-----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, PJPTs9+jToW5OUps/DXFBwvU2/+wFAZTG3Y/7LEkV7cSqLtHaDvr1fOucHv22ph9 IvpLQaR4KbZSn2KQXZCFXw== 0000914317-06-001356.txt : 20060510 0000914317-06-001356.hdr.sgml : 20060510 20060510122828 ACCESSION NUMBER: 0000914317-06-001356 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060510 DATE AS OF CHANGE: 20060510 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30062 FILM NUMBER: 06824532 BUSINESS ADDRESS: STREET 1: 4901 GLENWOOD AVENUE CITY: RALEIGH STATE: NC ZIP: 27612 BUSINESS PHONE: 9196456312 MAIL ADDRESS: STREET 1: PO BOX 18949 CITY: RALEIGH STATE: NC ZIP: 27619-8949 10-Q 1 form10q-76758_capital.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2006 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From _____ to ____ Commission File Number 000-30062 CAPITAL BANK CORPORATION (Exact name of registrant as specified in its charter) North Carolina 56-2101930 -------------- ---------- State or other jurisdiction of (IRS Employer incorporation or rganization) Identification No.) 4901 Glenwood Avenue Raleigh, North Carolina 27612 ----------------------------- (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (919) 645-6400 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. [X] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No As of May 4, 2006 there were 11,623,629 shares outstanding of the registrant's common stock, no par value. Capital Bank Corporation Form 10-Q CONTENTS
PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements Condensed consolidated statements of financial condition at March 31, 2006 (Unaudited) and December 31, 2005 1 Condensed consolidated statements of income for the three months ended March 31, 2006 and 2005 (Unaudited) 2 Condensed consolidated statements of changes in shareholders' equity for the three months ended March 31, 2006 and 2005 (Unaudited) 3 Condensed consolidated statements of cash flows for the three months ended March 31, 2006 and 2005 (Unaudited) 4 - 5 Notes to condensed consolidated financial statements 6 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 Item 4. Controls and Procedures 24 PART II - OTHER INFORMATION Item 1. Legal Proceedings 25 Item 1A. Risk Factors 25 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 Item 3. Defaults Upon Senior Securities 29 Item 4. Submission of Matters to a Vote of Security Holders 29 Item 5. Other Information 29 Item 6. Exhibits 29 Signatures 31
Item 1 Financial Statements -------------------- CAPITAL BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION March 31, 2006 and December 31, 2005
March 31, December 31, 2006 2005 - ---------------------------------------------------------------------------------------- (Dollars in thousands, except share data) (Unaudited) ASSETS Cash and due from banks: Interest earning $ 6,938 $ 4,603 Noninterest earning 33,435 30,544 Cash held in escrow -- 33,185 Federal funds sold and short term investments 19,444 8,757 Investment securities - available for sale, at fair value 168,894 149,266 Investment securities - held to maturity, at amortized cost 12,138 12,334 Loans - net of unearned income and deferred fees 944,325 668,982 Allowance for loan losses (14,209) (9,592) ----------- ----------- Net loans 930,116 659,390 ----------- ----------- Premises and equipment, net 21,594 14,868 Bank owned life insurance 20,088 19,857 Deposit premium and goodwill, net 67,149 12,853 Accrued interest receivable and other assets 28,771 15,249 ----------- ----------- Total assets $ 1,308,567 $ 960,906 =========== =========== LIABILITIES Deposits: Demand, noninterest bearing $ 107,425 $ 77,847 Savings and interest bearing demand deposits 315,933 237,005 Time deposits 548,874 383,628 ----------- ----------- Total deposits 972,232 698,480 ----------- ----------- Repurchase agreements and federal funds purchased 26,305 14,514 Short-term debt -- 30,000 Federal Home Loan Bank advances 107,798 93,173 Subordinated debentures 30,930 30,930 Accrued interest payable and other liabilities 13,207 10,317 ----------- ----------- Total liabilities 1,150,472 877,414 ----------- ----------- SHAREHOLDERS' EQUITY Common stock, no par value; 20,000,000 shares authorized; 11,623,629 and 6,852,156 issued and outstanding as of March 31, 2006 and December 31, 2005, respectively 143,669 70,985 Retained earnings 16,245 14,179 Accumulated other comprehensive loss (1,819) (1,672) ----------- ----------- Total shareholders' equity 158,095 83,492 ----------- ----------- Total liabilities and shareholders' equity $ 1,308,567 $ 960,906 =========== ===========
See Notes to Condensed Consolidated Financial Statements 1
CAPITAL BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2006 and 2005 (Unaudited) 2006 2005 - -------------------------------------------------------------------------------------------------- (Dollars in thousands, except share and per share data) Interest income: Loans and loan fees $ 17,018 $ 9,742 Investment securities 2,110 1,697 Federal funds and other interest income 542 17 ----------- ----------- Total interest income 19,670 11,456 ----------- ----------- Interest expense: Deposits 6,110 3,182 Borrowings and repurchase agreements 2,170 1,368 ----------- ----------- Total interest expense 8,280 4,550 ----------- ----------- Net interest income 11,390 6,906 Provision (credit) for loan losses 412 (250) ----------- ----------- Net interest income after provision (credit) for loan losses 10,978 7,156 ----------- ----------- Noninterest income: Service charges and other fees 965 657 Mortgage fees and revenues 364 272 Net gain on sale of securities -- 6 Bank owned life insurance 231 123 Other noninterest income 455 282 ----------- ----------- Total noninterest income 2,015 1,340 ----------- ----------- Noninterest expenses: Salaries and employee benefits 4,542 3,149 Occupancy 778 614 Furniture and equipment 492 367 Data processing 489 311 Director fees 376 171 Advertising 255 216 Amortization of deposit premium 343 54 Professional fees 212 322 Telecommunications 176 140 Other expenses 1,151 806 ----------- ----------- Total noninterest expenses 8,814 6,150 ----------- ----------- Income before income tax expense 4,179 2,346 Income tax expense 1,416 791 ----------- ----------- Net income $ 2,763 $ 1,555 =========== =========== Earnings per share - basic $ 0.24 $ 0.23 =========== =========== Earnings per share - diluted $ 0.24 $ 0.22 =========== =========== Weighted average shares Basic 11,616,894 6,754,576 =========== =========== Fully diluted 11,704,315 6,941,776 =========== ===========
See Notes to Condensed Consolidated Financial Statements 2 Capital Bank Corporation Consolidated Statements of Changes in Shareholders' Equity For the Three Months Ended March 31, 2006 and 2005 (Unaudited) (Dollars in thousands, except share data)
Shares of Other Common Common Comprehensive Retained Stock Stock Income Earnings Total ----------- ----------- ----------- ----------- ----------- Balance at January 1, 2005 6,612,787 $ 68,341 $ 305 $ 9,092 $ 77,738 Repurchase of outstanding common stock (50,000) (892) (892) Issuance of common stock for options exercised 2,255 19 19 Net income 1,555 1,555 Other comprehensive loss (1,061) (1,061) ----------- Comprehensive income 494 ----------- Dividends ($0.05 per share) (394) (394) ----------- ----------- ----------- ----------- ----------- Balance at March 31, 2005 6,565,042 $ 67,468 $ (756) $ 10,253 $ 76,965 =========== =========== =========== =========== =========== Balance at January 1, 2006 6,852,156 $ 70,985 $ (1,672) $ 14,179 $ 83,492 Repurchase of outstanding common stock (116,000) (1,847) (1,847) Issuance of common stock for acquisition of 1st State Bancorp, Inc. 4,882,630 74,499 74,499 Issuance of common stock for options exercised 4,843 32 32 Net income 2,763 2,763 Other comprehensive loss (147) (147) ----------- Comprehensive income 2,616 ----------- Dividends ($0.06 per share) (697) (697) ----------- ----------- ----------- ----------- ----------- Balance at March 31, 2006 11,623,629 $ 143,669 $ (1,819) $ 16,245 $ 158,095 =========== =========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements 3
