Capital Bank Announces Financial Results for Second Quarter of 2010

RALEIGH, N.C., July 30 /PRNewswire-FirstCall/ -- Capital Bank Corporation (Nasdaq: CBKN), the parent company of Capital Bank, today reported financial results for the second quarter of 2010.

Key Items in Second Quarter of 2010:

• Regulatory capital ratios were in excess of "well capitalized" levels as of June 30, 2010;
• Net loss attributable to common shareholders was $14.2 million, or $1.09 per share, in the second quarter of 2010 compared with net income available to common shareholders of $762 thousand, or $0.07 per share, in the second quarter of 2009;
• Net interest margin increased to 3.25% in the second quarter of 2010 from 3.22% in the first quarter of 2010 and 3.17% in the second quarter of 2009;
• Nonperforming assets and restructured loans were 5.76% of total assets as of June 30, 2010 compared with 5.67% as of March 31, 2010 and 4.87% as of December 31, 2009;
• Allowance for loan losses increased to 2.65% of total loans as of June 30, 2010 from 2.12% as of March 31, 2010 and 1.88% as of December 31, 2009;
• Provision for loan losses increased to $20.0 million in the second quarter of 2010 from $1.7 million in the second quarter of 2009; and
• Valuation allowance of $3.3 million was recorded against deferred tax assets in the second quarter of 2010.

Key Items in First Half of 2010:

• Successfully completed $8.5 million private placement offering of common stock and subordinated debt to qualified investors;
• Net loss attributable to common shareholders was $20.1 million, or $1.60 per share, in the first half of 2010 compared with net loss attributable to common shareholders of $4.3 million, or $0.38 per share, in the first half of 2009;
• Net interest margin increased to 3.23% in the first half of 2010 from 2.95% in the first half of 2009; and
• Provision for loan losses increased to $31.8 million in first half of 2010 from $7.7 million in the first half of 2009.

"Our quarterly financial results were again significantly impacted by an elevated provision for loan losses," stated B. Grant Yarber, president and CEO. "We continue to work aggressively to resolve our problem loans and have experienced success with these efforts. Through our special financing program introduced in mid-2009, we have sold 135 new houses for an aggregate purchase price in excess of $49 million to qualified homeowners. This program has helped to significantly reduce our residential construction portfolio and has provided a boost to our borrowers and the surrounding communities. However, many of our borrowers remain under significant stress from a protracted economic recession that has been more severe than we or most experts ever predicted. Our core operations remain strong, but we anticipate that future increases to our allowance for loan losses and elevated provisions may be necessary as we continue working through this credit cycle."

Net Interest Income

Net interest income increased by $580 thousand, rising from $12.2 million in the second quarter of 2009 to $12.7 million in the second quarter of 2010. This improvement was due to an increase in net interest margin from 3.17% in the second quarter of 2009 to 3.25% in the second quarter of 2010, coupled with 2.2% 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 from 2.50% for the quarter ended June 30, 2009 to 1.97% for the quarter ended June 30, 2010. The Company's interest rate swap on prime-indexed commercial loans, which expired in October 2009, increased interest income by $1.1 million in the second quarter of 2009, representing a benefit to net interest margin of 0.28% in that quarter. Since the swap expired in 2009, the Company received no benefit in the second quarter of 2010.

Year-to-date net interest income increased by $2.9 million, rising from $22.3 million in the first half of 2009 to $25.3 million in the first half of 2010. This improvement was due to an increase in net interest margin from 2.95% in the first half of 2009 to 3.23% in the first half of 2010, coupled with 3.2% growth in average earning assets over the same period. The interest rate swap contributed $2.3 million to interest income in the first half of 2009, representing a benefit to net interest margin of 0.29% in that period.

A significant increase in loans placed on nonaccrual status negatively affected net interest income during the first half of 2010. 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. Reversal of accrued interest on loans placed on nonaccrual reduced net interest income by approximately $679 thousand and $164 thousand for the quarters ended June 30, 2010 and 2009, respectively, representing a negative impact to net interest margin of 0.17% and 0.04%, respectively. Reversal of accrued interest reduced net interest income by approximately $1.4 million and $614 thousand for the six months ended June 30, 2010 and 2009, respectively, representing a negative impact to net interest margin of 0.17% and 0.08%, respectively.

Provision for Loan Losses and Asset Quality

Provision for loan losses for the quarter ended June 30, 2010 totaled $20.0 million, a significant increase from $1.7 million for the quarter ended June 30, 2009. The increase in the loan loss provision was primarily due to difficult economic conditions and troubled real estate markets which resulted in continued rising levels of nonperforming assets and impaired loans. Additionally, higher default and charge-off rates as well as downgrades to the credit ratings of certain loans in the portfolio increased general reserves applied to performing loan groupings. Further, declining real estate values contributed to higher levels of charge-offs on impaired loans. Net charge-offs increased from $1.6 million, or 0.49% of average loans, in the second quarter of 2009 to $13.4 million, or 3.91% of average loans, in the second quarter of 2010.

Provision for loan losses totaled $31.8 million for the first half of 2010, an increase from $7.7 million for the first half of 2009. Net charge-offs increased from $3.9 million, or 0.61% of average loans, in the first half of 2009 to $22.1 million, or 3.19% of average loans, in the first half of 2010.

