of specific business problems. At December 31, 2001 and 2000, the allowance for loan losses as a percentage of total loans was 1.40% and 1.43%, respectively. Management believes the allowance for loan losses of $4.3 million at 2001 provides adequate coverage of the probable losses in the loan portfolio. Investment Securities. Investment securities represent the second largest component of earning assets. On December 31, 2001 and 2000, investments totaled $71.2 million and $60.9 million, respectively. At December 31, 2001 and 2000, all investments were classified as "available for sale". This classification allows flexibility in the management of interest rate risk, liquidity, and loan portfolio growth. The following table reflects the debt securities by contractual maturities as of December 31, 2001. 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. Securities Available For Sale Portfolio
(In thousands) 1 Year or Less 1 - 5 Years 5 - 10 Years 10 or More Years Total - ----------------------------------------------------------------------------------------------------------------------------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ----------------------------------------------------------------------------------------------------------------------------------- US Agency securities $ -- -- $11,331 6.36% $ 5,125 6.24% $ -- -- $16,456 6.32% Corporate bonds -- -- 5,108 6.33% 1,070 6.25% -- -- 6,177 6.32% Municipal bonds (1) -- -- -- -- -- -- 5,584 7.64% 5,584 7.64% Mortgage-backed securities 220 6.02% 762 6.88% 10,591 6.47% 31,411 6.61% 42,985 6.57% ------- ------- ------- ------- ------- $ 220 $17,201 $16,786 $36,995 $71,202 ======= ======= ======= ======= =======
Money Market Investments and Federal Funds. At year-end 2001 and 2000, the Company had $3.7 million and $17.5 million, respectively, in short-term money market investments and federal funds. These figures include interest-bearing cash. Liabilities During 2001 and 2000, the Company relied on deposits, advances from the Federal Home Loan Bank, repurchase agreements and excess liquidity to fund its earning assets. Deposits. Total deposits increased from $279.1 million at December 31, 2000 to $304.4 million at December 31, 2001. Of these amounts, $28.5 million and $20.3 million were in the form of non-interest-bearing demand deposits at December 31, 2001 and 2000, respectively, and $275.9 million and $258.8 million were in the form of interest-bearing deposits at December 31, 2001 and 2000, respectively. Balances in certificates of deposit of $100,000 and over were $44.8 million and $40.1 million at year-end 2001 and 2000, respectively. The following table reflects the maturities of certificates of deposit of $100,000 and over as of December 31, 2001. Maturity Average (In thousands) Amount Rate ----------------------- Three months or less $18,830 4.36% Over three months to six months 12,208 3.80% Over six months to twelve months 11,420 3.81% Over twelve months 2,387 4.85% ----------------------- $44,845 4.10% ======================= 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION Debt. At December 31, 2001 and 2000, the Company's outstanding advances with the Federal Home Loan Bank were $50.0 million and $15.0 million, respectively. During the year ended December 31, 2001, the maximum outstanding advances were $50.0 million. The Company had average outstanding FHLB advances of $26.3 million and $13.9 million with weighted average rates of 5.43% and 6.21% at December 31, 2001 and 2000, respectively. These advances were used to provide additional funding at favorable rates to accommodate loan growth. Capital Resources - -------------------------------------------------------------------------------- Total shareholders' equity for 2001 and 2000, excluding unrealized gains net of taxes on available for sale securities of $568,000 and $323,000 in 2001 and 2000, respectively, was $36.4 million and $34.7 million, respectively. The Company did not pay any dividends to its shareholders during 2001 or 2000. However, prior to the merger with Capital Bank Corporation, Home Saving Bank paid dividends to its shareholders. At December 31, 2001, the Company had a leverage ratio of 8.8%, a Tier 1 capital ratio of 9.6%, and a risk based capital ratio of 10.9%. These ratios exceed the federal regulatory minimum requirements for a "well capitalized" bank. Asset/Liability Management - -------------------------------------------------------------------------------- Asset/liability management functions to maximize profitability within established guidelines for interest rate risk, liquidity, and capital adequacy. Measurement and monitoring of liquidity, interest rate risk, and capital adequacy are performed centrally through the Asset/Liability Management Committee, and reported under guidelines established by management, the Board of Directors and regulators. Oversight on asset/liability management matters is provided by the Board of Directors through its Asset/Liability Management Committee. Liquidity management involves the ability to meet the cash flow requirements of depositors wanting 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 at the Federal Reserve. The Company must submit weekly reports to the Federal Reserve to ensure that it meets those requirements. At December 31, 2001, the Company met all of its liquidity requirements. The Company had $16.1 million in its most liquid assets, cash and cash equivalents, at December 31, 2001. The Company's principal sources of funds are deposits, short-term 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 $296.6 million or 72.9% of total assets at December 31, 2001. At December 31, 2000, core deposits and equity capital totaled $273.9 million or 79.7% of total assets during that period. The Company's liquidity can best be demonstrated by an analysis of its cash flows. In addition to the increase in core deposits described above, the Company had other financing activities including additional borrowings from the Federal Home Loan Bank of $35.0 million. Operating activities also provided $3.4 million of liquidity for the year ended December 31, 2001, compared to $3.3 million and $2.5 million in 2000 and 1999, respectively. The principal elements of these operating flows are net income, increased for significant non-cash expenses for the provision for loan losses and depreciation and amortization. In 2001, deposit growth and increased borrowings were utilized to fund $65.0 million in new loan growth. A secondary source of liquidity for the Corporation comes from investing activities, principally the sales of, maturities of and cash flows from investment securities. During 2001, due to the rapidly declining interest rate environment, the cash flow from mortgage-backed securities accelerated and certain securities with call features were called. The cash received from these events, combined with maturities, amounted to $53.8 million, compared to $5.0 million in 2000 and $11.0 million in 1999. As of December 31, 2001, the Corporation had approximately $220,000 of investment securities that mature in 12 months. During 2001, the Company purchased $63.3 million of investment securities to replace the securities sold, called or matured during the same period and to meet liquidity needs. Additional sources of liquidity are available to the Bank through the Federal Reserve System and through membership in the Federal Home Loan Bank system. As of December 31, 2001, Capital Bank had a maximum borrowing capacity of $81.3 million through the Federal Home Loan Bank of Atlanta. These funds can be made available with various maturities and interest rate structures. Borrowings cannot exceed twenty percent of total assets or twenty times the amount of Federal Home Loan Bank stock owned by the borrowing bank. At December 31, 2001, Capital Bank owned $2.5 million of stock or five percent of its outstanding advances of $50.0 million. Borrowings are collateralized by a blanket lien by the Federal Home Loan Bank on the Bank's qualifying assets. 14 The following table reflects maturities of contractual obligations and expirations of ongoing commitments that affect the Company's liquidity.
