Capital Bank Announces Financial Results for Third Quarter of 2010

RALEIGH, N.C., Nov. 12, 2010 /PRNewswire-FirstCall/ -- Capital Bank Corporation (Nasdaq: CBKN), the parent company of Capital Bank, today reported financial results for the third quarter of 2010.

Key Items in Third Quarter of 2010:

• Regulatory capital ratios remained in excess of "well capitalized" levels as of September 30, 2010;
• Net loss to common shareholders was $9.7 million, or $0.74 per share, in the third quarter of 2010 compared with net income to common shareholders of $3.0 million, or $0.26 per share, in the third quarter of 2009;
• Net interest margin improved to 3.48% in the third quarter of 2010 from 3.25% in the second quarter of 2010 and 3.41% in the third quarter of 2009;
• Nonperforming assets, including restructured loans, were 5.69% of total assets as of September 30, 2010 compared with 5.76% as of June 30, 2010 and 4.87% as of December 31, 2009;
• Allowance for loan losses increased to 2.74% of total loans as of September 30, 2010 from 2.65% as of June 30, 2010 and 1.88% as of December 31, 2009;
• Provision for loan losses fell to $6.8 million in the third quarter of 2010 from $20.0 million in the second quarter of 2010 but increased from $3.6 million in the third quarter of 2009; and
• The valuation allowance recorded against deferred tax assets increased to $8.8 million as of September 30, 2010 from $3.3 million as of June 30, 2010.

On November 4, 2010, subsequent to the third quarter of 2010, the Company announced that North American Financial Holdings, Inc. ("NAFH") agreed to invest approximately $181 million in the Company through the purchase of the Company's common stock at $2.55 per share. The transaction will result in NAFH owning approximately 85% of the Company's common stock. This investment is pursuant to terms and conditions in the investment agreement and is subject to receipt of all necessary regulatory approvals, shareholder approval, and certain other customary closing conditions.

"Our quarterly financial results were impacted by elevated credit losses and an increase in the valuation allowance on our deferred tax assets," stated B. Grant Yarber, president and CEO. "While these factors negatively impacted our bottom line, we remain focused on capital preservation, asset quality, and liquidity management as we emerge from the 'great recession.' Many of our borrowers remain under stress, but we continue to work aggressively to resolve our problem loans and have experienced measurable success with many of these efforts. We are encouraged by the decrease in our nonperforming assets during the third quarter of 2010. As previously announced, we are thrilled to have NAFH commit to investing a significant amount of capital in Capital Bank Corporation, and we look forward to the opportunities this investment will provide for our shareholders, our customers, and our employees."

Net Interest Income

Net interest income decreased by $173 thousand, declining from $13.6 million in the third quarter of 2009 to $13.4 million in the third quarter of 2010. This decrease was primarily due to a 3.3% drop in average earning assets from the third quarter of 2009 to the third quarter of 2010 and was partially offset by an increase in net interest margin from 3.41% in the third quarter of 2009 to 3.48% in the third quarter of 2010. Net interest margin benefited from a significant decline in funding costs partially offset by a decline in asset yields. Rates on total interest-bearing liabilities fell from 2.33% for the quarter ended September 30, 2009 to 1.76% for the quarter ended September 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 third quarter of 2009, representing a benefit to net interest margin of 0.27% in that quarter. Since the swap expired in 2009, the Company received no benefit in the third quarter of 2010.

Year-to-date net interest income increased by $2.8 million, rising from $35.9 million in the first nine months of 2009 to $38.7 million in the first nine months of 2010. This improvement was due to an increase in net interest margin from 3.11% in the first nine months of 2009 to 3.30% in the first nine months of 2010, coupled with 0.9% growth in average earning assets over the same period. The interest rate swap contributed $3.4 million to interest income in the first nine months of 2009, representing a benefit to net interest margin of 0.28% in that period.

Mr. Yarber continued, "Ongoing improvement in our margin has been a highlight for Capital Bank. The third quarter 2010 net interest margin of 3.48% was our highest reported quarterly margin in three years despite elevated levels of nonaccrual loans and an interest rate swap that provided margin benefit through the fourth quarter of 2009."