Nonperforming assets, which include loans on nonaccrual and other real estate, increased to 5.37% of total assets as of June 30, 2010 compared to 2.90% as of December 31, 2009 and 1.40% as of June 30, 2009. Nonperforming assets and restructured loans increased to 5.76% of total assets as of June 30, 2010 compared to 4.87% as of December 31, 2009 and 2.27% as of June 30, 2009. Loans past due more than 30 days, excluding nonperforming loans, increased to 0.72% of total loans as of June 30, 2010 compared to 0.67% as of December 31, 2009 and 0.43% as of June 30, 2009.

As a result of deteriorating credit quality, the Company increased the allowance for loan losses to 2.65% of total loans as of June 30, 2010 compared to 1.88% as of December 31, 2009 and 1.44% as of June 30, 2009. The allowance for loan losses was 48% of nonperforming loans as of June 30, 2010, which was a decline from 66% as of December 31, 2009 and 100% as of June 30, 2009. The allowance for loan losses was 295% of nonperforming loans, net of loans charged down to fair value, which was a significant increase from 115% as of December 31, 2009 and 167% as of June 30, 2009.

Noninterest Income

Noninterest income decreased by $1.2 million, or 33%, declining from $3.7 million in the second quarter of 2009 to $2.5 million in the second quarter of 2010. This decrease was primarily related to a nonrecurring bank-owned life insurance ("BOLI") gain of $913 thousand recorded in the quarter ended June 30, 2009. Also contributing to the noninterest income decrease, the Company realized net gains from sales of certain debt securities totaling $69 thousand in the second quarter of 2010 compared with net gains of $336 thousand in the same quarter last year. Further, mortgage origination and other loan fees declined by $244 thousand. Partially offsetting the decline in noninterest income was an improvement in bank card service income of $158 thousand from a higher volume of debit card transactions as well as an increase of $135 thousand in brokerage fees from improved sales efforts.

Year-to-date noninterest income decreased by $785 thousand, or 14%, declining from $5.8 million in the first half of 2009 to $5.0 million in the first half of 2010. This decrease was primarily related to the nonrecurring BOLI gain in the first half of 2009. Mortgage origination and other loan fees declined by $444 thousand, which also contributed to the noninterest income decrease. Partially offsetting the decline in noninterest income was an increase in net gains on investment securities which totaled $397 thousand in the first half of 2010 compared with $16 thousand in the first half of 2009.

Noninterest Expense

Noninterest expense decreased $85 thousand, or 1%, declining from $12.5 million in the second quarter of 2009 to $12.4 million in the second quarter of 2010. This decrease was due in part to a $537 thousand decline in salaries and employee benefits from the suspension of the Company's 401(k) match in mid-2009 and higher deferred loan costs, which reduce expense. FDIC deposit insurance expense decreased by $528 thousand primarily due to the FDIC's special assessment on all insured depository institutions in the second quarter of last year. Further, directors' fees decreased by $183 thousand primarily due to acceleration of benefit payments on a retirement plan upon the death of a former director and in part due the board reduction late in 2009. Partially offsetting the decrease in noninterest expense was an increase of $376 thousand in advertising and public relations expense due in part from radio and television ads promoting the Company's special financing programs. Other real estate losses and loan-related costs increased $310 thousand as higher loan workout, appraisal and foreclosure costs were incurred. Professional fees increased $250 thousand primarily due to higher legal costs. Other noninterest expense increased $232 thousand in part from a loss incurred upon the repurchase of a previously sold mortgage loan and from higher reserve levels for unfunded lending commitments.

Year-to-date noninterest expense increased $941 thousand, or 4%, rising from $24.0 million in the first half of 2009 to $25.0 million in the first half of 2010. This increase was primarily due to $1.5 million in higher other real estate and loan-related costs, of which $949 thousand was related to valuation adjustments to and losses on the sale of other real estate with the remaining increase representing higher loan workout, appraisal and foreclosure costs. Advertising and public relations expense increased $483 thousand in part from ads promoting the Company's special financing programs. Partially offsetting the increase in noninterest expense was a decrease of $1.1 million in salaries and employee benefits from the suspension of the Company's 401(k) match and higher deferred loan costs.

Income Taxes

Income tax benefits recorded in both the three and six-month periods ended June 30, 2010 were primarily impacted by net losses before income taxes and were partially offset by a valuation allowance of $3.3 million recorded against deferred income taxes in the second quarter of 2010.

Balance Sheet

Loan balances declined by $39.2 million in the first half of 2010 due in part to net charge-offs in the period as well as net principal paydowns on outstanding loans. The declining loan portfolio reflects an effort by the Company to de-leverage its balance sheet to preserve capital and reduce its exposure to certain sectors of the commercial real estate market. Total investment securities decreased by $16.7 million over the same period as management has continued to sell certain municipal bonds to reduce the duration of its fixed income portfolio and to mitigate its exposure to a future rising interest rate environment. The Company's portfolio has also experienced higher levels of paydowns on U.S. government sponsored mortgage-backed securities. Total deposits declined by $7.2 million in the first half of 2010. Checking accounts and time deposits increased by $10.8 million and $16.1 million, respectively, during the six months ended June 30, 2010 while money market accounts decreased by $36.3 million in the same period.

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.

Information in this press release contains forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially, including without limitation, the management of our growth, the risks associated with Capital Bank's loan portfolio, local economic conditions affecting retail and commercial real estate, competition within the industry, dependence on key personnel, government regulation and the risks associated with possible or completed acquisitions. Additional factors that could cause actual results to differ materially are discussed in Capital Bank Corporation's filings with the Securities and Exchange Commission, including without limitation its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K. Capital Bank Corporation does not undertake a duty to update any forward-looking statements in this press release.