Payments Due By Period -------------------------------------------------------------- Less Than 1 - 3 4 - 5 After 5 (In thousands) 1 Year Years Years Years Total -------------------------------------------------------------- Contractual Obligations FHLB Advances $25,000 $15,000 $10,000 $ -- $50,000 Operating Leases 628 1,281 1,185 1,951 5,045 -------------------------------------------------------------- $25,628 $16,281 $11,185 $ 1,951 $55,045 ============================================================== Amount of Commitment Expiration per Period -------------------------------------------------------------- Less Than 1 - 3 4 - 5 After 5 (In thousands) 1 Year Years Years Years Total -------------------------------------------------------------- Commercial Commitments Commercial Letters of Credit $ 549 $ -- $ -- $ -- $ 549 Other Commercial Loan Commitments 30,549 4,668 2,321 1,965 39,503 -------------------------------------------------------------- $31,098 $ 4,668 $ 2,321 $ 1,965 $40,052 =============================================================
Effects of Inflation - -------------------------------------------------------------------------------- The financial statements have been prepared in accordance with generally accepted accounting principles, 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. However, the effect of inflation on interest rates can materially impact bank 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. Critical Accounting Policies and Estimates - -------------------------------------------------------------------------------- Capital Bank Corporation's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Capital Bank Corporation 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 on-going basis, the Company evaluates its estimates, including those related to the reserve for loan losses, investment and intangible asset values, income taxes, and contingencies and litigation. Capital Bank Corporation 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. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Capital Bank records estimated loan loss reserves based on known problem loans and estimated deficiencies in the existing loan portfolio. The reserve calculation takes into account historic write-off trends and current market and economic conditions. If economic conditions were to decline significantly or the financial condition of Capital Bank's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional reserves may be required. The Company records an investment impairment charge when it believes an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions and associated market values of investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future. Capital Bank Corporation assesses the need to record a valuation allowance to reduce its 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL BANK CORPORATION deferred tax assets to the amount that is more likely than not to be realized. The Company considers anticipated future taxable income and ongoing prudent and feasible tax planning strategies in determining the need for the valuation allowance which, at this time, it deems not to be necessary. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Recent Accounting Developments - -------------------------------------------------------------------------------- Please refer to Note 1 of the Company's financial statements for the year ended December 31, 2001 for a discussion of recent accounting developments. Quantitative and Qualitative Disclosure About Market Risk - -------------------------------------------------------------------------------- Capital Bank Corporation utilizes an outside asset liability management advisory firm to help management evaluate interest rate risk and develop asset/liability management strategies. One tool used is a computer simulation model which projects the Company's performance under different interest rate scenarios. Analyses are prepared quarterly which evaluate the Company's performance in a base strategy which reflects the Company's 2001 and 2002 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. The December 31, 2001 analysis of the Company indicates that interest rate risk exposure over a twelve-month time horizon is minimal and well within the guidelines established by the Board of Directors. For the upcoming twelve month period in the Flat rate scenario, Capital Bank Corporation is projected to earn $14.7 million in net interest income. In the Rising rate scenario, which contemplates a 200 basis point increase in interest rates over a twelve month period, the Company is expected to see its annualized net interest income improve by $405,000, or 2.8%. Conversely, the bank will see a decline in net interest income of $769,000, or 5.3%, if rates decline 200 basis points. 16 Consolidated Balance Sheets For the Years Ended December 31, 2001 AND 2000 CAPITAL BANK CORPORATION
(In thousands, except share data) 2001 2000 - -------------------------------------------------------------------------------------------------------- Assets Cash and due from banks: Interest-earning $ 2,793 $ 16,724 Noninterest earning 12,380 10,952 Federal funds sold 944 750 Securities (Note 3) Available for sale 28,217 34,596 Mortgage-backed securities available for sale (Note 3) 42,985 26,351 Federal Home Loan Bank stock (Note 4) 2,500 1,000 Loans (Note 5) 306,891 242,275 Less allowance for loan losses (4,286) (3,463) ---------------------- Net loans 302,605 238,812 ---------------------- Accrued interest receivable 1,853 2,346 Premises and equipment, net (Note 6) 5,009 5,149 Deposit premium and goodwill, net 4,105 4,615 Deferred income tax 2,033 1,412 Other assets 1,317 913 ---------------------- Total assets $ 406,741 $ 343,620 ====================== Liabilities and Shareholders' Equity Deposits (Note 7): Demand deposits $ 28,470 $ 20,346 Savings and interest bearing checking 43,716 31,028 Money market deposit accounts 57,837 37,673 Time deposits less than $100,000 129,575 149,914 Time deposits $100,000 and greater 44,845 40,133 ---------------------- Total deposits 304,443 279,094 ---------------------- Repurchase agreements 11,167 9,804 Federal Home Loan Bank advances (Note 8) 50,000 15,000 Accrued interest payable 792 968 Other liabilities 3,356 3,739 ---------------------- Total liabilities 369,758 308,605 ---------------------- Commitments and contingencies (Notes 10, 11, 12 and 13) Shareholders' equity: Common stock, no par value; 20,000,000 shares authorized, 3,658,689 issued; outstanding 3,597,339 and 3,658,689, respectively 34,805 34,806 Treasury stock, no par value; 61,350 shares and none, respectively (696) -- Accumulated other comprehensive income 568 323 Retained earnings (accumulated deficit) 2,306 (114) ---------------------- Total shareholders' equity 36,983 35,015 ---------------------- Total liabilities and shareholders' equity $ 406,741 $ 343,620 ----------------------
The accompanying notes are an integral part of these consolidated financial statements. 17 Consolidated Statements of Operations For the Years Ended December 31, 2001, 2000 and 1999 CAPITAL BANK CORPORATION
(In thousands except per share data) 2001 2000 1999 - --------------------------------------------------------------------------------------------------------- Interest income: Loans and fees on loans $ 20,982 $ 19,069 $ 11,020 Investment securities 4,674 3,419 2,898 Federal funds and other interest income 517 1,263 635 ------------------------------- Total interest income 26,173 23,751 14,553 ------------------------------- Interest expense: Deposits 12,925 11,869 6,676 Borrowings 1,427 861 821 Repurchase agreements 349 371 159 ------------------------------- Total interest expense 14,701 13,101 7,656 ------------------------------- Net interest income 11,472 10,650 6,897 Provision for loan losses 1,215 1,110 924 ------------------------------- Net interest income after provision for loan losses 10,257 9,540 5,973 ------------------------------- Other operating income: Service charges and fees 1,735 925 461 Net gain on sale of securities 190 -- -- Mortgage origination fees 1,999 989 635 Other fees and income 566 279 164 ------------------------------- Total other operating income 4,490 2,193 1,260 ------------------------------- Other operating expenses: Personnel 6,317 4,876 3,422 Occupancy 1,152 800 503 Data processing 649 526 328 Furniture and equipment 703 508 301 Amortization of intangibles 598 473 216 Advertising 346 454 276 Professional fees 350 240 257 Director fees 210 206 229 Merger expenses -- 90 1,647 Other 1,522 1,423 945 ------------------------------- Total other operating expenses 11,847 9,596 8,124 ------------------------------- Net income (loss) before income tax expense (benefit) 2,900 2,137 (891) Income tax expense (benefit) 480 (36) (40) Net income (loss) $ 2,420 $ 2,173 $ (851) =============================== Net income (loss) per share - basic and diluted $ .65 $ .59 $ (.23) ------------------------------- Dividends per share $ -- $ -- $ .05 ===============================
The accompanying notes are an integral part of these consolidated financial statements. 18 Consolidated Statements of Changes in shareholders' equity For the Years Ended December 31, 2001, 2000 and 1999 CAPITAL BANK CORPORATION
Accumulated Retained Unearned Deferred Other Earnings Common ESOP Stock Treasury Comprehensive (Accumulated (In thousands) Stock Shares Awards Stock Income (Loss) Deficit) Total\ - ------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1999 $ 34,788 $ (66) $ (195) $ -- $ 235 $ (1,255) $ 33,507 Release of ESOP shares 18 66 -- -- -- -- 84 MRP amortization -- -- 195 -- -- -- 195 Net loss -- -- -- -- -- (851) (851) Other comprehensive loss -- -- -- -- (1,628) -- (1,628) Comprehensive loss (2,479) Cash dividends paid -- -- -- -- -- (181) (181) - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 34,806 -- -- -- (1,393) (2,287) 31,126 Net income -- -- -- -- -- 2,173 2,173 Other comprehensive income -- -- -- -- 1,716 -- 1,716 ----- Comprehensive income 3,889 - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 34,806 -- -- -- 323 (114) 35,015 Purchase of treasury stock -- -- -- (702) -- -- (702) Reissuance of common stock for options excercised (1) -- -- 6 -- -- 5 Net income -- -- -- -- -- 2,420 2,420 Other comprehensive income -- -- -- -- 245 -- 245 --- ----- Comprehensive income 2,665 - ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 $ 34,805 $ -- $ -- $ (696) $ 568 $ 2,306 $ 36,983 ==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 19 Consolidated Statements of Cash Flows For the Years Ended December 31, 2001, 2000 and 1999 CAPITAL BANK CORPORATION