Provision for Loan Losses and Asset Quality

Provision for loan losses for the quarter ended September 30, 2010 totaled $6.8 million, an increase from $3.6 million for the quarter ended September 30, 2009 and a decrease from $20.0 million for the quarter ended June 30, 2010. The loan loss provision remains elevated compared to the same quarter last year due to significantly higher levels of nonperforming assets as well as increased charge-off rates as the Company continues making progress resolving problem loans. On a linked-quarter basis, however, the loan loss provision declined as charge-offs were reduced and nonperforming assets fell. Net charge-offs totaled $6.3 million, or 1.87% of average loans, in the third quarter of 2010, an increase from $2.7 million, or 0.80% of average loans, in the third quarter of 2009 and a decrease from $13.4 million, or 3.91% of average loans, in the second quarter of 2010.

Provision for loan losses totaled $38.5 million for the first nine months of 2010, an increase from $11.2 million for the first nine months of 2009. Net charge-offs increased from $6.5 million, or 0.67% of average loans, in the first nine months of 2009 to $28.4 million, or 2.76% of average loans, in the first nine months of 2010.

Nonperforming assets, which include nonperforming loans and other real estate, totaled 5.32% of total assets as of September 30, 2010, a decrease from 5.37% as of June 30, 2010 and an increase from 2.90% as of December 31, 2009. Nonperforming assets, including restructured loans, totaled 5.69% of total assets as of September 30, 2010, a decrease from 5.76% as of June 30, 2010 and an increase from 4.87% as of December 31, 2009. Loans past due more than 30 days, excluding nonperforming loans, increased to 1.00% of total loans as of September 30, 2010 compared to 0.72% of total loans as of June 30, 2010 and 0.67% as of December 31, 2009.

The allowance for loan losses increased to 2.74% of total loans as of September 30, 2010 compared to 2.65% as of June 30, 2010 and 1.88% as of December 31, 2009. The allowance for loan losses covered 52% of nonperforming loans as of September 30, 2010, which was an increase from 48% as of June 30, 2010 and a decrease from 66% as of December 31, 2009. The allowance for loan losses covered 401% of nonperforming loans, net of impaired loans charged down to fair value, which was a significant increase from 295% as of June 30, 2010 and 115% as of December 31, 2009. As the Company continues to charge down the majority of its impaired loans to current fair value, the allowance for loan losses increasingly represents reserves against performing loans rather than specific reserves against impaired loans.

Noninterest Income

Noninterest income remained relatively flat, totaling $2.5 million in both quarters ended September 30, 2010 and 2009. Bank card services increased by $112 thousand from a higher volume of debit card transactions, and brokerage fees increased by $116 thousand as a result of improved sales efforts. Further, net gains on investment securities, including sales of debt securities as well as appreciation in fair market value of an equity investment, increased by $96 thousand. Offsetting these increases in noninterest income, service charges and other fees declined by $244 thousand due to a reduction in the volume of overdrawn accounts and non-sufficient funds transactions. Additionally, bank owned life insurance, or BOLI, income fell by $102 thousand after the Company surrendered certain BOLI contracts in the third quarter of 2010.

Year-to-date noninterest income decreased by $792 thousand, or 10%, declining from $8.3 million in the first nine months of 2009 to $7.5 million in the first nine months of 2010. This decrease was primarily related to a nonrecurring BOLI gain of $913 thousand in the nine months ended September 30, 2009. In addition, service charges and other fees declined by $433 thousand while mortgage origination and other loan fees declined by $412 thousand. Partially offsetting the decline in noninterest income was an increase of $477 thousand in net gains on investment securities. Additionally, bank card services increased by $346 thousand from a higher volume of debit card transactions, and brokerage fees increased by $275 thousand as a result of improved sales efforts.

Noninterest Expense

Noninterest expense increased $3.1 million, or 28%, rising from $11.1 million in the third quarter of 2009 to $14.2 million in the third quarter of 2010. This increase was primarily due to a $1.5 million increase in other real estate and loan-related costs, of which $1.0 million was related to valuation adjustments to and losses on the sale of other real estate with the remaining increase representing higher loan workout, appraisal and foreclosure costs to resolve problem assets. Additionally, salaries and employee benefits expense increased by $790 thousand due to lower deferred loan costs, which decrease expense, and increased employee health insurance expense. Other noninterest expense increased by $376 thousand primarily due to legal fees and other professional fees associated with the Company's recent public stock offering and withdrawn registration statement.

Year-to-date noninterest expense increased $4.1 million, or 12%, rising from $35.1 million in the first nine months of 2009 to $39.2 million in the first nine months of 2010. This increase was primarily due to a $2.9 million increase in other real estate and loan-related costs, of which $1.9 million was related to valuation adjustments to and losses on the sale of other real estate with the remaining increase representing higher loan workout, appraisal and foreclosure costs to resolve problem assets. Professional fees increased by $614 thousand due to higher legal and audit expense, and other noninterest expense increased by $657 thousand primarily due to fees associated with the Company's recent public stock offering and withdrawn registration statement.