CAPITAL BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 2006 and 2005 (Unaudited) 2006 2005 - ----------------------------------------------------------------------------------------- (Dollars in thousands) Cash Flows From Operating Activities: Net income $ 2,763 $ 1,555 Adjustments to reconcile net income to net cash used in operating activities: Amortization of deposit premium 343 54 Depreciation 481 362 Net gains on sale of securities available for sale -- (6) Change in held for sale loans, net (2,458) (1,550) Amortization of premiums on securities, net 38 76 Deferred income tax expense 1,548 135 Provision (credit) for loan losses 412 (250) Changes in assets and liabilities: Accrued interest receivable and other assets 4,688 (1,243) Accrued interest payable and other liabilities (141) 2,457 Other operating activities, net -- -- --------- --------- Net cash provided by operating activities 7,674 1,590 --------- --------- Cash Flows From Investing Activities: Loan repayments (originations), net (38,375) 8,280 Additions to premises and equipment (1,175) (445) Net (purchase) sales of Federal Home Loan Bank stock 767 (47) Purchase of securities available for sale (15,489) (7,491) Purchase of securities held to maturity -- (973) Proceeds from maturities of securities available for sale 2,427 4,637 Proceeds from sales of securities available for sale 102,396 2,430 Proceeds from maturities of securities held to maturity 199 261 Net cash paid in merger transaction (37,470) -- Proceeds from sales of property and equipment 12 -- --------- --------- Net cash provided by investing activities 13,292 6,652 --------- --------- Cash Flows From Financing Activities: Net increase in deposits 1,716 7,202 Net increase (decrease) in repurchase agreements 11,791 (2,409) Net decrease in borrowings (19,519) (1,456) Repayment of short-term debt (30,000) -- Distribution of cash held in escrow 33,185 -- Dividends paid (411) (397) Issuance of common stock for options and other plans 32 19 Repurchase of common stock (1,847) (892) Other financing activities, net -- -- --------- --------- Net cash (used in) provided by financing activities (5,053) 2,067 --------- --------- Net change in cash and cash equivalents 15,913 10,309 Cash and cash equivalents at beginning of period 43,904 23,011 --------- --------- Cash and cash equivalents at end of period $ 59,817 $ 33,320 ========= ========= (continued on next page)
See Notes to Condensed Consolidated Financial Statements 4 CAPITAL BANK CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Three Months Ended March 31, 2006 and 2005 (Unaudited) 2006 2005 - ------------------------------------------------------------------------ (Dollars in thousands) Supplemental Disclosure of Cash Flow Information Transfer of loans and premises and equipment to other real estate owned $ 2,142 $ 116 ======== ======== Dividends payable $ 697 $ 394 ======== ======== Cash paid for: Income taxes $ -- $ 223 ======== ======== Interest $ 7,992 $ 4,414 ======== ======== Acquisition of 1st State Bancorp Fair value of assets acquired $429,981 $ -- Issuance of common stock $ 74,499 $ -- Cash paid $ 46,570 $ -- Liabilities assumed $308,912 $ -- See Notes to Condensed Consolidated Financial Statements 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Significant Accounting Policies and Interim Reporting The accompanying unaudited condensed consolidated financial statements include the accounts of Capital Bank Corporation (the "Company") and its wholly owned subsidiary, Capital Bank (the "Bank"). In addition, the Company has interests in three trusts, Capital Bank Statutory Trust I, II, and III (hereinafter collectively referred to as the "Trusts"). The Trusts have not been consolidated with the financial statements of the Company. The interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. They do not include all of the information and footnotes required by such accounting principles for complete financial statements and therefore should be read in conjunction with the audited consolidated financial statements and accompanying footnotes in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, as amended. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities as well as the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments necessary for a fair presentation of the financial position and results of operations for the periods presented have been included and all significant intercompany transactions have been eliminated in consolidation. All such adjustments are of a normal and recurring nature. Certain amounts reported in prior periods have been reclassified to conform to the current presentation. Such reclassifications have no effect on net income or shareholders' equity as previously reported. The results of operations for the three month period ended March 31, 2006 are not necessarily indicative of the results of operations that may be expected for the year ended December 31, 2006. The balance sheet at December 31, 2005 has been derived from the audited consolidated financial statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, as amended. The accounting policies followed are as set forth in Note 1 of the Notes to Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, as amended. In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 154, Accounting Changes and Error Corrections ("SFAS 154"), which replaces APB No. 20, Accounting Changes ("APB 20"), and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies to all voluntary changes in accounting principles and requires retrospective application of changes in accounting principle to prior period financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effects of the change. SFAS 154 carries forward without change the guidance contained in APB 20 for reporting the correction of an error and a change in accounting estimate. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company 6 adopted SFAS 154 effective January 1, 2006. The adoption of SFAS 154 had no impact on the Company's financial position or results of operations. In March 2006, the FASB issued SFAS No. 156, Accounting For Servicing of Financial Assets, an Amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, ("SFAS 156") which requires that all separately recognized servicing assets and liabilities be initially measured at fair value, if practicable, and requires entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of Statement 140 for subsequent measurement. SFAS 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. The Company plans to adopt SFAS 156 on January 1, 2007. The adoption of SFAS 156 is not expected to have any material impact on the Company's financial condition or results of operations. 2. Acquisition of 1st State Bancorp On January 3, 2006, the Company completed its acquisition of all the outstanding capital stock of 1st State Bancorp, Inc. ("1st State Bancorp"), the holding company for 1st State Bank. ("1st State Bank"). The total purchase price was approximately $121.1 million, including transaction costs of $6.3 million. The Company issued approximately 4.9 million shares of common stock and paid $40.1 million in cash in exchange for 100% of 1st State Bancorp's outstanding common stock and stock options. The transaction was accounted for under the purchase method of accounting and is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code. An unaudited summary of the preliminary estimated fair values of assets acquired and liabilities assumed is as follows: (Dollars in thousands) Loans receivable, net of allowance for loan losses $ 230,600 Investment securities 110,107 Premises and equipment 7,925 Deposit premium 5,331 Goodwill 49,308 Other assets 26,710 Deposits (272,037) Borrowings (34,144) Other liabilities (2,731) --------- Investment in subsidiary, net of dividends to shareholders and capitalized acquisition costs $ 121,069 ========= 3. Comprehensive Income Comprehensive income includes net income and all other changes to the Company's equity, with the exception of transactions with shareholders ("other comprehensive income"). The Company's comprehensive income for the three month periods ended March 31, 2006 and 2005 are as shown in the Company's Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2006 and 2005 (unaudited). The Company's only components of other comprehensive income relate to unrealized gains and losses on securities available for sale, net of the applicable income tax effect and are as follows: 7 As of March 31, 2006 2005 ------------------ (Dollars in thousands) (Unaudited) Unrealized losses on securities available for sale $ (239) $(1,721) Reclassification of gains recognized in net income -- (6) Income tax benefit 92 666 ------- ------- Other comprehensive loss $ (147) $(1,061) ======= ======= 4. Earnings Per Share The Company is required to report both basic and diluted earnings per share ("EPS"). 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. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock instruments, such as stock options, unless the effect is to reduce a loss or increase earnings per share. For the Company, EPS is adjusted for outstanding stock options using the treasury stock method in order to compute diluted EPS. The following tables provide a computation and reconciliation of basic and diluted EPS for the three month periods ended March 31, 2006 and 2005:
As of March 31, 2006 2005 ----------- ----------- (Dollars in thousands) (Unaudited) Income available to shareholders - basic and diluted $ 2,763 $ 1,555 =========== =========== Shares used in the computation of earnings per share: Weighted average number of shares outstanding - basic 11,616,894 6,754,576 Incremental shares from assumed exercise of stock options 87,421 187,200 ----------- ----------- Weighted average number of shares outstanding - diluted 11,704,315 6,941,776 =========== ===========