(In thousands) 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------- Net income (loss) $ 2,420 $ 2,173 $ (851) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of deposit premium and goodwill 598 473 216 Depreciation 810 642 397 (Gain) loss on disposal of equipment (2) 6 -- Amortization (accretion) of premiums/discounts on securities, net 32 6 47 MRP and ESOP compensation -- -- 279 Gain on sale of investments (190) -- -- Provision for loan losses 1,215 1,110 924 Deferred tax benefits (978) (1,139) (273) Changes in assets and liabilities: Accrued interest receivable 493 (1,102) (391) Accrued interest payable (176) 297 170 Other assets (404) (417) 544 Other liabilities (383) 1,262 1,402 --------------------------------- Net cash provided by operating activities 3,435 3,311 2,464 --------------------------------- Cash flows from investing activities: Net increase in loans (65,008) (57,493) (48,603) Additions to premises and equipment (706) (1,753) (1,306) Proceeds from sale of equipment 38 -- -- Purchase of Federal Home Loan Bank stock (1,500) -- (395) Purchase of securities available for sale (31,006) (8,457) (14,964) Purchase of mortgage-backed securities available for sale (32,317) (10,154) (6,281) Proceeds from maturities of securities available for sale 11,032 3,955 7,450 Proceeds from maturities of securities held to maturity -- -- 3,560 Proceeds from sales of securities available for sale 14,796 -- -- Proceeds from calls of securities available for sale 28,000 1,000 -- Capitalized purchase costs (88) -- -- Net cash received from branch acquisitions -- 37,013 -- --------------------------------- Net cash used by investing activities $(76,759) $(35,889) $(60,539) ---------------------------------
(continued) 20 Consolidated Statements of Cash Flows (continued) For the Years Ended December 31, 2001, 2000 and 1999 CAPITAL BANK CORPORATION
(In thousands) 2001 2000 1999 - -------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase in deposits $ 25,349 $ 49,356 $ 25,902 Net increase in repurchase agreements 1,363 4,986 2,317 Proceeds from Federal Home Loan Bank borrowings 45,000 15,000 20,000 Principal repayments of Federal Home Loan Bank borrowings (10,000) (20,000) (5,000) Purchase of treasury stock (702) -- -- Exercise of common stock options 5 -- -- Principal repayments of ESOP Note -- -- (66) Cash dividends paid -- -- (181) -------------------------------- Net cash provided by financing activities 61,015 49,342 42,972 -------------------------------- Net change in cash and cash equivalents (12,309) 16,764 (15,103) Cash and cash equivalents at beginning of year 28,426 11,662 26,765 -------------------------------- Cash and cash equivalents at end of year $ 16,117 $ 28,426 $ 11,662 ================================ Supplemental Disclosure of Cash Flow Information: Cash payments for interest $ 14,877 $ 12,804 $ 7,486 ================================ Cash payments for income taxes $ 1,392 $ 501 $ 287 ================================ Transfers from loans to real estate acquired through foreclosure $ -- $ 32 $ -- ================================
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 1. Summary of Significant Accounting Policies - -------------------------------------------------------------------------------- Nature of Operations Capital Bank Corporation (the "Company") is a financial holding company incorporated under the laws of North Carolina on August 10, 1998. The Company's primary function is to serve as the holding company for its wholly-owned subsidiaries, Capital Bank and Capital Bank Investment Services, Inc. Capital Bank (the "Bank") was incorporated under the laws of North Carolina on May 30, 1997 and commenced operations on June 20, 1997. The Bank is not a member of the Federal Reserve System and has no subsidiaries. The Bank is a locally owned community bank engaged in general commercial banking, providing a full range of banking services. The majority of the Bank's customers are individuals and small to medium-size businesses. The Bank's primary source of revenue is interest earned from loans to customers and from invested cash and securities and non-interest income derived from various fees. Prior to 2001, the Bank operated primarily throughout the central part of North Carolina with branch facilities located in Raleigh (2), Cary (2), Sanford (3), Siler City (1), Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1). In January, 2001, the Bank opened a new branch in Raleigh, making the existing branches structure 14 separate locations. The Company's corporate headquarters reside on Glenwood Avenue in Raleigh, North Carolina. On March 1, 2001, Capital Bank Corporation announced that it had formed Capital Bank Investment Services, Inc. ("CBIS"), an investment services subsidiary and agreed to acquire an independent branch brokerage office located in Raleigh, North Carolina. CBIS makes available a full range of non-deposit investment services to individuals and corporations, including the customers of the Bank. These investment services include full-service securities brokerage, asset management, financial planning and retirement services, such as 401(k) plans, all provided exclusively through a strategic alliance with Raymond James Financial Services, Inc. ("Raymond James"). These services will be available in the offices of Capital Bank through registered investment representatives. The Investment Company is a full service brokerage firm whose profitability depends on net commissions generated by investment sales and services. The Company has no operations other than those of its subsidiaries, Capital Bank and Capital Bank Investment Services, Inc. The Company's profitability depends principally upon the net interest income, provision for loan losses, non-interest income and non-interest expenses of the Bank and the net commissions generated by CBIS. As used in this report, the term "Company" refers to Capital Bank Corporation and its subsidiaries, Capital Bank and Capital Bank Investment Services, Inc. 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. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. 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 and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. At times, the Bank places deposits with high credit quality financial institutions in amounts which, at times, may be in excess of federally insured limits. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION Securities Investments in certain securities are classified into three categories and accounted for as follows: 1. Securities 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; 2. 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; 3. Securities 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 classification of securities is generally determined at the date of purchase. Gains and losses on sales of securities, computed based on specific identification of the adjusted cost of each security, are included in other income at the time of the sales. Premiums and discounts on debt securities are recognized in interest income on the level interest yield method over the period to maturity. Loans and Allowance for Loan Losses Loans are stated at the amount of unpaid principal, reduced by an allowance for loan losses and net deferred loan origination fees and costs. 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 yield method. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. Loans deemed to be impaired at December 31, 2001 amounted to $1.8 million. Average impaired loans during 2001 were $722,000. There were no loans in the Bank's portfolio during 2000 which were considered to be impaired. The Bank uses several factors in determining if a loan is impaired. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income or loss, etc. It is possible that these factors and management's evaluation of the adequacy of the allowance for loan losses will change. 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 collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions and trends that may affect the borrowers' ability to pay. Income Recognition on Impaired and Nonaccrual Loans Loans, including impaired 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. 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 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 (generally a minimum of six months) by the borrower of interest and principal in accordance with the contractual terms. While a loan is classified as nonaccrual and the future collectibility 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 collectibility 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. Foreclosed Assets Any assets acquired as a result of foreclosure are valued at the lower of the recorded investment in the loan or fair value less estimated costs to sell. The recorded investment is the sum of the outstanding principal loan balance and foreclosure costs associated with the loan. Any excess of the recorded investment over the fair value of the property received is charged to the allowance for loan losses. Valuations will be periodically performed by management and any subsequent write-downs due to the carrying value of a property exceeding its estimated fair value less estimated costs to sell are charged against other expenses. 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. 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 or amortization are relieved and any gains or losses are reflected in operations. Intangible Assets Deposit premium and goodwill arising from branch acquisitions during 1997 and 2000 and the acquisition of Capital Bank Investment Services, Inc. in 2001 are being amortized on a straight-line basis over seven to ten years. These lives were estimated by management at the time the assets were acquired using information available at that time and are subject to re-evaluation as new information becomes available. Deposit premium and goodwill at December 31, 2001 and 2000 are as follows: 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION Accumulated (in thousands) Gross Amortization Net - ---------------------------------------------------------------------------- At December 31, 2001 From March, 2001 acquisitions of CBIS: Goodwill $ 88 $ (34) $ 54 From April, 2000 branch acquisitions: Deposit premium 2,963 (519) 2,444 Goodwill 508 (85) 423 ----------------------------- 3,471 (604) 2,867 ----------------------------- From June, 1997 branch acquisitions: Deposit premium 2,000 (906) 1,094 Goodwill 164 (74) 90 ----------------------------- 2,164 (980) 1,184 ----------------------------- $ 5,723 $(1,618) $ 4,105 ============================= At December 31, 2000 From April, 2000 branch acquisitions: Deposit premium $ 2,963 $ (222) $ 2,741 Goodwill 508 (35) 473 ----------------------------- 3,471 (257) 3,214 ----------------------------- From June, 1997 branch acquisitions: Deposit premium 2,000 (705) 1,295 Goodwill 164 (58) 106 ----------------------------- 2,164 (763) 1,401 ----------------------------- $ 5,635 $(1,020) $ 4,615 ============================= Amortization expense recognized during the years ended December 31, 2001, 2000, and 1999 was $598,000, $473,000, and $216,000, respectively. The Company evaluates intangible assets for potential impairment by analyzing the operating results, trends and prospects of the Company. The Company also takes into consideration recent acquisition patterns within the banking industry and any other events or circumstances which might indicate potential impairment. 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 financial statements that will result in taxable or deductible amounts in future years. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recorded for deferred tax assets if the Company cannot determine that the benefits will more likely than not be realized. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities The Company applies a financial-components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Due to the small number of transactions and the immateriality of revenue associated with these transactions, there was no material impact on results of operations or financial position due to the adoption of this statement. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION Net Income (Loss) Per Share The Company follows Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". In accordance with SFAS 128, the Bank has presented both basic and diluted EPS on the face of the Statement of Operations. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. For loss periods, diluted EPS is the same as basic EPS due to the fact that including common stock equivalents in the calculation of diluted EPS would be antidilutive. The weighted average number of shares outstanding for 2001, 2000, and 1999 were as follows:
