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While the world appears to be coming to an end for the Money Center banks, some regionals are getting hit while their fundamentals haven't looked better in years.

I tend to agree with the “sky is falling” crowd on financials in general, but I think it is foolish to keep away from financials that will earn their way out of this mess. Thanks to strong underwriting and an excellent local market, I believe Capital Bank Corp of Raleigh, NC (CBKN) qualifies as one of these survivors.

Before I get into my macro thesis, let's get it out of the way. CBKN holds no subprime or Alt-A mortgages. Commercial/CRE loans were done with a sharp eye on underwriting. Construction finance will be an area to keep an eye on, but I don't see any blowouts there, only $418,000 in NPA. (Have a look for yourself here.)

So, why a 1.18B deposit, 110M market cap speck of a bank? Growth. Management. Cost Control.

On the growth front, anyone who knows about North Carolina knows that the area is growing while the most of the country is coming to a grinding halt. I wont waste your time with the details, but if you are interested, go google “research triangle park” as just one example of why this growth will continue. A second “research triangle” type industrial park is being constructed in CBKN's footprint. Capital's management appears to have the desire and ability to capitalize (pardon the pun) on the region's growth.

While the rest of the banking world dumped billions on branches that made little to no strategic sense, Capital focuses on growing deposits and loans in the branches it has. Last quarter, total loans and deposits increased just over 80M. Net interest margin decreased from 3.59% to 3.21% for the first half of 2008 vs.  2007, but this is a great performance when compared to the competition. The NIM pressure does look to be due to competitive pressures from the Money Center Banks' ridiculously high rates on time deposits. This would appear to be a significant handicap, but the Wachovias of the world are not going to be able to offer these rates forever if they want to stay in business.

Non-interest expense MRQ was been basically flat year-over-year. This is pretty incredible when you think about the size of CBKN in relation to its peers and look at the deposit/loan growth. For comparison, BB&T non-interest expense increased 8.6% and First Citizen's was up 14.8%. This cost control culture will be a benefit no matter what the economy.

In conclusion, CBKN is poised to move higher. It is currently trading at around a 10% discount to book value, has little analyst coverage and a small float. I don't expect to see this explode to the upside tomorrow, but over the next few quarters, CBKN will begin to show up on some screens when investors start looking at the real fundamentals of these regionals.

PS: Take a look at the insider buying and the top 10 institutional holders.

Disclosure: Author holds a long position in CBKN

Source: Capital Bank: The Baby That Went Out with the Bathwater