Options to purchase approximately 374,000 shares of common stock were used in the diluted calculation. An aggregate of 117,000 options were not included in the diluted calculation because the option price exceeded the average fair market value of the associated shares of common stock. 5. Stock Based Compensation Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, Share-Based Payments ("SFAS 123R"), using the modified-prospective transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123") and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. Beginning January 1, 2006, the Company will recognize the cost of all new employee share-based awards on a straight-line basis over their respective vesting periods, net of estimated 8 forfeitures. The Company previously accounted for stock options using the intrinsic value method in accordance with the provisions of APB Opinion No. 25 ("APB 25"), Accounting for Stock Issued to Employees, and SFAS 123. Under the SFAS 123, the Company was required to disclose the pro forma effects on net income as if it had recorded compensation based on the fair value of options granted. On December 29, 2005, the Compensation/Human Resources Committee of the Board of Directors of the Company approved the acceleration of vesting of all then outstanding unvested stock options awarded under the Company's Equity Incentive Plan. As a result, options to purchase 67,200 shares of the Company's common stock, which would otherwise have vested from time to time over the next five years, became immediately exercisable on December 30, 2005. As a result of the acceleration of vesting, approximately $331,000 of future compensation expense that would have been recognized in operating results under SFAS 123R over the next five years was eliminated. Accordingly, the adoption of SFAS 123R did not have a material impact on the Company's operating results or financial condition. The Company has stock option plans providing for the issuance of up to 650,000 options to purchase shares of the Company's common stock to officers and directors. At March 31, 2006, options for 186,709 shares of common stock remained available for future issuance. In addition, there were approximately 567,000 options which were assumed under various plans from previously acquired financial institutions, of which approximately 218,000 remain outstanding. Grants of options are made by the Board of Directors or its Compensation/Human Resources 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 certain vesting provisions. There were no new stock option grants in the quarter ended March 31, 2006 and all options outstanding as of March 31, 2006 were fully vested. The Company also administers the Capital Bank Corporation Deferred Compensation Plan for Non-Employee Directors ("Deferred Compensation Plan"). Under the Deferred Compensation Plan, eligible directors may elect to defer all or part of their directors' fees for a calendar year, in exchange for common stock of the Company, based on the year-end share price. The amount deferred, if elected, is equal to 125 percent of their total director's fees. Each participant is fully vested in his account balance. The Deferred Compensation Plan generally provides for payment of share units either in shares of common stock of the Company or cash (at the Company's option) after the participant ceases to serve as a director for any reason. The Deferred Compensation Plan is classified as a liability-based plan under SFAS 123R. The following is a summary of stock option information and the weighted average exercise price ("WAEP") for the quarter ended March 31, 2006: Shares WAEP -------- -------- Outstanding at January 1, 2006 495,822 $ 11.25 Granted -- -- Exercised (4,843) 6.92 Terminated -- -- -------- -------- Outstanding at March 31, 2006 490,979 $ 11.70 ======== ======== Options exercisable at March 31, 2006 490,979 $ 11.70 ======== ======== 9 The following table summarizes information about the Company's stock options at March 31, 2006:
Number Contractual Number Exercise Price Outstanding Life in Years Exercisable - --------------------- ------------------- ------------------- ----------------- $6.62 - $9.00 167,925 4.00 167,925 $9.01 - $12.00 105,201 5.31 105,201 $12.01 - $15.00 74,692 2.32 74,692 $15.01 - $18.00 82,911 7.29 82,911 $18.01 - $18.37 60,250 8.99 60,250 ------------------- ------------------- ----------------- 490,979 5.18 490,979 =================== =================== =================
The fair values of the options granted prior to January 1, 2006 had been estimated on the date of the grants using the Black-Scholes option-pricing model. Option pricing models require the use of highly subjective assumptions, including expected stock volatility, which when changed can materially affect fair value estimates. The expected life of the options used in this calculation was the period the options are expected to be outstanding. Expected stock price volatility was based on the historical volatility of the Company's common stock for a period approximating the expected life, the expected dividend yield was based on the Company's historical annual dividend payout, and the risk-free rate was based on the implied yield available on US Treasury issues. The following weighted-average assumptions were used in the determining fair value for options granted in the quarter ended March 31, 2006 and 2005: 2006 2005 -------------------------- Dividend yield -- 1.21% Expected volatility -- 27.7% Risk-free interest rate -- 4.02% Expected life -- 7 years 6. Investment Securities The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2006: 10
(Dollars in thousands) Less Than 12 Months 12 Months or Greater Total --------------------------------------------------------------------------------- Unrealized Unrealized Unrealized Description of Security Fair Value Losses Fair Value Losses Fair Value Losses - --------------------------------------------------------------------------------------------------------------------------------- Available for sale Direct obligations of U.S. government agencies $ 23,003 $ 126 $ 34,558 $ 1,075 $ 57,561 $ 1,201 Municipal bonds 4,686 18 3,925 126 8,611 144 Mortgage-backed securities 24,380 481 39,552 1,573 63,932 2,054 --------------------------------------------------------------------------------- 52,069 625 78,035 2,774 130,104 3,399 --------------------------------------------------------------------------------- Held to maturity Direct obligations of U.S. government agencies 594 3 3,888 108 $ 4,482 $ 111 Municipal bonds -- -- 290 10 290 10 Mortgage-backed securities 2,239 58 4,780 168 7,019 226 --------------------------------------------------------------------------------- 2,833 61 8,958 286 11,791 347 --------------------------------------------------------------------------------- Total at March 31, 2006 $ 54,902 $ 686 $ 86,993 $ 3,060 $ 141,895 $ 3,746 =================================================================================
The unrealized losses on the Company's investments in direct obligations of U.S. government agencies and mortgage-backed securities were primarily the result of interest rate changes. Mortgage-backed securities include securities issued by government agencies and corporate entities. The Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity. Accordingly, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2006. 7. Loans The composition of the loan portfolio by loan classification at March 31, 2006 and December 31, 2005 is as follows: March 31, December 31, (Dollars in thousands) 2006 2005 ------------ ------------ Commercial $ 756,494 $ 555,198 Consumer 32,878 26,222 Home equity lines 98,905 65,566 Residential mortgages 55,953 21,863 ------------ ------------ 944,230 668,849 Plus deferred loan costs, net 95 133 ------------ ------------ $ 944,325 $ 668,982 ============ ============ Loans held for sale as of March 31, 2006 and December 31, 2005 were $6.6 million and $4.2 million, respectively, and were included in the residential mortgage category. 11 Item 2 Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- The following discussion presents an overview of the unaudited financial statements for the three month period ended March 31, 2006 and 2005 for Capital Bank Corporation (the "Company") and it's wholly owned subsidiary, Capital Bank (the "Bank"). This discussion and analysis is intended to provide pertinent information concerning financial position, results of operations, liquidity, and capital resources for the periods covered and should be read in conjunction with the unaudited financial statements and related footnotes contained in Part I, Item 1 of this report. Information set forth below contains various forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which statements represent the Company's judgment concerning the future and are subject to risks and uncertainties that could cause the Company's actual operating results to differ materially. 