(In thousands except number of shares) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Shares used in the computation of earnings per share: Weighted average number of shares outstanding - basic 3,712,280 3,709,070 3,676,432 Incremental shares from assumed exercise of stock options - antidilutive during loss periods 34,561 6,871 n/a ----------------------------------------- Weighted average number of shares outstanding - diluted 3,746,841 3,715,941 3,676,432 =========================================
Comprehensive Income (Loss) The Company follows SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains, and losses) in general-purpose financial statements. The Company's only components of other comprehensive income relate to unrealized gains and losses on available for sale securities. Information concerning the Company's other comprehensive income (loss) for the years ended December 31, 2001, 2000 and 1999 is as follows:
(In thousands except number of shares) 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities available for sale $ 435 $ 1,716 $(1,628) Reclassification of gains recognized in net income (190) -- -- -------------------------------------- Other comprehensive income (loss) $ 245 $ 1,716 $(1,628) ======================================
Segment Information The Company follows the provisions of SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." The Statement requires that public business enterprises report certain information about operating segments in their annual financial statements and in condensed financial statements of interim periods issued to shareholders. It also requires that the public business enterprises report related disclosures and descriptive information about products and services provided by significant segments, geographic areas, and major customers, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. 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, the providing of general commercial financial services to customers located in the single geographic area of central North Carolina. The various products are those generally offered by community banks, and the allocation of resources is based on the overall performance of the institution, versus the individual branches or products. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION Employers Disclosures about Pensions and Other Postretirement Benefits The Company follows the provisions of SFAS No. 132, "Employers Disclosures about Pensions and Other Postretirement Benefits". This Statement requires employers' disclosures about pension and other postretirement benefit plans. Reclassifications Certain items included in the 2000 and 1999 financial statements have been reclassified to conform to the 2001 presentation. These reclassifications have no effect on the net loss or shareholders' equity previously reported. New Pronouncements The Financial Accounting Standards Board ("FASB") has issued Statements of Financial Accounting Standards No. 141 ("FAS 141"), Business Combinations, No. 142 ("FAS 142"), Goodwill and Other Intangible Assets, No. 143 ("FAS 143"), Accounting for Asset Retirement Obligations and No. 144 ("FAS 144"), Accounting for the Impairment or Disposal of Long-Lived Assets. FAS 141 supersedes APB Opinion No. 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises and requires that all business combinations be accounted for using the purchase method. This Statement carries forward without reconsideration those portions of APB Opinion No. 16, Business Combinations, that provide guidance related to the application of the purchase method. This Statement requires that intangible assets that meet certain criteria be recognized as assets apart from goodwill. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. This Statement also applies to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The application of this statement is not expected to have a material impact on the Company's financial statements. FAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. This Statement carries forward without reconsideration those provisions of Opinion 17 related to the accounting for internally developed intangible assets. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001 and early application is permitted for entities with fiscal years beginning after March 15, 2001, under certain conditions. Impairment losses for goodwill and indefinite-lived intangible assets that arise due to the initial application of this Statement (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principle. The application of this statement is not expected to have a material impact on the Company's financial statements. FAS 143 requires that obligations associated with the retirement of tangible long-lived assets be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. FAS 143 will be effective for financial statements beginning after June 15, 2002, though early adoption is encouraged. The application of this statement is not expected to have a material impact on the Company's financial statements. FAS 144 supersedes FAS 121 and applies to all long-lived assets, including discontinued operation, and amends Accounting Principles Board Opinion No. 30 ("APB 30") Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions. FAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book or fair value less cost to sell. FAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and its provisions are generally expected to be applied prospectively. The application of this statement is not expected to have a material impact on the Company's financial statements. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 2. Organization and Significant Activities - -------------------------------------------------------------------------------- The Bank was organized on December 12, 1996 and commenced a public subscription offering on February 17, 1997. The offering resulted in gross proceeds of $27.3 million from the sale of 2,477,651 shares. On June 20, 1997, the Bank acquired two branches located in Sanford, North Carolina from a large community bank and began its banking operations. In accordance with the rules and regulations of the North Carolina Commissioner of Banks, all expenditures of the Bank prior to commencing operations in June 1997 were charged against surplus. The operating expenses, principally personnel and occupancy, amounted to $437,000, and expenses related to the offering aggregated $1,069,000. In 1997, a branch was opened in Raleigh, North Carolina followed by two branches in Cary, North Carolina in 1998 and one in Sanford in 1999. On March 26, 1999, pursuant to the reorganization of the Bank into a holding company structure, the common stock of the Bank was converted on a share-for-share basis into common stock in the Company that have rights, privileges and preferences identical to the common stock of the Bank. On March 31, 1999, the Company completed its acquisition of Home Savings Bank of Siler City SSB, Inc. ("Home Savings") through the issuance of 1.28 shares of the Company's common stock for each share of Home Saving's outstanding common stock, or 1,181,038 shares. The acquisition was accounted for as a pooling-of-interests. On July 16, 1999, Home Savings merged with the Bank to form one subsidiary under the Company. Prior to the merger with the Company, Home Savings reported total interest income of $994,000, net interest income of $418,000 and a net loss of $1,285,000 for the three months ended March 31, 1999. In April, 2000, the Bank acquired 5 branches from another area financial institution which was accounted for as a purchase transaction. The transaction included branches in the eastern part of North Carolina including Oxford (2), Warrenton (1), Seaboard (1), and Woodland (1). A summary of the acquisition is as follows: (In thousands) - -------------------------------------------------------------------------------- Deposits assumed $ 66,493 Deposit premium paid (2,963) Loans acquired (25,847) Goodwill recorded (508) Net other assets acquired (162) -------- Net cash received $ 37,013 ======== In June, 2000, the Bank opened a new branch and moved its corporate headquarters to the same facility on Glenwood Avenue in Raleigh, North Carolina. In January 2001, the Bank opened a new branch in Raleigh. On April 23, 2001, the Company converted to a financial holding company. On March 1, 2001, Capital Bank Corporation announced that it had formed Capital Bank Investment Services, Inc., an investment services subsidiary and agreed to acquire an independent branch brokerage office located in Raleigh, North Carolina. On October 5, 2001, the Company entered into a definitive agreement to acquire First Community Financial Corporation ("First Community") in Burlington, NC. First Community was incorporated on October 7, 1998 to serve as the holding company for Community Savings Bank, Inc. ("Community Savings Bank"), upon Community Savings Bank's conversion from a state chartered mutual savings bank to a state chartered stock savings bank. First Community completed the conversion on June 21, 1999. Since the conversion, First Community has had no significant assets other than the outstanding capital stock of Community Savings Bank, a portion of the net proceeds of the conversion which it has invested, and a promissory note evidencing a loan made by First Community to the Community Savings Bank's employee stock ownership plan. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION Community Savings Bank was originally chartered in 1934, and its market area consists of the communities in Alamance County, North Carolina. Community Savings Bank is primarily engaged in soliciting deposit accounts from businesses and the general public and making commercial loans, construction loans, residential real estate loans, home equity line of credit loans, consumer loans and various investments. The acquisition was approved at a special shareholder meeting on January 17, 2002 and the transaction took place effective the close of business on January 18, 2002. Each First Community share of common stock was to be exchanged for 1.30275 shares of Capital Bank Corporation common stock plus $16.20 cash. Alternatively, shareholders could elect to receive all cash or all stock for their shares. To the extent that First Community shareholders elected to receive more aggregate stock or cash consideration than permitted by the agreement, pro rata allocations were made. The transaction will be accounted for under the purchase method and is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The following table reflects the unaudited proforma combined results of operations, assuming the acquisition had occurred at the beginning of fiscal 2001: (In thousands except per share amounts) 2001 - -------------------------------------------------------------------------------- Net interest income $20,939 Net income 2,967 Net earnings per diluted share 0.53 In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what actual combined results of operations might have been if the acquisition had been effective at the beginning of fiscal 2001. A summary of estimated fair values of assets acquired and liabilities assumed is as follows: (In thousands) - -------------------------------------------------------------------------------- Loans receivable $ 132,271 Premises and equipment 5,373 Deposit premium 782 Goodwill 119 Other assets 75,837 Deposits (156,241) Borrowings (16,414) Other liabilities (25,341) --------- Investment in subsidiary, net of dividends to shareholders and capitalized acquisition costs $ 16,386 ========= 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 3. Securities - -------------------------------------------------------------------------------- Securities at December 31, 2001 and 2000 are summarized as follows:
Gross Gross Estimated Amortized Unrealized Unrealized Market (In thousands) Cost Gains Losses Value - --------------------------------------------------------------------------------------------- 2001 Available for sale: U.S. Agency obligations $16,000 $ 456 $-- $16,456 Corporate bonds 6,077 116 16 6,177 Municipal bonds 5,683 21 120 5,584 ------------------------------------------------ 27,760 593 136 28,217 Mortgage-backed securities 42,516 557 88 42,985 ------------------------------------------------ $70,276 $ 1,150 $ 224 $71,202 ================================================ 2000 Available for sale: U.S. Agency obligations $33,662 $ 276 $ 125 $33,813 Municipal bonds 759 24 -- 783 ------------------------------------------------ 34,421 300 125 34,596 Mortgage-backed securities 26,203 264 116 26,351 ------------------------------------------------ $60,624 $ 564 $ 241 $60,947 ================================================
The amortized cost and estimated market values of securities at December 31, 2001 by contractual maturities are shown 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. Estimated Amortized Market (In thousands) Cost Value - ---------------------------------------------------------------------- Due in one year or less $ 217 $ 220 Due after one year through five years 16,793 17,201 Due after five years through ten years 16,348 16,786 Due after ten years 36,918 36,995 --------------------- $70,276 $71,202 ===================== During the year ended December 31, 2001, the Company had gross realized gains of $190,000 on sales of available for sale securities with book values of $14.6 million. There were no sales of securities during the periods ended December 31, 2000 or 1999. Securities with an amortized cost of $39.9 million were pledged as of December 31, 2001 to secure public deposits, repurchase agreements, and Federal Home Loan Bank advances. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 4. Federal Home Loan Bank Stock - -------------------------------------------------------------------------------- The Company, as member of the Federal Home Loan Bank System, is required to maintain an investment in capital stock of the FHLB in an amount equal to the greater of 1% of its outstanding home loans or 5% of its outstanding FHLB advances. No ready market exists for the FHLB stock, and it has no quoted market value. 5. Loans and Allowance for Loan Losses - -------------------------------------------------------------------------------- The composition of the loan portfolio by loan classification at December 31, 2001 and 2000 is as follows: (In thousands) 2001 2000 - --------------------------------------------------------------------------- Commercial $ 229,305 $ 164,967 Consumer 28,201 24,364 Home Equity Lines 28,383 25,558 Residential mortgages 20,921 27,423 -------------------------- 306,810 242,312 Less deferred loan fees (costs), net (81) 37 -------------------------- $ 306,891 $ 242,275 ========================== A summary of activity in the allowance for loan losses for the years ended December 31, 2001, 2000, and 1999 is as follows: (In thousands) 2001 2000 1999 - ---------------------------------------------------------------------------- Balance at beginning of year $ 3,463 $ 2,328 $ 1,457 Adjustment for loans acquired -- 387 -- Provision for loan losses 1,215 1,110 924 Loans charged-off, net of recoveries (392) (362) (53) ------------------------------- Balance at end of year $ 4,286 $ 3,463 $ 2,328 =============================== At December 31, 2001, nonperforming assets consisted of nonaccrual loans in the amount of $3.1 million. At December 31, 2000, nonperforming assets consisted of nonaccrual loans in the amount of $381,000. Unrecognized income on loans in nonaccrual at December 31, 2001 and 2000 were $149,000 and $28,000, respectively. At December 31, 2001 and 2000, there were no loans past due greater than 90 days and still accruing interest. 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 loan customers. Total loans to such groups at December 31, 2001 and activity during the year ended December 31, 2001, is summarized as follows: (In thousands) Beginning balance $9,990 New loans 5,333 Principal repayments (7,037) ------ Ending balance $8,286 ====== 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION In addition, such groups had available lines of credit in the amount of $2.1 million at December 31, 2001. The Company paid an aggregate of approximately $608,000, $1.1 million, and $274,000 to companies owned by members of the board of directors for leased space, equipment, construction and consulting services during 2001, 2000 and 1999, respectively. 6. Premises and Equipment - -------------------------------------------------------------------------------- Premises and equipment at December 31, 2001 and 2000 are as follows: (In thousands) 2001 2000 - -------------------------------------------------------------------------------- Land $ 744 $ 744 Buildings and leasehold improvements 3,343 3,161 Furniture and equipment 3,011 2,523 Automobiles 187 159 Construction in progress 35 121 ---------------------- 7,320 6,708 Less accumulated depreciation and amortization (2,311) (1,559) ---------------------- $ 5,009 $ 5,149 ====================== 7. Deposits - -------------------------------------------------------------------------------- At December 31, 2001, the scheduled maturities of certificates of deposit are as follows: Weighted Average (In thousands) Balance Rate - ------------------------------------------------------------------------------ 2002 $156,684 4.15% 2003 7,142 4.58% 2004 7,396 4.70% 2005 3,019 4.35% 2006 and thereafter 179 4.04% ---- ---------------------- $174,420 4.19% ====================== 8. Federal Home Loan Bank Advances - -------------------------------------------------------------------------------- Advances from the Federal Home Loan Bank had a weighted average rate of 3.60% at December 31, 2001 and were collateralized by certain 1 - 4 family mortgages and qualifying commercial loans. In addition, the Company pledged certain investment securities with an amortized cost of $11.1 million (Note 3). Advances outstanding at December 31, 2001 mature from November 2005 through February 2011. At December 31, 2001, the Company had an additional $31.3 million of credit available with the FHLB. 9. Income Taxes - -------------------------------------------------------------------------------- Income taxes charged to operations for the years ended December 31, 2001, 2000, and 1999 consist of the following components: (In thousands) 2001 2000 1999 - ----------------------------------------------------------------------------- Current income tax expense $ 1,458 $ 1,103 $ 233 Deferred income tax expense (benefit) (978) (1,139) (273) --------------------------------- Total income tax expense (benefit) $ 480 $ (36) $ (40) ================================= 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION The difference between income tax and the amount computed by applying the statutory federal income tax rate of 34% was primarily a result of the change in the valuation allowance on the net deferred tax asset for the years ended December 31, 2001, 2000 and 1999 and certain non-deductible merger expenses in those years. Significant components of deferred tax assets and liabilities at December 31, 2001 and 2000 are as follows: (In thousands) 2001 2000 - ---------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses $ 1,322 $ 1,020 Directors fees 468 389 Deferred compensation 353 377 Amortization 205 133 Preopening expenditures 18 58 Deferred loan fees and costs 8 16 Other 83 86 ----------------------- Total deferred tax assets 2,457 2,079 Valuation allowance -- (566) ----------------------- Net deferred tax assets 2,457 1,513 ----------------------- Deferred tax liabilities: Unrealized security gains (357) -- Depreciation (16) (50) FHLB stock (51) (51) Total deferred tax liabilites (424) (101) ----------------------- Net deferred tax assets $ 2,033 $ 1,412 ======================= 10. Leases - -------------------------------------------------------------------------------- The Company has noncancelable operating leases for its corporate office and branch locations that expire at various times through 2010. Future minimum lease payments under the leases for years subsequent to December 31, 2001 are as follows: (In thousands) 2002 $ 628 2003 645 2004 636 2005 638 2006 547 Thereafter 1,951 ----- $5,045 ====== During 2001, 2000, and 1999, payments under operating leases were $666,000, $392,000, and $212,000, respectively. 11. Regulatory Matters and Restrictions - -------------------------------------------------------------------------------- The Company and the Bank are subject to various regulatory capital requirements administered by the 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 consolidated financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as set forth in the table below. As of June 30, 2001, the most recent notification from regulators, the Bank was categorized as "well capitalized" by regulatory authorities. There are no conditions or events since that date that management believes could have changed the Bank's category. Management believes, as of December 31, 2001, that the Company meets all capital requirements to which it is subject. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statues Section 53-87. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank. Dividends as shown in the consolidated financial statements of the Company reflect only those dividends paid by Home Savings prior to the effective merger date. To be categorized as well capitalized, the Company and the Bank must maintain minimum amounts and ratios. The Company's actual capital amounts and ratios as of December 31, 2001 and December 31, 2000 and the minimum requirements are presented in the following table.