Income Taxes

Income taxes recorded in both the three and nine-month periods ended September 30, 2010 were primarily impacted by net losses before income taxes in those periods, which created tax benefits, offset by valuation allowances recorded against deferred tax assets. The valuation allowance recorded against deferred tax assets increased to $8.8 million as of September 30, 2010 from $3.3 million as of June 30, 2010.

Deferred tax assets represent timing differences in the recognition of certain tax benefits for accounting and income tax purposes, including the expected value of future tax savings that will be available to the Company to offset future taxable income through the carry forward of net operating losses. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. In future periods, the Company may be able to reduce some or all of the valuation allowance upon a determination that it will be able to realize such tax savings.

Balance Sheet

Loan balances declined by $65.4 million in the first nine months 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 $49.4 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 relatively high levels of paydowns on U.S. government sponsored mortgage-backed securities. The cash surrender value of BOLI policies decreased by $15.9 million after the Company surrendered certain BOLI contracts on former employees and directors in the third quarter of 2010 for the purpose of repositioning the BOLI portfolio for capital, liquidity and tax planning purposes.

Total deposits declined by $18.6 million in the first nine months of 2010. Savings accounts and time deposits increased by $2.2 million and $31.3 million, respectively, during the nine months ended September 30, 2010 while checking accounts and money market accounts decreased by $7.7 million and $44.4 million, respectively, in the same period. Borrowings and repurchase agreements decreased by $44.5 million in the first nine months of 2010 as the Company paid off certain short-term borrowings with increased liquidity from paydowns on loans and investment securities as well as the surrender of certain BOLI contracts.

Capital Bank Corporation, headquartered in Raleigh, N.C., with approximately $1.6 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.

Cautionary Statement

The investment by NAFH discussed above involves the sale of securities in a private transaction that will not be registered under the Securities Act of 1933, as amended, and will be subject to the resale restrictions under that act. Such securities may not be offered or sold absent registration or an applicable exemption from registration requirements. This document does not constitute an offer to sell or a solicitation of an offer to buy any securities, nor shall there be any sale of securities in any state or jurisdiction in which such an offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction.

Forward-looking Statements

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 inability to comply with the requirements of our Memorandum of Understanding with the FDIC and the North Carolina Office of the Commissioner of Banks (the "NC Commissioner"), delays in obtaining or failure to receive required regulatory approvals for the NAFH investment, including approval by the NC Commissioner and the Board of Governors of the Federal Reserve System and the U.S. Department of the Treasury's agreement to permit the Company to redeem or repurchase the Treasury's preferred stock and warrant, the possibility that fewer than the required number of the Company's shareholders vote to approve the NAFH investment or the related amendment to the Company's articles of incorporation, the occurrence of events that would have a material adverse effect on the Company as described in the NAFH investment agreement, the risk that the investment agreement could be terminated under circumstances that would require the Company to pay a termination fee of $5 million, 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 (the "SEC"), 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.

Additional Information and Where To Find It

This communication may be deemed to be solicitation material in respect of the proposed investment in the Company by NAFH. The Company will file a definitive proxy statement and other documents regarding the proposed investment transaction described in this press release with the SEC. SHAREHOLDERS OF THE CAPITAL BANK CORPORATION ARE URGED TO READ ALL RELEVANT DOCUMENTS FILED WITH THE SEC, INCLUDING THE COMPANY'S DEFINITIVE PROXY STATEMENT, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED TRANSACTION. Investors and security holders will be able to obtain the proxy statement and other relevant documents free of charge at the SEC's website, http://www.sec.gov, and the Company's shareholders will receive information at an appropriate time on how to obtain the proxy statement and other transaction-related documents for free from the Company. Such documents are not currently available.

The Company and its directors, executive officers, certain members of management, and employees may have interests in the proposed investment transaction or be deemed to be participants in the solicitation of proxies of the Company's shareholders to approve the proposed investment transaction. Certain information regarding the participants and their interest in the solicitation is set forth in the proxy statement for the Company's 2010 Annual Meeting of Shareholders filed with the SEC on April 30, 2010. Shareholders may obtain additional information regarding the interests of such participants by reading the definitive proxy statement relating to the proposed transaction when it becomes available.

All selected financial data presented below is unaudited.