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 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, as well as the factors set forth in Part II, Item 1A of this report, and the Company's periodic reports and other filings with the Securities and Exchange Commission (the "SEC"). Overview The Bank is a full-service state chartered community bank conducting business throughout North Carolina. The Bank's business consists principally of attracting deposits from the general public and investing these funds in loans secured by commercial real estate, secured and unsecured commercial and consumer loans, single-family residential mortgage loans, and home equity lines. As a community bank, the Bank's profitability depends primarily upon its levels of net interest income, which is the difference between interest income from interest-earning assets and interest expense on interest-bearing liabilities. When interest-earning assets approximate or exceed interest-bearing liabilities, any positive interest rate spread will generate net interest income. The Bank's profitability is also affected by its provision for loan losses, other operating income, and other operating expenses. Other income primarily consists of miscellaneous service charges and ATM fees, fees generated from originating mortgage loans that are sold and the increase in cash surrender value of bank-owned life insurance. Operating expenses primarily consist of compensation and benefits, occupancy related expenses, advertising, data processing, professional fees, telecommunication and other expenses. The Bank's operations are influenced significantly by local economic conditions and by policies of financial institution regulatory authorities. The Bank's cost of funds is influenced by interest rates on competing investments and by rates offered on similar investments by competing financial institutions in our market area, as well as general market interest rates. Lending activities are affected by the demand for financing, which in turn is affected by the prevailing interest rates. 12 Executive Summary As discussed in more detail below, the following is a brief summary of certain of our significant results for the quarter ended March 31, 2006: o The Company reported net income for the quarter ended March 31, 2006 of $2.8 million compared to $1.6 million for the quarter ended March 31, 2005. Fully diluted earnings per share were $0.24 and $0.22 for the quarter ended March 31, 2006 and 2005, respectively. The increase in net income was primarily due to the effects of the 1st State Bancorp merger transaction and a 53 basis point increase in the net interest margin for the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005. o The provision for loan losses for the quarter ended March 31, 2006 was $412,000 compared to a credit in the quarter ended March 31, 2005 of $250,000. The increase in the provision for loan losses is primarily due to an increase in the specific allocation for one loan relationship and the estimated inherent losses associated with the net growth in the loan portfolio during the quarter ended March 31, 2006. Net charge-offs for the quarter ended March 31, 2006 were $3.4 million, or 1.45% of average loans, compared to $99,000, or 0.06% of average loans for the quarter ended March 31, 2005. Charge-offs for the quarter ended March 31, 2006 includes $3.2 million related to one loan relationship that had been fully reserved by 1st State Bank as of December 31, 2005 and had no impact on the Bank's loan loss provision for the quarter ended March 31, 2006 o Net interest income for the quarter ended March 31, 2006 rose to record levels as the net interest margin widened to 4.06%, a 33 basis point increase over the fourth quarter of 2005 and an increase of 53 basis points over the net interest margin for the quarter ended March 31, 2005. Net interest income rose to $11.4 million for the quarter ended March 31, 2006, a 65% increase over the $6.9 million reported in the quarter ended March 31, 2005, primarily due to the infusion of 1st State Bancorp's interest-earning assets, organic loan portfolio growth in the quarter and the continued increase in short term rates by the Federal Reserve. o Non-interest income for the quarter ended March 31, 2006 increased $675,000 to $2.0 million compared to the quarter ended March 31, 2005. This increase is primarily due to higher service charges and other fees as a result of a higher volume of transaction accounts, which were acquired in the 1st State Bancorp merger transaction. o Non-interest expenses were $8.8 million for the quarter ended March 31, 2006 compared to $6.2 million for the quarter ended March 31, 2005. The increase is primarily due to higher salaries and employee benefits, which increased by $1.4 million in the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005. The increase in salaries and employee benefits was primarily due to an increase in the number of personnel employed by the Company as a result of the 1st State Bancorp merger transaction as well as higher costs associated with the Company's growth. Financial Condition Total consolidated assets of the Company at March 31, 2006 were $1,308.6 million compared to $960.9 million at December 31, 2005, an increase of $347.7 million, or approximately 36%. The 13 increase in total consolidated assets for the quarter ended March 31, 2006 is primarily due to a $271 million increase in Capital Bank's loan portfolio, net of the allowance for loan losses, from December 31, 2005, which includes $230 million of net loans acquired in the 1st State Bancorp merger transaction. Total deposits as of March 31, 2006 were $972 million, which represents growth of $274 million from December 31, 2005 and includes $271 million of total deposits acquired in the 1st State Bancorp merger transaction. Total earning assets were $1,151.7 million at March 31, 2006 compared to $843.9 million at December 31, 2005. Earning assets represented 88.0% and 87.8% of total assets as of March 31, 2006 and December 31, 2005, respectively. At March 31, 2006, investment securities were $181.0 million, which includes $7.8 million of investment securities acquired in the 1st State Bancorp merger transaction, compared to $161.6 million at December 31, 2005. The Company sold approximately $102.3 million of investment securities acquired in the 1st State Bancorp merger transaction during January 2006, with proceeds principally being used to repay the $30 million of short-term debt that was outstanding as of December 31, 2005 (used to fund the majority of the cash portion of the 1st State Bancorp merger consideration), fund new loan growth and purchase new investment securities. Interest-earning cash, federal funds sold and short term investments were $26.4 million at March 31, 2006, an increase of $13.0 million from December 31, 2005. The Company has increased its holdings of short-term investment assets to maintain liquidity for loan fundings and future commitments. As of December 31, 2005, the Company had $33.1 million of cash held in escrow, which represented funds the Company was required to deposit with its transfer agent for payment to 1st State Bancorp shareholders as cash consideration in connection with the 1st State Bancorp merger transaction. Earning assets exclude bank owned life insurance, which increased from $19.9 million at December 31, 2005 to $20.1 million at March 31, 2006 due to the increase in cash surrender values. The allowance for loan losses as of March 31, 2006 was $14.2 million and represented approximately 1.50% of total loans at March 31, 2006. The allowance for loan losses increased $4.6 million from the December 31, 2005 balance of $9.6 million. The increase is primarily due to the addition of 1st State Bank's allowance for loan losses, which was $7.6 million as of the January 3, 2006 acquisition date, offset by net charge-offs of $3.4 million, including $3.2 million related to one 1st State Bank loan relationship that had been fully reserved for prior to the closing date of the transaction. Management believes that the amount of the allowance is adequate to absorb the estimated probable losses inherent in the current loan portfolio. See "Asset Quality" for further discussion of the allowance for loan losses. Total deposits as of March 31, 2006 were $972.2 million, an increase of $273.8 million, or 39.2%, from December 31, 2005. The increase was primarily the result of $271 million of deposits acquired in the 1st State Bancorp merger transaction. At March 31, 2006, the Company experienced an increase of $137.8 million, or 39.8%, in certificates of deposit ("CDs") compared to December 31, 2005, which includes $139.8 million of CDs acquired in the 1st State Bancorp merger transaction. Absent the CDs acquired in the 1st State Bancorp merger transaction, CDs would have decreased slightly between December 31, 2005 and March 31, 2006 as a result of CD maturities exceeding new CD sales and renewals. Total time deposits represented 56.5% of total deposits at March 31, 2006 compared to 54.9% at December 31, 2005. Noninterest bearing demand deposit accounts ("DDA") were $107.4 million at March 31, 2006, an increase of $29.6 million, or 38%, from December 31, 2005, which includes $19.8 million of noninterest bearing deposits acquired in the 1st State Bancorp merger transaction. The average 14 balance of noninterest DDA accounts was $100.0 million during the quarter ended March 31, 2006 compared to $62.0 million during the quarter ended March 31, 2005. Total consolidated shareholders' equity was $158.1 million as of March 31, 2006, an increase of $74.6 million from December 31, 2005. The Company issued 4.9 million shares of common stock valued at $74.5 million in connection with the 1st State Bancorp merger transaction. Retained earnings increased by $2.1 million reflecting $2.8 million of net income for the quarter ended March 31, 2006 less $697,000 of dividends paid during the quarter. See Item 1. Financial Statements - Consolidated Statements of Changes in Shareholders' Equity for additional information. Results of Operations Quarter ended March 31, 2006 compared to quarter ended March 31, 2005 - --------------------------------------------------------------------- For the quarter ended March 31, 2006, the Company reported net income of $2.8 million, or $0.24 per diluted share, compared to net income of $1.6 million, or $0.22 per diluted share, for the quarter ended March 31, 2005. Net income increased by $1.2 million primarily due to higher loan and deposit balances on which net interest income and noninterest income are generated. The increased balances were primarily the result of the 1st State Bancorp merger transaction. The Company's net interest margin also widened in the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005 as a result of the increasing interest rate environment. Net interest income increased $4.5 million, or approximately 64.9%, from $6.9 million for the quarter ended March 31, 2005, to $11.4 million for the three month period ended March 31, 2006. Average earning assets increased $345.3 million to $1,158.3 million for the quarter ended March 31, 2006 from $813.0 million for the quarter ended March 31, 2005. Average interest bearing liabilities increased $299.4 million to $1,027.9 million for the quarter ended March 31, 2006 from $728.5 for the quarter ended March 31, 2005. The net interest margin on a fully taxable equivalent basis increased 53 basis points to 4.06% for the quarter ended March 31, 2006 from 3.53% for the quarter ended March 31, 2005. The earned yield on average interest earnings assets was 6.95% and 5.80% for the quarter ended March 31, 2006 and 2005, respectively, while the interest rate on average interest bearing liabilities for those periods was 3.26% and 2.53%, respectively. The increase in the net interest margin is primarily attributed to increases in the benchmark federal funds rates as determined by the Federal Reserve Open Market Committee ("FOMC"). The Company's balance sheet remains asset-sensitive and, as a result, its interest earning assets re-price faster than its interest bearing liabilities. The Company cannot be certain of the direction of the benchmark federal funds rates as set by the FOMC. Further increases by the FOMC will affect the level of the Company's prime rate and likely continue to increase the effective cost of interest-bearing liabilities. The following table shows 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. 15 Average Balances, Interest Earned or Paid, and Interest Yields/Rates Quarter Ended March 31, 2006 and 2005 (Taxable Equivalent Basis - Dollars in Thousands) (1)
2006 2005 ------------------------------------------------------------------------------------ Average Amount Average Average Amount Average Balance Earned Rate Balance Earned Rate ------------------------------------------------------------------------------------ Assets Loans receivable: (2) Commercial $ 738,162 $ 13,677 7.51% $ 533,246 $ 7,927 6.03% Consumer 31,570 640 8.23% 31,823 567 7.23% Home equity 100,319 1,822 7.37% 61,913 874 5.73% Residential mortgages (3) 53,899 878 6.61% 25,447 374 5.96% ------------------------------------------------------------------------------------ Total loans 923,950 17,018 7.47% 652,429 9,742 6.06% Investment securities (4) 194,535 2,303 4.80% 157,963 1,861 4.78% Federal funds sold and other interest on short term investments 39,839 542 5.52% 2,571 17 2.68% ------------------------------------------------------------------------------------ Total interest earning assets 1,158,324 $ 19,863 6.95% 812,963 $ 11,620 5.80% ========================= ========================= Cash and due from banks 31,374 22,466 Other assets 138,602 55,346 Allowance for loan losses (17,155) (10,863) ----------- ----------- Total assets $ 1,311,145 $ 879,912 =========== =========== Liabilities and Equity Savings deposits $ 43,815 $ 60 0.56% $ 15,751 $ 10 0.26% Interest-bearing demand deposits 265,685 1,549 2.36% 174,133 638 1.49% Time deposits 548,217 4,501 3.33% 395,926 2,534 2.60% ------------------------------------------------------------------------------------ Total interest bearing deposits 857,717 6,110 2.89% 585,810 3,182 2.20% Borrowed funds 114,362 1,326 4.70% 106,541 1,019 3.88% Subordinated debt 32,574 597 7.43% 20,620 276 5.43% Repurchase agreements 24,852 247 4.03% 15,480 73 1.91% ------------------------- ------------------------- Total interest-bearing liabilities 1,029,505 $ 8,280 3.26% 728,451 $ 4,550 2.53% ========================= ========================= Non-interest bearing deposits 99,976 61,977 Other liabilities 21,823 11,008 ----------- ----------- Total liabilities 1,151,304 801,436 Shareholders' equity 159,841 78,476 ----------- ----------- Total liabilities and shareholders' equity $ 1,311,145 $ 879,912 =========== =========== Net interest spread (5) 3.69% 3.26% Tax equivalent adjustment $ 193 $ 164 Net interest income and net interest margin (6) $ 11,583 4.06% $ 7,070 3.53%
(1) The taxable equivalent basis is computed using a blended federal and state tax rate of approximately 38%. (2) Loans receivable include nonaccrual loans for which accrual of interest has not been recorded. (3) Includes loans held for sale. (4) The average balance for investment securities exclude the effect of their mark-to-market adjustment, if any. (5) Net interest spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (6) Net interest margin represents the net interest income divided by average interest-earning assets. 16 Interest income on loans increased from $9.7 million for the quarter ended March 31, 2005 to $17.0 million for the quarter ended March 31, 2006. The increase is primarily due to higher average loan balances, which increased by $271.5 million primarily due to loan balances acquired in the 1st State Bancorp merger transaction, and increased loan yields. Yields on commercial, consumer, and home equity increased 148 basis points, 100 basis points and 164 basis points, respectively, in the quarter ended March 31, 2006 compared to the quarter ended March 31, 2005. Higher yields in 2006 reflect the increase in the prime rate charged by the Bank between those two periods. Variable rate loans made up approximately 69.6% of the total loan portfolio at March 31, 2006 compared to 69.3% at March 31, 2005. Interest income on investment securities increased from $1.7 million for the quarter ended March 31, 2005 to $2.1 million for the quarter ended March 31, 2006. The increase is primarily due to an increase in average balances outstanding between the periods, which increased by $36.6 million. The yield on investment securities on a tax-equivalent basis increased from 4.78% in the quarter ended March 31, 2005 to 4.80% in the quarter ended March 31, 2006. The slight increase is due to higher yields on new investment securities purchases offset by the overall lower yield on the acquired 1st State Bank's investment security portfolio. The Company sold $102.3 million of 1st State Bank's investment security portfolio after the completion of the merger. Proceeds were principally used to repay the $30 million of short-term debt that was outstanding at December 31, 2005 (used to fund the majority of the cash portion of the1st State Bancorp merger consideration), fund loan commitments and purchase new investment securities. Interest expense on deposits increased from $3.2 million for the quarter ended March 31, 2005 to $6.1 million for the quarter ended March 31, 2006. The increase is primarily due an increase in the average balance of interest bearing deposits outstanding, which increased $271.9 million primarily due to deposit balances acquired in the 1st State Bancorp merger transaction, and higher deposit rates. The average rate paid on time deposits increased from 2.60% for the quarter ended March 31, 2005 to 3.33% for the quarter ended March 31, 2006, a 73 basis point rise, as new certificates were opened at higher rates due to the rising interest rate environment. Rates on shorter maturity CDs have increased significantly with the FOMC interest rate increases and management anticipates the Bank's CD funding costs will increase on a quarterly basis going forward for the remainder of 2006. Interest expense on borrowings increased from $1.4 million for the quarter ended March 31, 2005 to $2.2 million for the quarter ended March 31, 2006. The increase is primarily due to higher outstanding borrowing and subordinated debt balances and an increase in interest rates. The rate on borrowings and subordinated debentures for the quarter ended March 31, 2006 increased to 4.70% and 7.43%, respectively, from 3.88% and 5.43%, respectively, for the quarter ended March 31, 2005. In July of 2003, the Bank entered into interest rate swap agreements on $25.0 million of its outstanding Federal Home Loan Bank advances to swap fixed rate borrowings to a variable rate. In the first quarter of 2005, the net effect of the swaps was a reduction of interest expense, however, as a result of the significant increase in short-term interest rates, the net effect of the swaps was an increase in interest expense for the first quarter of 2006. As short-term interest rates have increased following the FOMC rate increases, the overall effective rate on both borrowings and subordinated debt has increased. 