Minimum Requirements To Be: Actual Adequately Capitalized Well Capitalized - ---------------------------------------------------------------------------------------------------------------------------- (In thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------------------------- 2001 Total Capital (to Risk Weighted Assets) $36,507 10.88% $26,851 8.00% $33,564 10.00% Tier I Capital (to Risk Weighted Assets) 32,309 9.63% 13,425 4.00% 20,138 6.00% Tier I Capital (to Average Assets) 32,309 8.75% 14,766 4.00% 18,458 5.00% 2000 Total Capital (to Risk Weighted Assets) $33,162 13.02% $20,382 8.00% $25,479 10.00% Tier I Capital (to Risk Weighted Assets) 29,974 11.76% 10,191 4.00% 15,287 6.00% Tier I Capital (to Average Assets) 29,974 10.27% 11,676 4.00% 14,595 5.00%
12. Employee Benefit Plans - -------------------------------------------------------------------------------- 401(k) Plan The Company instituted a 401(k) plan for the benefit of its employees, which includes provisions for employee contributions, subject to limitation under the Internal Revenue Code, with the Company to match contributions up to 6% of the employee's salary. The Plan provides that employees' contributions are 100% vested at all times and the Company's contributions vest 25% during the third year of service, an additional 25% during the fourth year of service and the remaining 50% during the fifth year of service. After December 31, 2001 the vesting schedule was changed to 20% per year in years two through four with the final 40% vesting in year five. Further, the Company may make additional contributions on a discretionary basis. Aggregate contributions for 2001, 2000, and 1999 were $225,000, $193,000, and $132,000, respectively. Defined Benefit Plan The employees of the former Home Savings participated in a non-contributory defined benefit pension plan. The Company terminated this plan during 2000 and distributed all vested balances to the participants. There were no expenses associated with the plan incurred during 2001 and 2000. Net periodic pension cost for the year ended September 30, 1999 included the following components: (In thousands) 1999 - --------------------------------------------------------------- Service cost for benefits earned $25 Interest cost on projected benefit obligation 24 Actual return on plan assets (24) Net amortization and deferral 10 --- $35 === 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION There were no plan assets or liabilities at December 31, 2001 or 2000 due to the termination of the plan. Total pension plan expense charged to operations for the fiscal year ended September 30, 1999 was $39,000. There were no charges to operations during 2001 or 2000. Employee Stock Ownership Plan The employees of the former Home Savings participated in an Employee Stock Ownership Plan ("ESOP"). The ESOP used $717,000 in borrowings to purchase the equivalent of 91,875 shares of the Company's stock upon the mutual to stock conversion of Home Savings. These shares were allocated to employees and expensed at fair market value at the time they were committed to be released through the repayment of the associated borrowings. The ESOP debt was fully repaid by December 31, 1999. The financial statements for the year ended December 31, 1999 includes compensation expense of $20,000 and interest expense of $3,000 related to the ESOP. There were no such charges during 2001 or 2000 due to the paid status of the debt. In addition, during 1999, an expense of $52,000 related to the ESOP was charged to merger related expenses. Management Recognition Plan (MRP) On July 17, 1996, prior to the merger with the Company, Home Savings adopted an MRP Plan and committed to provide funding to the MRP Plan to purchase 35,854 shares of Home Saving's common stock, converted to 45,893 shares of the Company's stock, on that date. On July 17, 1996, 33,724 shares, with a market value of $382,032, were issued to the MRP Plan and awarded to certain officers and employees as restricted stock which were to vest at a rate of 20% per year over the five year period ending July 17, 2001. The remaining 9,507 shares could have been purchased and awarded at the discretion of the Board of Directors to participants in the future by Trustees of the MRP Plan. The plan contained provisions providing for forfeiture of unvested shares in the event of termination of employment, and vesting in the event of death, disability, or change in control. Per the terms of the plan, all unvested shares as of March 31, 1999, the effective date of the merger, became fully vested. The shares issued to the MRP plan were recorded as outstanding shares, and the unvested portion has been recorded as unearned compensation through a contra equity account. The consolidated statements of operations for the year ended December 31, 1999 includes compensation expense of $19,000 relating to the scheduled vesting of MRP shares. There were no such expenses recorded during the years ended December 31, 2001 and 2000 since all vested shares were distributed in 1999. In addition, during 1999, an expense of $175,000 related to the MRP was charged to merger related expenses. 13. Stock Options - ----------------- The Company's Board of Directors has approved an incentive stock option plan and a nonqualified stock option plan for the benefit of its employees and its employees and directors, respectively. The Board has reserved 200,000 shares for each of the plans. Grants of options are made by the Board or the Compensation Committee. All grants must be at no less than fair market value on the date of grant, must be exercised no later than 10 years from the date of grant, and may be subject to some vesting provisions. A summary of the changes during the years ending December 31, 2001, 2000 and 1999 of the Company's Plan, including the weighted average exercise price ("WAEP") is presented below:
2001 2000 1999 ------------------------------------------------------------------------ Shares WAEP Shares WAEP Shares WAEP ------------------------------------------------------------------------ Outstanding at beginning of year 313,744 $ 10.36 215,251 $ 11.46 180,851 $ 11.51 Granted 108,350 10.62 100,800 8.09 34,400 11.16 Exercised (650) 9.44 -- -- -- -- Terminated (5,500) 9.94 (2,307) 12.05 -- -- Outstanding at end of year 415,944 $ 10.43 313,744 $ 10.36 215,251 $ 11.46 ======================================================================== Options exercisable at year-end 343,714 $ 10.52 223,514 $ 10.48 143,931 $ 11.20 ========================================================================
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION The following table summarizes information about the Plan's stock options at December 31, 2001: Remaining Number Contractual Number Exercise Price Outstanding Life Exercisable --------------------------------------------------------------------- $ 8.00 93,550 8.0 years 65,170 $ 8.63 500 9.0 years 100 $ 8.98 63,094 4.8 years 63,094 $ 10.25 7,000 7.8 years 2,000 $ 10.50 8,000 9.2 years -- $ 10.65 99,600 10.0 years 99,600 $ 11.00 43,000 5.5 years 36,800 $ 11.13 28,350 7.3 years 11,340 $ 13.75 18,000 6.1 years 14,400 $ 14.00 54,850 6.6 years 51,210 ---------------------------------------------- 415,944 343,714 ============================================== The Company accounts for its Plans under the provisions of APB Opinion No. 25. However, the Company is required to disclose the pro forma effects on net income as if it had recorded compensation based on the fair value of options granted. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants: 2001 2000 1999 - -------------------------------------------------------------------------- Dividend yield -- -- -- Expected volatility 29.6% 29.2% 30.3% Riskfree interest rate 4.95% 6.82% 5.11% Expected life 7 years 7 years 7 years The weighted average fair value of options granted during 2001, 2000 and 1999 was $4.57, $3.84 and $4.19, respectively. Had compensation cost for the Company's stock-based compensation plans, as described above, been determined consistent with SFAS No. 123, the Company's net income (loss) and income (loss) per share for the years ended December 31, 2001, 2000 and 1999 would have been decreased to the pro forma amounts indicated below:
(In thousands, except per share data) 2001 2000 1999 - ------------------------------------------------------------------------------------------- Net income (loss) As reported $2,420 $2,173 $ (851) Pro forma 2,338 1,871 (998) Net income (loss) per share - Basic and diluted As reported $ 0.65 $ 0.59 $(0.23) Pro forma 0.63 0.50 (0.27)
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 14. Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk - --------------------------------------------------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. At December 31, 2001, these financial instruments were comprised entirely of unused lines of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company's exposure to credit loss in the event of nonperformance by the other party is represented by the contractual amount of those instruments. The Company uses the same credit policies in making these commitments as they do for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include trade accounts receivable, property, plant, and equipment and income-producing commercial properties. Since many unused lines of credit expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Unused lines of credit and outstanding letters of credit were $71.3 million and $549,000, respectively, at December 31, 2001 and $75.0 million and $349,000, respectively, at December 31, 2000. The Bank's lending is concentrated primarily in Wake, Chatham, Northampton, Granville, Warren, and Lee counties in North Carolina. 