Capital Bank Announces Financial Results for First Quarter of 2010

RALEIGH, N.C., April 27 /PRNewswire-FirstCall/ -- Capital Bank Corporation (Nasdaq: CBKN), the parent company of Capital Bank, today reported financial results for the first quarter of 2010.

First Quarter 2010 Financial Highlights:

  • Increased total regulatory capital through an $8.5 million private placement offering of common stock and subordinated debt to qualified investors;
  • Net interest margin increased to 3.22% in the first quarter 2010 from 2.72% in the first quarter 2009;
  • Nonperforming loans were 4.23% of total loans as of March 31, 2010 compared with 2.84% of total loans as of December 31, 2009;
  • Nonperforming assets were 4.24% of total assets as of March 31, 2010 compared with 2.90% of total assets as of December 31, 2009;
  • Allowance for loan losses increased to 2.12% of total loans as of March 31, 2010 from 1.88% of total loans as of December 31, 2009;
  • Allowance for loan losses increased to 132% of nonperforming loans, net of loans charged down to market value, as of March 31, 2010 from 115% of nonperforming loans, net of loans charged down to market value, as of December 31, 2009;
  • Annualized first quarter 2010 net charge-offs were 2.48% of average loans compared with 0.73% of average loans for the first quarter 2009;
  • Provision for loan losses increased to $11.7 million in first quarter 2010 from $6.0 million in first quarter 2009, an increase of $5.7 million; and
  • Net loss attributable to common shareholders was $5.9 million, or $0.49 per diluted share, in first quarter 2010 compared with net loss attributable to common shareholders of $5.1 million, or $0.45 per diluted share, in first quarter 2009.

The Company's results of operations in the first quarter of 2010 compared with the same quarter last year primarily reflect a significant increase in provision for loan losses, partially offset by an improved net interest income and a higher income tax benefit.

"Capital Bank was very pleased to announce the completion of an $8.5 million private placement offering during the first quarter of 2010," stated B. Grant Yarber, president and CEO. "We remain committed to capital preservation and to remaining above well capitalized levels as we work through the significant headwinds that community banks and the commercial real estate markets have been facing these past two years. This successful capital raise allowed us to increase our preliminary total risk-based capital ratio despite continuing elevated loan losses. We remain confident in the overall strength of our franchise and look forward to an improving economy."

Net Interest Income

Net interest income increased by $2.4 million, rising from $10.2 million in the first quarter of 2009 to $12.6 million in the first quarter of 2010. This improvement was due to an increase in net interest margin from 2.72% in the first quarter of 2009 to 3.22% in the first quarter of 2010, coupled with a 4.1% growth in average earning assets over the same period. Net interest margin benefited from a significant decline in funding costs as rates on total interest-bearing liabilities fell 70 basis points, from 2.80% for the quarter ended March 31, 2009 to 2.10% for the quarter ended March 31, 2010. The Company's interest rate swap on prime-indexed commercial loans, which expired in October 2009, increased loan interest income by $1.1 million in the first quarter of 2009, representing a benefit to net interest margin of 29 basis points in that quarter. Since the swap expired in 2009, the Company received no benefit in the first quarter of 2010.

A significant increase in loans placed on nonaccrual status during the first quarter of 2010 negatively affected net interest income during the quarter. When loans are placed on nonaccrual status, any accrued but unpaid interest is immediately reversed and has a direct impact on net interest income and net interest margin. During the first quarter of 2010, reversal of accrued interest on loans placed on nonaccrual reduced net interest income by approximately $750 thousand, representing a negative impact to net interest margin of 18 basis points.

"Despite a slight decline in loan yields from increased levels of nonaccrual loans and expiration of our prime swap in 2009, Capital Bank realized substantial net interest income improvement during the past year," stated Mr. Yarber. "Management remains primarily focused on capital preservation and asset quality but also considers margin management a key priority. Through disciplined margin controls in a more favorable interest rate environment, our net interest margin increased to 3.22% in the first quarter of 2010 from 2.72% in the first quarter of 2009. We are pleased by the positive trends in our net interest margin."

Provision for Loan Losses and Asset Quality

Provision for loan losses for the quarter ended March 31, 2010 totaled $11.7 million, an increase from $6.0 million for the quarter ended March 31, 2009. The increase in the loan loss provision was driven by continued difficult economic conditions and weakness in local real estate markets which resulted in significantly higher levels of nonperforming assets and impaired loans as well as downgrades to the credit ratings of certain loans in the portfolio. Further, a significant decline in commercial real estate values contributed to higher levels of specific reserves or charge-offs on impaired loans. Net charge-offs increased from $2.3 million, or 0.73% of average loans, in the first quarter of 2009 to $8.7 million, or 2.48% of average loans, in the first quarter of 2010.