17 For the quarter ended March 31, 2006, the provision for loan losses was $412,000 compared to a credit of $250,000 for the quarter ended March 31, 2005, an increase of $662,000. The increase in the provision for loan losses was primarily due to an increase in the specific allocation for one loan relationship and the estimated inherent losses associated with the net growth in the loan portfolio during the quarter ended March 31, 2006 and other factors as discussed more fully below under "Asset Quality". Net charge-offs for the quarter ended March 31, 2006 were $3.4 million, or 1.45% of average loans, compared to $99,000, or 0.06% of average loans for the quarter ended March 31, 2005. Charge-offs for the quarter ended March 31, 2006 includes $3.2 million related to one loan relationship that had been fully reserved by 1st State Bank as of December 31, 2005 and had no impact on the Bank's loan loss provision for the quarter ended March 31, 2006. Noninterest income for the quarter ended March 31, 2006 was $2.0 million compared to $1.3 million for the quarter ended March 31, 2005, an increase of $0.7 million. This increase was primarily due to higher service charges and other fees, which increased by $308,000, as a result of a higher volume of transaction accounts, which were acquired in the 1st State Bancorp merger transaction. Income on bank owned life insurance increased $108,000 primarily due to additional insurance purchased in the second quarter of 2005. Noninterest expenses for the quarter ended March 31, 2006 were $8.8 million compared to $6.2 million for the quarter ended March 31, 2005. Salaries and employee benefits, representing the largest noninterest expense category, increased to $4.5 million for the quarter ended March 31, 2006, from $3.1 million for the quarter ended March 31, 2005. The increase was primarily due to an increase in the number of personnel employed by the Company as a result of the 1st State Bancorp merger transaction and the Company's overall period-over-period growth. As of March 31, 2006, the Company had 328 full-time equivalent employees compared to 241 for the same date in 2005 and 256 at December 31, 2005. Occupancy costs, the second largest component of noninterest expenses, increased $164,000 to $778,000 for the quarter ended March 31, 2006 from $614,000 for the same period in 2005. The increase is primarily due to expenses associated with branches acquired in the 1st State Bancorp merger transaction. Furniture and equipment expenses for the quarter ended March 31, 2006 increased $125,000 from the same period in 2005 primarily due to higher equipment repair and maintenance costs associated with the increase in branch locations. Data processing expenses for the quarter ended March 31, 2006 increased $178,000 from the same period in 2005 primarily due to higher fees from third-party providers prior to the start-up of the Company's operations center. The Company completed the consolidation of its state-wide operations during the first quarter of 2006 and now processes data and banking items in-house. The Company anticipates data processing costs will decrease in future periods as a result of consolidating the transaction processing at its operations center in Burlington, North Carolina. Director fees for the quarter ended March 31, 2006 increased $205,000 from the same period in 2005 primarily due to higher expense accruals associated with the directors supplemental retirement plan and the directors deferred compensation plan as a result of the adoption of SFAS 123R. Deposit premium amortization for the quarter ended March 31, 2006 increased $289,000 from the same period in 2005 primarily as a result of the deposit premium intangible associated with the 1st State Bancorp merger transaction, which was valued at $5.3 million as of the closing date and is being amortized over eight years Other expenses for the quarter ended March 31, 2006 increased $345,000 from the same period in 2005 primarily due to higher postage, printing and travel expenses associated with the 1st State Bancorp merger transaction. 18 The Company's effective tax rate for the first quarter of 2006 was 33.9% compared to 33.7% for the comparable period of 2005. Income tax expense for the quarter ended March 31, 2006 and 2005 was $1.4 million and $0.8 million respectively. The Company forecasts its taxable and non-taxable income and calculates the effective tax rate for the entire year, which is then applied to the three month period. Asset Quality Determining the allowance for loan losses is based on a number of factors, many of which are subject to judgments made by management. At the origination of each commercial loan, management assesses the relative risk of the loan and assigns a corresponding risk grade. To ascertain that the credit quality is maintained after the loan is booked, the Bank has a procedure whereby a loan review officer performs an annual review of all unsecured loans over a predetermined loan amount, a sampling of loans within a lender's authority, and a sampling of the entire loan pool. Loans are reviewed for credit quality, sufficiency of credit and collateral documentation, proper loan approval, covenant, policy and procedure adherence, and continuing accuracy of the loan grade. This officer reports directly to the Chief Credit Officer and Audit Committee. On an as needed basis, the Bank will hire an outside third party firm to review the Bank's loan portfolio to ensure quality standards and reasonableness of risk assessment. The Company estimates the amount of allowance needed to cover probable losses in the portfolio by applying a loss allowance factor to each risk grade. Consumer loans and mortgages are not risk graded, but a loss allocation factor is utilized for these loans based on historical losses. The loss allocation factors have been developed based on the Bank's historical losses and industry trends. In addition to this quantitative analysis, a qualitative assessment of the general economic trends, portfolio concentration and the trend of delinquencies are taken into consideration. The loan loss allowance is adjusted to an amount that management believes is adequate to absorb probable losses inherent in the loan portfolio as of the balance sheet date presented. Beginning in the second quarter of 2005, the Company began estimating a specific allowance for loan losses associated with certain commercial loans greater than $750,000. Management determines the level of specific allowance based on the facts and circumstances of each loan, including among other factors, payment history, collateral values, guarantor liquidity, and net worth. Of the $14.2 million allowance for loan losses as of March 31, 2006, $3.1 million has been allocated to specific loans. 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. Based on this allowance calculation, management recorded a provision of $412,000 for the quarter ended March 31, 2006, compared to a credit of $250,000 for the quarter ended March 31, 2005. The Company added 1st State Bank's allowance for loan losses, which was $7.6 million as of December 31, 2005, to the Company's allowance for loan losses. The Company continued to experience an overall improvement in the risk ratings of the loan portfolio during the quarter ended March 31, 2006, however past due loans as a percentage of the loan portfolio increased from 1.07% at December 31, 2005 to 1.26% at March 31, 2006. Past dues greater than 90 days as a percentage of total loans decreased from 0.66% at December 31, 2005 to 0.46% at March 31, 2006. The following 19 table presents an analysis of changes in the allowance for loan losses for the three month periods ended March 31, 2006 and 2005, respectively: Three Months Ended March 31, 2006 2005 -------- -------- (Dollars in thousands) Allowance for loan losses, beginning of period $ 9,592 $ 10,721 1st State Bank loan loss allowance acquired 7,637 -- Net charge-offs: Loans charged off: Commercial 3,316 96 Consumer 106 159 Home equity lines -- -- Mortgage 31 51 -------- -------- Total charge-offs 3,453 306 -------- -------- Recoveries of loans previously charged off: Commercial 8 201 Consumer 4 6 Home equity lines 4 -- Mortgage 5 -- -------- -------- Total recoveries 21 207 -------- -------- Total net charge-offs 3,432 99 -------- -------- Loss provisions (credits) charged to operations 412 (250) -------- -------- Allowance for loan losses, end of period $ 14,209 $ 10,372 ======== ======== Net charge-offs to average loans during the period (annualized) 1.49% 0.06% Allowance as a percent of gross loans 1.50% 1.60% Net charge-offs for the quarter ended March 31, 2006 includes $3.2 million related to one 1st State Bank loan relationship that was fully reserved by 1st State Bank as of December 31, 2005. Excluding this transaction, charge-offs declined, which reflects the resources management has allocated to improving the overall credit quality of the loan portfolio. The following table presents an analysis of nonperforming assets as of March 31, 2006 and 2005 and December 31, 2005: 20 March 31, December 31, 2006 2005 2005 ------- ------- ------- (Dollars in thousands) Nonaccrual loans: Commercial and commercial real estate $ 5,149 $ 5,797 $ 5,040 Mortgage 1,588 1,880 1,628 Construction 807 2,374 737 Equity lines 398 323 497 Comsumer 100 195 176 ------- ------- ------- Total nonaccrual loans 8,042 10,569 8,078 Foreclosed property held 888 431 771 ------- ------- ------- Total nonperforming assets $ 8,930 $11,000 $ 8,849 ======= ======= ======= Nonperforming assets to total loans 0.95% 1.63% 1.32% Nonperforming assets to total assets 0.68% 1.24% 0.92% Allowance coverage of nonperforming loans 177% 98% 119% At March 31, 2006, nonperforming assets were $8.9 million, an increase of $0.1 million from December 31, 2005. The majority of the Company's nonperforming loans are secured by real estate and to a lesser extent the Company relies on the support of guarantors. The Company monitors the value of the underlying collateral and the liquidity of the guarantors on a periodic basis. Based on this review and analysis, the Company does not currently anticipate any material losses associated with the nonperforming loans existing at March 31, 2006. 