15. Fair Value of Financial Instruments - --------------------------------------- Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS No. 107"), requires the disclosure of estimated fair values for financial instruments. Quoted market prices, if available, are utilized as an estimate of the fair value of financial instruments. Because no quoted market prices exist for a significant part of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net amounts ultimately collected could be materially different from the estimates presented below. In addition, these estimates are only indicative of the values of individual financial instruments and should not be considered an indication of the fair value of the Company taken as a whole. The fair values of cash and due from banks, Federal funds sold, interest bearing deposits in banks and accrued interest receivable/payable are equal to the carrying value due to the nature of the financial instruments. The estimated fair values of investment securities and mortgage-backed securities are provided in Note 3 to the Financial Statements. The fair value of the net loan portfolio has been estimated using the present value of expected cash flows, discounted at an interest rate giving consideration to estimated prepayment risk and credit loss factors. The fair value of the Bank's loan portfolio at December 31, 2001 and 2000 were as follows: (In thousands) 2001 2000 ------------------------------------------------------------------ Loans: Carrying amount $302,605 $238,812 Estimated fair value 304,736 238,043 The fair values of deposit liabilities and repurchase agreements with no stated maturities has been estimated to equal the carrying amount (the amount payable on demand), totaling $143.2 million and $100.9 million at December 31, 2001 and 2000, respectively. Therefore, the fair 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION value estimates for these products do not reflect the benefits that the Bank receives from the low-cost, long-term funding they provide. These benefits are considered significant. The fair values of certificates of deposits and advances from the FHLB is estimated by discounting the future cash flows using the current rates offered for similar deposits and advances with the same remaining maturities. The carrying value and estimated fair values of certificates of deposit and FHLB advances at December 31, 2001 and 2000 were as follows: (In thousands) 2001 2000 -------------------------------------------------------------------- Certificates of deposits: Carrying amount $174,420 $190,047 Estimated fair value 175,438 190,673 Advances from the FHLB: Carrying amount $ 50,000 $ 15,000 Estimated fair value 50,284 14,329 There is no material difference between the carrying amount and estimated fair value of off-balance sheet items totaling $71.8 million and $75.3 million at December 31, 2001 and 2000, respectively, which are primarily comprised of unfunded loan commitments. The Company's remaining assets and liabilities are not considered financial instruments. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 16. Parent Company Financial Information - -------------------------------------------------------------------------------- Condensed financial information of the parent company of the Bank at December 31, 2001 and 2000 and for the years ended December 31, 2001 and 2000 and the period from April 1, 1999 to December 31, 1999 is presented below:
(In thousands) 2001 2000 - ------------------------------------------------------------------------------------------- Condensed Balance Sheet Assets: Cash $ 3 $ 100 Equity investment in subsidiary 37,336 34,915 ------------------------- Total assets $ 37,339 $ 35,015 ========================= Liabilities: Deferred tax liabilties $ 357 $ -- ------------------------- Total liabiltiies 357 -- ------------------------- Shareholders' equity: Common stock 31,850 31,850 Treasury stock (696) -- Accumulated other comprehensive income 568 323 Retained earnings 5,260 2,842 Total shareholders' equity 36,982 35,015 ------------------------- Total liabilities and shareholders' equity $ 37,339 $ 35,015 =========================
2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- Condensed Statements of Operations Dividends from wholly-owned subsidiaries $ 600 $ -- $ 100 Equity in earnings (losses) of subsidiaries 1,820 2,173 (951) ------------------------------------- Net income (loss) $ 2,420 $ 2,173 $ (851) ------------------------------------- Condensed Statements of Cash Flows Operating activities: Net income (loss) $ 2,420 $ 2,173 $ (851) Equity in undistributed (earnings) losses of subsidiary (1,820) (2,173) 951 ------------------------------------- Cash flow provided by operating activities 600 -- 100 ------------------------------------- Financing activities: Proceeds from issuance of common stock 6 -- -- Payments to repurchase common stock (703) -- -- ------------------------------------- Cash flow used in financing activities (697) -- -- ------------------------------------- Net increase in cash and cash equivalents (97) -- 100 Cash and cash equivalents, beginning of period 100 100 -- ------------------------------------- Cash and cash equivalents, end of period $ 3 $ 100 $ 100 =====================================
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CAPITAL BANK CORPORATION 17. Selected Quarterly Financial Data (Unaudited) - -------------------------------------------------------------------------------- Selected unaudited quarterly balances and results for the years ended December 31, 2001 and 2000 are as follows:
2001 ------------------------------------------------------------ Three Months Ended ------------------------------------------------------------ (In thousands except per share data) Dec. 31 Sept. 30 June 30 March 31 - ----------------------------------------------------------------------------------------------------------------- Assets $ 406,741 $ 391,212 $ 377,362 $ 362,809 Loans 306,891 276,115 268,132 261,731 Investment securities 73,702 78,091 78,085 70,895 Deposits 304,443 309,776 296,088 289,008 Shareholders' equity 36,983 37,220 36,200 36,022 Net interest income $ 2,967 $ 2,806 $ 2,800 $ 2,899 Provision for loan losses 315 300 300 300 Other operating income 1,377 1,183 1,134 796 Other operating expenses 3,049 2,927 3,057 2,814 Income taxes 349 272 215 (356) ------------------------------------------------------------ Net income $ 631 $ 490 $ 362 $ 937 ============================================================ Net income per share - Basic and diluted $ .17 $ .13 $ .10 $ .25 ============================================================
2001 ------------------------------------------------------------ Three Months Ended ------------------------------------------------------------ (In thousands except per share data) Dec. 31 Sept. 30 June 30 March 31 - ----------------------------------------------------------------------------------------------------------------- Assets $ 343,620 $ 321,666 $ 315,463 $ 245,358 Loans 242,275 232,373 214,677 175,445 Investment securities 61,947 54,687 54,150 47,005 Deposits 279,094 266,783 255,992 189,710 Shareholders' equity 35,015 33,246 31,997 31,286 Net interest income $ 2,946 $ 2,829 $ 2,720 $ 2,155 Provision for loan losses 345 255 255 255 Other operating income 648 639 529 377 Other operating expenses 2,659 2,613 2,447 1,877 Income taxes (36) -- -- -- ------------------------------------------------------------ Net income $ 626 $ 600 $ 547 $ 400 ============================================================ Net income per share - Basic and diluted $ .17 $ .16 $ .15 $ .11 ============================================================
40 REPORT OF INDEPENDENT ACCOUNTANTS CAPITAL BANK CORPORATION The Board of Directors and Shareholders Capital Bank Corporation Raleigh, North Carolina In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Capital Bank Corporation at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Pricewaterhousecoopers LLP - ------------------------------ January 30, 2002 Raleigh, North Carolina 41 BOARDS OF DIRECTORS CAPITAL BANK CORPORATION - -------------------------------------------------------------------------------- O. A. Keller, III (Chairman of the Board) Managing Member, Keller Group, LLC William R. Gilliam (Vice Chairman of the Board) Former President and Chief Executive Officer First Community Financial Corporation and Community Savings Bank James A. Beck President and Chief Executive Officer Capital Bank Corporation and Capital Bank William C. Burkhardt Chairman of Pharma-Derm Solutions, Inc. Director of Scana Corporation and Industrial Microwave Systems Robert L. Jones Chairman Tri Properties, Inc. Oscar A. Keller, Jr. President and Chief Executive Officer Parkview Retirement Home, Inc. Charles A. LeGrand Retired Hosiery Executive James D. Moser, Jr. Certified Public Accountant Gilliam Coble & Moser, LLP Samuel J. Wornom, III President and Chief Executive Officer Nouveau Properties CAPITAL BANK - -------------------------------------------------------------------------------- O. A. Keller, III (Chairman of the Board) Managing Member, Keller Group, LLC William R. Gilliam (Vice Chairman of the Board) Former President and Chief Executive Officer First Community Financial Corporation and Community Savings Bank Charles F. Atkins President Cam-L Corporation Lamar Beach Retired Former Chief Executive Officer Spanco Corporation James A. Beck President and Chief Executive Officer Capital Bank Corporation and Capital Bank Edwin E. Bridges Marketing and Public Relations Officer Capital Bank William C. Burkhardt Chairman of Pharma-Derm Solutions, Inc. Director of Scana Corporation and Industrial Microwave Systems L.I. Cohen Chief Executive Officer Lee Iron & Metal Company David J. Gospodarek Certified Public Accountant Gospodarek, Lunsford & Strickland, CPA, PA Carolyn W. Grant Investment Broker Trademark Properties Julian P. Griffin Retired Transportation Executive and Minister John F. Grimes Partner Budd Tire Company Darleen M. Johns President and Chief Executive Officer Alphanumeric Systems, Inc. Robert L. Jones Chairman Tri Properties, Inc. Oscar A. Keller, Jr. President and Chief Executive Officer Parkview Retirement Home, Inc. Charles A. LeGrand Retired Hosiery Executive Vernon Malone Retired Educator Wake County Commissioner James D. Moser, Jr. Certified Public Accountant Gilliam Coble & Moser, LLP George R. Perkins, III President Frontier Spinning Mills, Inc. Don W. Perry President Lee Brick & Tile Alfred J. Spitzner Metallurgical Consultant J. Rex Thomas President Grubb & Ellis/Thomas Linderman, Inc. Bruce V. Wainright, D.D.S., P.A. President Bruce V. Wainright, DDS Samuel J. Wornom, III President and Chief Executive Officer Nouveau Properties 42 Management Capital Bank Corporation - -------------------------------------------------------------------------------- Executive Officers James A. Beck President and Chief Executive Officer Allen T. Nelson, Jr. Executive Vice President, Secretary, Treasurer and Chief Financial Officer Franklin G. Shell Executive Vice President Chief Credit Officer CAPITAL BANK - -------------------------------------------------------------------------------- Senior Officers and Bank Management Sam P. Adams, Jr. Siler City Market CEO John N. Anthony Senior Vice President Retail Banking Manager James A. Beck President and Chief Executive Officer Charlie T. Bowers, Jr. Lee/Chatham Regional President D. Michael Byrd Senior Vice President Senior Relationship Manager Allen B. Cofiori Senior Vice President Regional Senior Lending Officer - Lee/Chatham Steven E. Crouse Senior Vice President Controller William L. Dawkins Wake Regional President Robert S. Denlinger Senior Vice President Operations Manager Robert R. Levine Senior Vice President Mortgage Loan Department Manager Thomas K. Manning Alamance Regional President Ernest F. McAllister Cary Market CEO Christopher B. McCoy, Jr. Northern Regional President Allen T. Nelson, Jr. Executive Vice President, Secretary and Chief Financial Officer Karen H. Priester Senior Vice President Regional Senior Lending Officer - Wake Daniel M. Roberts Senior Vice President Regional Senior Lending Officer - Alamance Rick C. Rogers President and CEO Capital Bank Investment Services, Inc. Franklin G. Shell Executive Vice President Chief Credit Officer F. Todd Simpson Senior Vice President Senior Relationship Manager Ruby L. Ward Senior Vice President Government Lending Department Manager 43 CORPORATE INFORMATION CAPITAL BANK CORPORATION Annual Meeting - -------------------------------------------------------------------------------- The 2002 Annual Meeting of the Shareholders of Capital Bank Corporation will be held at 3:00 p.m., Thursday, May 23, 2002, at the Paramount Theater, 128 E. Front Street, Burlington, North Carolina. Stock Market Information - -------------------------------------------------------------------------------- Capital Bank common stock commenced trading on the OTC Bulletin Board on July 22, 1997 under the symbol "CBKN" and on December 18, 1997 was listed on the NASDAQ Small Cap Market under the symbol "CBKN." On March 31, 1999 shares of Capital Bank stock were converted on a share-for-share basis into common stock of Capital Bank Corporation. On March 15, 2002, there were approximately 1,128 shareholders of record and 2,051 beneficial holders of stock. The following table sets forth market prices per share of common stock for the periods indicated. The price ranges reflect the high and low sales price of actual transactions. 