Nonperforming assets, which include loans on nonaccrual and other real estate, increased to 4.24% of total assets as of March 31, 2010 compared to 2.90% as of December 31, 2009 and 1.24% as of March 31, 2009. Past due loans, which include all loans past due 30 days or more, increased to 4.96% of total loans as of March 31, 2010 compared to 2.80% as of December 31, 2009 and 1.34% as of March 31, 2009.

As a result of the deteriorating credit quality, the Company increased the allowance for loan losses to 2.12% of total loans as of March 31, 2010 compared to 1.88% as of December 31, 2009 and 1.45% as of March 31, 2009. The allowance for loan losses was 50% of nonperforming loans as of March 31, 2010, which was a decline from 66% as of December 31, 2009 and 109% as of March 31, 2009. The allowance for loan losses was 132% of nonperforming loans, net of loans charged down to market value, which was an increase from 115% as of December 31, 2009 and a decline from 155% as of March 31, 2009.

Noninterest Income

Noninterest income decreased by $444 thousand, or 21%, declining from $2.1 million in the first quarter of 2009 to $1.7 million in the first quarter of 2010. This decrease was primarily related to write-downs to the values of real estate owned totaling $646 thousand in the quarter ended March 31, 2010. Management continues to proactively monitor the market values of its real estate owned by obtaining updated appraisals, and reduces other noninterest income by any decline in valuations during the period. Other noninterest income was further reduced by $229 thousand in losses on the sale of certain real estate owned during the first quarter of 2010. Mortgage origination and other loan fees also declined by $200 thousand in the quarter ended March 31, 2010 compared with the quarter ended March 31, 2009. The lower noninterest income was partially offset by gains of $263 thousand on the sale of certain debt securities and recognized appreciation of $65 thousand in the market value of an equity security in the quarter ended March 31, 2010 compared with a $320 thousand loss on an investment in Silverton Bank stock in the quarter ended March 31, 2009.

Noninterest Expense

Noninterest expense increased $157 thousand, or 1%, rising from $11.6 million in the first quarter of 2009 to $11.7 million in the first quarter of 2010. This increase was primarily due to higher FDIC deposit insurance expense, which rose by $436 thousand during the quarter. Increased deposit insurance expense reflects higher deposit insurance assessment rates to cover losses incurred by the FDIC's deposit insurance fund. Growth in core deposits during the past year also partially contributed to the increase in FDIC deposit insurance expense. Additionally, miscellaneous loan handling costs increased $278 thousand as higher loan workout, appraisal and foreclosure costs were incurred in the quarter ended March 31, 2010. Partially offsetting the increase in noninterest expense, salaries and employee benefits expense fell by $561 thousand partially due to suspension of the Company's 401(k) match in 2009 and partially due to higher deferred loan costs which reduced expense.

Income tax benefit increased from $800 thousand in the first quarter of 2009 to $3.9 million in the first quarter of 2010. This increase was primarily due to a larger net loss before taxes over the same period.

Balance Sheet

Loan balances declined by $14.2 million in the first quarter of 2010 partially due to net charge-offs in the quarter and partially due to an effort by the Company to slow balance sheet growth to preserve its regulatory capital ratios and reduce its exposure to commercial real estate lending. Total deposits increased by $2.6 million in the quarter ended March 31, 2010. Checking and savings accounts decreased by $8.3 million during the quarter ended March 31, 2010 primarily due to a decline in average balances held by depositors. As the economy continues to stabilize and consumer spending rises, the Company expects to experience a decline in average customer checking account balances. Time deposits, which include brokered deposits, increased $35.0 million in the first quarter of 2010 while money market accounts decreased by $24.1 million in the same period.

The Company increased regulatory capital during the quarter ended March 31, 2010 through an $8.5 million private placement offering to qualified investors. The offering was structured in the form of investment units consisting of a subordinated promissory note with a principal balance of $3,997 and shares of the Company's common stock valued at $6,003. As a result of the offering, the Company sold subordinated promissory notes with an aggregate principal amount of approximately $3.4 million and shares of the Company's common stock valued at approximately $5.1 million. The Company may elect to sell additional units in one or more subsequent closings on or prior to June 16, 2010, unless the Company elects to extend the offering, provided that the aggregate number of all units sold does not exceed 1,500. The Company may redeem some or all of the promissory notes at any time beginning on March 18, 2015 at a price equal to 100% of the principal amount of the redeemed promissory notes plus accrued but unpaid interest to the redemption date.

Capital Bank Corporation, headquartered in Raleigh, N.C., with approximately $1.7 billion in total assets, offers a broad range of financial services. Capital Bank operates 32 banking offices in Asheville (4), Burlington (3), Cary (2), Clayton, Fayetteville (4), Graham, Hickory, Holly Springs, Mebane, Morrisville, Oxford, Pittsboro, Raleigh (5), Sanford (3), Siler City, Wake Forest and Zebulon. The Company's website is http://www.capitalbank-us.com.