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. There were no impaired loans at March 31, 2006 and December 31, 2005. The Bank uses several factors in determining if a loan is impaired. Internal asset classification procedures include a review of significant loans and lending relationships by both management and third party credit review firms and includes the accumulation of related data such as loan payment status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income or loss. The Company's determination of the allowance for loan losses is subject to management's judgment and analysis of many internal and external factors. While management is comfortable with the adequacy of the current allowance, changes in factors and management's future evaluation of the adequacy of the allowance for loan losses will change. Foreclosed property increased to $888,000 at March 31, 2006 from $771,000 at December 31, 2005. The increase is largely attributable to the foreclosure of certain nonaccrual loans during the quarter. The Company is actively marketing all of its foreclosed property. All foreclosed assets are recorded at the lower of cost or fair value. Foreclosed property excludes $1.8 million related to four branch locations that are held for sale and are reported as other real estate owned pursuant to bank regulations and are also recorded at the lower of cost or fair value. 21 Liquidity and Capital Resources The Company's liquidity management involves planning to meet the Company's anticipated funding needs at a reasonable cost. Liquidity management is guided by policies formulated by the Company's senior management and the Asset/Liability Management Committee of the Company's Board of Directors. The Company had $59.8 million in its most liquid assets, cash and cash equivalents, as of March 31, 2006. The Company's principal sources of funds are loan repayments, deposits, Federal Home Loan Bank borrowings and capital and, to a lesser extent, investment repayments. 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, which totaled $ 948.6 million and $652.1 million at March 31, 2006 and December 31, 2005, respectively, funded 72.2% of total assets at March 31, 2006 compared to 67.7% at December 31, 2005. In addition, the Company has the ability to take advantage of various other funding programs available from the Federal Home Loan Bank of Atlanta, as well as access to funding through various brokered deposit programs, federal funds lines and security repurchase agreements. The management of equity is a critical aspect of capital management in any business. The determination of the appropriate amount of equity is affected by a wide number of factors. The primary factor for a regulated financial institution is the amount of capital needed to meet regulatory requirements, although other factors, such as the "risk equity" the business requires and balance sheet leverage, also affect the determination. On February 27, 2006, the Company announced the Company's Board of Directors had authorized the Company to acquire in the open market or in any private transaction, from time-to-time and in accordance with applicable laws, rules and regulations, up to 1.0 million shares of the Company's common stock. Management plans to utilize share repurchases to manage capital levels of the Company. The Company plans to effect the repurchase program through open-market purchases. During the first quarter of 2006, the Company repurchased 116,000 shares at a weighted average price of $15.92 per share. 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 March 31, 2006 and the minimum requirements are presented in the following table:
Minimum Requirements To Be Actual Well Capitalized ----------------------------- ---------------------------- (Dollars in thousands) Amount Ratio Amount Ratio ------------- -------------- ------------- ------------- Capital Bank Corporation ------------------------ Total Capital (to Risk Weighted Assets) $ 131,036 11.42% $ 114,713 10.00% Tier I Capital (to Risk Weighted Assets) 115,602 10.08% 68,829 6.00% Tier I Capital (to Average Assets) 115,602 9.34% 61,898 5.00% Capital Bank ------------ Total Capital (to Risk Weighted Assets) $ 127,832 11.15% $ 114,638 10.00% Tier I Capital (to Risk Weighted Assets) 113,500 9.90% 68,783 6.00% Tier I Capital (to Average Assets) 113,500 9.68% 58,645 5.00%
22 Consolidated capital ratios decreased from December 31, 2005 due to the increase in risk-weighted and total assets associated with the Company's acquisition of 1st State Bancorp exceeding the tangible capital acquired. Total capital to risk weighted assets, Tier I capital to risk weighted assets and Tier I capital to average assets on a consolidated basis as of December 31, 2005 were 13.71%, 11.73% and 10.64%, respectively. Shareholders' equity was $158.1 million, or $13.60 per share, at March 31, 2006. Management believes this level of shareholders' equity provides adequate capital to support the Company's growth and to maintain a well capitalized position. Item 3 Quantitative and Qualitative Disclosures about Market Risk ---------------------------------------------------------- As described in more detail in our Annual Report on Form 10-K for the year ended December 31, 2005, as amended, asset/liability management involves the evaluation, monitoring and management of interest rate risk, liquidity and funding. While the Board of Directors has overall responsibility for the Company's asset/liability management policies, the Asset and Liability Committee monitors loan, investment, and liability portfolios to ensure comprehensive management of interest rate risk and adherence to the policies. The Company utilizes an outside asset liability management advisory firm to help management evaluate interest rate risk and develop asset/liability management strategies. One tool used is a computer simulation model which projects the Company's performance under different interest rate scenarios. Analyses are prepared quarterly which evaluate the Company's performance under different interest rate scenarios (flat, rising and declining). The following tables illustrate the output from the Company's simulation model based on the balance sheets as of March 31, 2006 and December 31, 2005. The tables reflect rate-sensitive positions at March 31, 2006 and December 31, 2005, and are not necessarily indicative of positions on other dates. The projected results as of March 31, 2006 include the impact of the 1st State Bancorp merger transaction, which was completed on January 3, 2006. The following table illustrates the Company's interest rate sensitivity as of March 31, 2006 and December 31, 2005. The carrying amounts of interest rate sensitive assets and liabilities are presented in periods in which they next reprice to market rates or mature and are aggregated to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability amounts were based on estimated cash flows rather than contractual cash flows. The Company continues to be "asset sensitive" at March 31, 2006 as its assets reprice faster than its liabilities.
Within One One to Two Two to Five After Five Interest Rate Sensitivity Year Years Years Years Total - ------------------------- ---- ----- ----- ----- ----- (Dollars in thousands) As of March 31, 2006 Total assets $ 845,796 $ 92,466 $ 161,215 $ 209,090 $1,308,567 Total liabilities and equity $ 654,266 $ 217,885 $ 198,395 $ 238,021 $1,308,567 --------- --------- --------- --------- ---------- Interest-rate sensitivity gap $ 191,530 ($ 125,419) ($ 37,180) ($ 28,931) $ -- Cumulative interest-rate sensitivity gap $ 191,530 $ 66,111 $ 28,931 $ --
23
Within One One to Two Two to Five After Five Year Years Years Years Total ---- ----- ----- ----- ----- As of December 31, 2005 Total assets $ 569,081 $ 60,830 $182,755 $ 148,240 $960,906 Total liabilities and equity $ 387,158 $ 250,575 $115,821 $ 207,352 $960,906 --------- --------- -------- --------- -------- Interest-rate sensitivity gap $ 181,923 ($ 189,745) $ 66,934 ($ 59,112) $ -- Cumulative interest-rate sensitivity gap $ 181,923 ($ 7,822) $ 59,112 $ --
As of March 31, 2006 and December 31, 2005, under the flat rate scenario, the Company was projected to earn $50.4 million and $34.9 million, respectively. The table below measures the impact on net interest income of both a gradual and immediate 200 basis point change in interest rates over the twelve months following the interest rate change. Actual results could differ from these estimates.