2001 High Low Close ----------------------------------------------------- First Quarter 11.25 8.63 10.25 Second Quarter 11.70 10.25 11.70 Third Quarter 13.50 11.05 11.05 Fourth Quarter 11.50 10.40 10.80 2000 High Low Close ----------------------------------------------------- First Quarter 9.38 7.13 7.19 Second Quarter 10.25 7.00 9.00 Third Quarter 10.00 8.13 9.25 Fourth Quarter 10.00 8.19 8.75 Transfer Agent - -------------------------------------------------------------------------------- Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 (800) 368-5948 Financial Information - -------------------------------------------------------------------------------- To obtain financial information or a copy of the Company's Annual Report or Form 10-K, please contact: Allen T. Nelson, Jr. Executive Vice President and Chief Financial Officer Capital Bank Corporation P. 0. Box 18949 Raleigh, NC 27619-8949 (919) 645-6321 44 BANKING OFFICES CAPITAL BANK CORPORATION Burlington - Main Office Raleigh - Corporate Center 708 South Church Street 4901 Glenwood Avenue Burlington, NC 27215 Raleigh, NC 27612 (336) 227-3631 (919) 645-6449 Burlington - Graham Hopedale Raleigh - Six Forks Rd. 257 South Graham Hopedale Rd. 8816 Six Forks Rd., Suite 101 Burlington, NC 27215 Raleigh, NC 27615 (336) 228-8385 (919) 861-2050 Burlington - Huffman Mill Sanford - Main Office 166 Huffman Mill Rd. 130 N. Steele Street Burlington, NC 27215 Sanford, NC 27330 (336) 229-2735 (919) 775-4000 Cary - Harrison Ave. Sanford - Kendale Plaza 915 North Harrison Ave. 2800 Williams Street Cary, NC 27513 Sanford, NC 27330 (919) 319-1049 (919) 775-2800 Cary - Kildaire Farm Rd. Sanford - Tramway Crossing 1201 Kildaire Farm Rd. 2222 Jefferson Davis Highway Cary, NC 27511 Sanford, NC 27330 (919) 469-9400 (919) 776-2222 Graham Seaboard Office 227 South Main St. 200 S. Main St. Graham, NC 27253 Seaboard, NC 27876 (336) 226-1198 (252) 589-2821 Oxford - Main Office Siler City Office 109 Hillsboro Street 300 East Raleigh St. Oxford, NC 27565 Siler City, NC 27344 (919) 693-9000 (919) 742-4186 Oxford - Linden Ave. Warrenton Office 703 Linden Ave. 207 S. Main St. Oxford, NC 27565 Warrenton, NC 27589 (919) 693-6840 (252) 257-1231 Raleigh - Falls of Neuse Rd. Woodland Office 4400 Falls of Neuse Rd. 123 E. Main St. Raleigh, NC 27609 Woodland, NC 27897 (919) 878-3100 (252) 587-6200 www.capitalbank-nc.com (800) 308-3971 This annual report to stockholders contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and other business of the Company that are subject to various factors which could cause actual results to differ materially from those estimates. Factors which could influence the estimates include changes in general and local market conditions, legislative and regulatory conditions, and an adverse interest rate environment. CAPITAL BANK CORPORATION 4901 Glenwood Avenue Raleigh, NC 27612 (919) 645-6400 EX-21 6 exhibit21.txt EXHIBIT 21 Subsidiaries of the Registrant Capital Bank Capital Bank Investment Services, Inc. EX-23 7 exhibit23.txt EXHIBIT 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File No. 333-76919), Form S-8 (File No. 333-42628) and Form S-8 (File No. 333-82602) of Capital Bank Corporation of our report dated January 30, 2002, relating to the financial statements of Capital Bank Corporation, which appears in the annual report to shareholders, which is incorporated by reference in this Annual Report on Form 10-K. /s/ PRICEWATERHOUSECOOPERS LLP - ------------------------------ Raleigh, North Carolina March 28, 2001 EX-99 8 exhibit99.txt EXHIBIT 99 Risk Factors Relating to the Company We Depend Heavily on Our CEO, James Beck The Company currently depends heavily on the services of its Chief Executive Officer, James A. Beck, and a number of other key management personnel. Even though the Company carries a $2 million key man life insurance policy on Mr. Beck, the loss of his services or of other key personnel could affect the Company in a material and adverse way. The Company's success will also depend in part on its ability to attract and retain additional qualified management personnel who have experience both in sophisticated banking matters and in operating a small to mid-size bank. Competition for such personnel is strong in the banking industry and the Company may not be successful in attracting or retaining the personnel it requires. The Company attempts to effectively compete in this area by offering financial packages that include incentive-based compensation and the opportunity to join in the rewarding work of building a new bank. Government Regulations May Prevent or Impair 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 the Company's operations. The Company is subject to supervision and periodic examination by the FDIC and the North Carolina State Banking Commission. Banking regulations, designed primarily for the protection of depositors, may limit our growth and the return to you, our investors, by restricting our activities, such as: o the payment of dividends to our shareholders; o possible mergers with or acquisitions by other institutions; o our desired investments; o loans and interest rates; o interest rates paid on our deposits; o the possible expansion of our branch offices; and/or o our ability to provide securities or trust services. The Company also is subject to capitalization guidelines set forth in federal legislation, and could be subject to enforcement actions to the extent that the Company is found by regulatory examiners to be undercapitalized. The Company 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 the future business and earnings prospects of the Company. The cost of compliance with regulatory requirements may adversely affect the Company's ability to operate profitably. Technological Advances Impact Our Business The banking industry is undergoing 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 Trading Volume Has Been Low Compared With Larger Banks The trading volume in Company's common stock on the Nasdaq SmallCap Market has been comparable to other similarly-sized banks since trading began in December 1997. As of April 1, 2002, the Company's common stock will be traded on the Nasdaq National Market. Nevertheless, this trading is relatively low when compared with more seasoned companies listed on the Nasdaq SmallCap Market, the Nasdaq National Market or other stock exchanges. Thus, the market in the Company's stock is limited in scope relative to other companies. In addition, we cannot say with any certainty that an active and liquid trading market for the Company's stock will develop. Our Results Are Impacted by the Economic Conditions of Our Principal Operating Regions Our operations are concentrated in Eastern and Piedmont North Carolina. As a result of this geographic concentration, our results may correlate to the economic conditions in these areas. A deterioration in economic conditions in our market areas, particularly in the industries on which these areas depend, may adversely affect the quality of our loan portfolio and the demand for our products and services, and accordingly, our results of operations. We Compete With Much Larger Companies for Some of the Same Business The banking and financial services business in the Company's market areas is highly competitive and is becoming more competitive as a result primarily of: o changes in regulations; o changes in technology and product delivery systems; and o the accelerating pace of consolidation among financial services providers. 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 are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services. 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. Potential Risks Associated with Acquisitions We intend to continue to explore expanding a branch system through selective acquisitions of existing banks or bank branches in major North Carolina markets. 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 and 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 of Wake, Chatham, Alamance and Lee Counties, North Carolina. In attempting to make such acquisitions, we anticipate competing with other financial institutions, many of which have greater financial and operational resources. 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 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. Recent Terrorist Attacks Could Result in a Material Adverse Effect on the Company's Business On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. In response to these terrorist attacks, the United States military began a military campaign against Al Qaeda terrorist training camps and military installations of the Taliban regime in Afghanistan. The terrorist attacks and the United States military campaign caused and continue to cause significant instability in the world's financial markets and may lead to further armed hostilities. While the short and long term affects of these events and their potential consequences are uncertain, they could have a material adverse effect on general economic conditions, consumer confidence and market liquidity. Among other things, it is possible that interest rates may be affected by these events. If interest rates increase rapidly, it could cause the Company's borrowing costs to increase faster than increases in the interest rates it earns on its loans. If that were to happen, the Company's earnings could be negatively affected. In addition, prior to the events of September 11, 2001, unemployment rates in certain of the Company's market areas were increasing. High unemployment rates in the Company's market areas could have a negative effect on its level of deposits. If unemployment rates continue to rise, due to worsening economic conditions or consumer confidence resulting from the events of September 11, 2001 and their aftermath, the Company's financial condition and results of operations could be adversely affected. -----END PRIVACY-ENHANCED MESSAGE-----