Change in 12 month Projected Net Interest Income Versus Projected Net Interest Income Under No Rate Change -------------------------------------------------- March 31, 2006 December 31, 2005 -------------- ----------------- (Dollars in millions) Dollar Change Percentage Change Dollar Change Percentage Change ------------- ----------------- ------------- ----------------- Basis Point Change +200 gradual $ 4.8 9.5% $ 2.9 8.3% +200 immediate $ 8.4 16.6% $ 5.2 14.9% No rate change -- -- -- -- - -200 gradual ($2.5) (5.0%) ($1.7) (4.9%) - -200 immediate ($5.2) (10.3%) ($3.3) (9.5%)
The table does not reflect the impact of hedging strategies discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2005, as amended. Item 4 Controls and Procedures ----------------------- The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods required by the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding disclosure. Management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding management's control objectives. As required by paragraph (b) of Rule 13a-15 under the Exchange Act, an evaluation was carried out under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company that is required to be included in its Exchange Act filings. 24 Changes in Internal Control over Financial Reporting There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting. Management has implemented changes in internal control over financial reporting as a result of remediation of matters identified through its review of internal control over financial reporting as required under Section 404 of the Sarbanes Oxley Act, however it does not believe any of the changes implemented were material in nature. Part II - Other Information Item 1 Legal Proceedings ----------------- There are no material pending legal proceedings to which the Company is a party or to 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 condition. Item 1A Risk Factors ------------ You should consider the following material risk factors carefully before deciding to invest in Capital Bank Corporation securities. Additional risks and uncertainties not presently known to us, that we may currently deem to be immaterial or that are similar to those faced by other companies in our industry or business in general, such as competitive conditions, may also impact our business operations. If any of the events described below occur, the Company's business, financial condition, or results of operations could be materially adversely affected. In that event, the trading price of the Company's common stock may decline, in which case the value of your investment may decline as well. Our Results Are Impacted by the Economic Conditions of Our Principal Operating Regions Our operations are concentrated throughout Central and Western North Carolina. As a result of this geographic concentration, our results may correlate to the economic conditions in these areas. Deterioration in economic conditions in any of these market areas, particularly in the industries on which these geographic 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 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 25 performance and diversifying our loan portfolio. Such policies and procedures, however, may not prevent unexpected losses that could adversely affect our results of operations. We Compete With Larger Companies for Business The banking and financial services business in our market areas continues to be a competitive field and is becoming more competitive as a result of: 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 have substantially greater resources including higher total assets and capitalization, greater access to capital markets and a broader offering of financial services. Our Trading Volume Has Been Low Compared With Larger Banks The trading volume in the Company's common stock on the NASDAQ National Market has been comparable to other similarly-sized banks. Nevertheless, this trading is relatively low when compared with more seasoned companies listed on the NASDAQ National Market or other consolidated reporting systems or stock exchanges. Thus, the market in the Company's common stock may be limited in scope relative to other companies. We Depend Heavily on Our Key Management Personnel The Company's success depends in part on its ability to retain key executives and 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 we may not be successful in attracting or retaining the personnel we require. We expect 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 growing bank. 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. 26 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 our operations. We are subject to supervision and periodic examination by the Federal Deposit Insurance Corporation 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 certain of our activities, such as: o The payment of dividends to our shareholders; o Possible mergers with or acquisitions of or by other institutions; o Our desired investments; o Loans and interest rates on loans; 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. We also are subject to capitalization guidelines set forth in federal legislation, and could be subject to enforcement actions to the extent that we are found by regulatory examiners to be undercapitalized. We cannot predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects. The cost of compliance with regulatory requirements including those imposed by the Securities and Exchange Commission may adversely affect our ability to operate profitably. There Are Potential Risks Associated With Future Acquisitions and Expansions We intend to continue to explore expanding our branch system through selective acquisitions of existing banks or bank branches in the Research Triangle area and other 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 or unexpected expenses in integrating such acquisitions. In the ordinary course of business, we evaluate potential acquisitions that would bolster our ability to cater to the small business, individual and residential lending markets in 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 our common stock in connection with such acquisitions. Any given acquisition, if and when consummated, may adversely affect our results of operations or overall financial condition. In addition, we may expand our branch network through de novo branches in existing or new markets. These de novo branches will have expenses in excess of revenues for varying periods after opening, which could decrease our reported earnings. 27 Compliance with Changing Regulation of Corporate Governance and Public Disclosure May Result in Additional Risks and Expenses Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations, are creating uncertainty for companies such as ours. These laws, regulations and standards are subject to varying interpretations in many cases, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased expenses and a diversion of management time and attention. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding management's required assessment of our internal control over financial reporting and our external auditors' audit of that assessment has required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. Further, the members of our Board of Directors, members of the Audit or Compensation/Human Resources committees, our chief executive officer, our chief financial officer and certain other of our executive officers could face an increased risk of personal liability in connection with the performance of their duties. As a result, our ability to attract and retain executive officers and qualified Board and committee members could be more difficult. In addition, it may become more difficult and more expensive to obtain director and officer liability insurance. We May Not Be Able to Successfully Integrate 1st State Bancorp or to Realize the Anticipated Benefits of our Recently Completed Merger Our recently completed merger with 1st State Bancorp involves the combination of two bank holding companies that previously have operated independently. A successful combination of the operations of the two entities will depend substantially on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. We may not be able to combine the operations of 1st State Bancorp with our operations without encountering difficulties, such as: o The loss of key employees and customers; o The disruption of operations and business; o Inability to maintain and increase competitive presence; o Deposit attrition, customer loss and revenue loss; o Possible inconsistencies in standards, control procedures and policies; o Unexpected problems with costs, operations, personnel, technology and credit; and/or o Problems with the assimilation of new operations, sites or personnel, which could divert resources from regular banking operations. Further, although meaningful cost savings are anticipated as a result of the merger, such expected cost savings may not be realized. Finally, any cost savings that are realized may be offset by losses in revenues or other charges to earnings. 28 Item 2 Unregistered Sale of Equity Securities and Use of Proceeds ---------------------------------------------------------- The following table lists all repurchases (both open market and private transactions) during the quarter ended March 31, 2006 of any the Company's securities registered under Section 12 of the Exchange Act, by or on behalf of the Company, or any affiliated purchaser of the Company:
Issuer Purchase of Equity Securities ------------------------------------ Total Number of Shares Maximum Number Purchased as of Shares That Part of Publicly May Yet Be Total Number Average Price Announced Purchased Under of Shares Paid per Plans or Plans or Month of Purchased Share Programs (1) Programs - --------------------------- ------------------------------------------------------------------- January 2006 -- $ -- -- 1,000,000 February 2006 -- -- -- 1,000,000 March 2006 116,000 15.92 116,000 884,000 ---------------------------------------------- 116,000 $ 15.92 116,000 ============== ==============
(1) On February 27, 2006, the Company announced that on February 23, 2006 the Company's Board of Directors had authorized a program to repurchase (in the open market or in any private transaction), up to 1.0 million shares of the Company's outstanding common stock. The repurchase program is for a period of up to two years and supercedes the share repurchase program authorized by the Company's Board of Directors on December 22, 2004, which authorized the repurchase of up to 100,000 shares. The Company did not acquire any shares under this former repurchase program. As of March 31, 2006, there was an aggregate of 884,000 shares remaining authorized for future repurchases. Item 3 Defaults Upon Senior Securities ------------------------------- None Item 4 Submission of Matters to a Vote of Security Holders --------------------------------------------------- None Item 5 Other Information ----------------- None Item 6 Exhibits -------- Exhibit 4.1 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, certain instruments respecting long-term debt of the registrant have been omitted but will be furnished to the Commission upon request. 29 Exhibit 10.1 Employment Agreement, dated January 3, 2006, between Capital Bank and A. Christine Baker (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 9, 2006). Exhibit 31.1 Certification of B. Grant Yarber pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 Certification of A. Christine Baker pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 Certification of B. Grant Yarber pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.] Exhibi 32.2 Certification of A. Christine Baker pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.] 30 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in Raleigh, North Carolina, on the 10th day of May 2006. CAPITAL BANK CORPORATION By: /s/ A. Christine Baker ----------------------- A. Christine Baker Chief Financial Officer 31 Exhibit Index - -------------------------------------------------------------------------------- Exhibit 4.1 In accordance with Item 601(b)(4)(iii)(A) of Regulation S-K, certain instruments respecting long-term debt of the registrant have been omitted but will be furnished to the Commission upon request. - -------------------------------------------------------------------------------- Exhibit 10.1 Employment Agreement, dated January 3, 2006, between Capital Bank and A. Christine Baker (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on January 9, 2006). - -------------------------------------------------------------------------------- Exhibit 31.1 Certification of B. Grant Yarber pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - -------------------------------------------------------------------------------- Exhibit 31.2 Certification of A. Christine Baker pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - -------------------------------------------------------------------------------- Exhibit 32.1 Certification of B. Grant Yarber pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.] - -------------------------------------------------------------------------------- Exhibi 32.2 Certification of A. Christine Baker pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 [This exhibit is being furnished pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 and shall not, except to the extent required by that act, be deemed to be incorporated by reference into any document or filed herewith for purposes of liability under the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, as the case may be.] - -------------------------------------------------------------------------------- 32 EX-31.1 2 ex31-1.txt Exhibit 31.1 I, B. Grant Yarber, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Bank Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Exhibit 31.1 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2006 /s/ B. Grant Yarber ------------ ----------------------------------- B. Grant Yarber President and Chief Executive Officer EX-31.2 3 ex31-2.txt Exhibit 31.2 I, A. Christine Baker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Capital Bank Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and Exhibit 31.2 (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 10, 2006 /s/ A. Christine Baker ------------- --------------------------- A. Christine Baker Chief Financial Officer EX-32.1 4 ex32-1.txt Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Capital Bank Corporation (the "Company") for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, B. Grant Yarber, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/B. Grant Yarber - ------------------ B. Grant Yarber President and Chief Executive Officer May 10, 2006 This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 5 ex32-2.txt Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Capital Bank Corporation (the "Company") for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, A. Christine Baker, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ A. Christine Baker - ---------------------- A. Christine Baker Chief Financial Officer May 10 , 2006 This Certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed "filed" by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and shall not be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Report, irrespective of any general incorporation language contained in such filing. A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----