U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) OCTOBER 2, 1997
TRIANGLE BANCORP, INC.
<TABLE>
<S> <C>
NORTH CAROLINA 0-21346 56-1764546
(STATE OR OTHER JURISDICTION OF INCORPORATION) (COMMISSION FILE NUMBER) IRS EMPLOYER IDENTIFICATION NO.)
</TABLE>
4300 GLENWOOD AVENUE, RALEIGH, NORTH CAROLINA 27612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (919) 881-0455
2
<PAGE>
Item 5. Other Information
(A) As reported in the Triangle Bancorp, Inc. ("Triangle")
Form 8-K filed on May 19, 1997, Triangle announced that on
April 25, 1997 Triangle signed a definitive Agreement and Plan
of Reorganization and Merger (the "Agreement") with Bank of
Mecklenburg, Charlotte, North Carolina, ("Mecklenburg")
whereby Mecklenburg will be acquired by and operated as a
subsidiary of Triangle. The acquisition of Mecklenburg by
Triangle was completed on October 2, 1997, as reported by
Triangle in its Current Report on Form 8-K filed on October
17, 1997.
As a result of the acquisition of Mecklenburg, which was
accounted for as a pooling-of-interests, the financial
statements of Triangle have been restated. Attached as listed
under the exhibits below, are supplemental consolidated
financial statements as of December 31, 1996 and 1995 and for
each of the three years ended December 31, 1996, 1995 and
1994.
Pro forma financial information has also been included with
this report to reflect the pro forma combined condensed
balance sheet as of June 30, 1997 and the pro forma combined
condensed statement of income for the six months ended June
30, 1997 and the year ended December 31, 1996.
(B) As reported in Triangle's Form 8-K's dated May 16 and May
23, 1997, the Company announced that on May 2, 1997, it signed
a Purchase and Assumption Agreement (the "Branch Agreement")
with Branch Banking and Trust Company ("BB&T"), United
Carolina Bank ("UCB") and Centura Bank ("Centura") whereby
BB&T and UCB (collectively the "Seller") agreed to divest
certain assets and liabilities and Triangle and Centura agreed
to acquire such assets and liabilities. The branch acquisition
was completed on August 15, 1997, and Triangle acquired ten
branch office locations with total deposits of approximately
$195 million and loans of approximately $62 million.
Pro forma financial information has been included with this
report to reflect the pro forma combined balance sheet as of
June 30, 1997 and the pro forma statements of income for the
six months ended June 30, 1997 and the year ended December 31,
1996.
3
<PAGE>
Item 7. Exhibits
23 Consent of Coopers & Lybrand L.L.P.
99(a) Supplemental Consolidated Financial Statements of
Triangle Bancorp, Inc. and Subsidiaries as of December 31,
1996 and 1995 and for each of the years ended December 31,
1996, 1995 and 1994.
99(b) Management's Discussion and Analysis of Financial
Condition and Results of Operations as of December 31, 1996
and 1995 and for each of the years ended December 31, 1996,
1995 and 1994.
99(c) Guide 3 Disclosures.
99(d) Pro forma financial information.
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, Triangle Bancorp, Inc. has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
TRIANGLE BANCORP, INC.
______________________
(Registrant)
Date: October 31, 1997 By: /s/ Debra L. Lee
_______________________
Debra L. Lee
Chief Financial Officer
5
<PAGE>
EXHIBIT INDEX
Page
23 Consent of Coopers & Lybrand L.L.P.
99(a) Supplemental Consolidated Financial Statements of Triangle
Bancorp, Inc. and Subsidiaries as of December 31, 1996 and 1995 and for
each of the years ended December 31, 1996, 1995 and 1994.
99(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations as of December 31, 1996 and 1995 and for each of
the years ended December 31, 1996, 1995 and 1994.
99(c) Guide 3 Disclosures.
99(d) Pro forma financial information.
5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Triangle Bancorp, Inc.
Raleigh, North Carolina
We have audited the supplemental consolidated balance sheets of Triangle
Bancorp, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
supplemental consolidated statements of income, changes in shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of the
Bank of Mecklenburg, a wholly owned subsidiary, which statements reflect total
assets and revenues constituting 21.8 percent and 18.5 percent, respectively,
for 1996 and 19.0 percent and 14.4 percent, respectively, for 1995, and revenues
constituting 12.0 percent for 1994, of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts for Bank of
Mecklenburg, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The supplemental financial statements give retroactive effect to the merger of
Triangle Bancorp, Inc. and Bank of Mecklenburg on October 2, 1997, which has
been accounted for as a pooling of interests as described in Notes 1 and 2 to
the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests methods in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Triangle Bancorp.
Inc. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
<PAGE>
In our opinion, based on our report and the report of the other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Triangle Bancorp, Inc. and subsidiaries
as of December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles
applicable after financial statements are issued for a period which includes the
date of consummation of the business combination.
Raleigh, North Carolina
October 30, 1997
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Supplemental Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands, except share data)
<S> <C>
ASSETS
Cash and due from banks $ 40,725 $ 47,136
Federal funds sold 2,011 7,910
Interest-bearing deposits in banks 879 1,128
Securities available for sale 282,576 212,499
Securities held to maturity, estimated market value
in 1996 and $92,968 in 1995 98,112 89,452
Loans held for sale 2,413 3,497
Loans, less allowance for loan losses of $10,890 in 1996
and $9,658 in 1995 752,399 639,557
Premises and equipment, net 26,426 21,154
Interest receivable 10,410 8,950
Deferred income taxes 6,815 5,907
Intangible assets, net 12,607 9,124
Other assets 6,021 7,731
---------- ----------
$1,241,394 $1,054,045
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 154,015 $ 138,232
Interest-bearing demand 135,841 125,717
Savings and money market accounts 187,619 153,959
Large denomination certificates of deposit 104,970 79,174
Other time 443,307 347,796
---------- ----------
Total deposits 1,025,752 844,878
Short-term debt 46,638 69,322
Other borrowings 50,342 30,391
Interest payable 8,584 7,919
Other liabilities 4,342 4,665
---------- ----------
Total liabilities 1,135,658 957,175
---------- ----------
Commitments and contingencies (Notes 12 and 13)
Shareholders' equity:
Common stock; no par value; 20,000,000 shares
authorized; 12,586,481 shares and 12,534,523 shares
issued and outstanding in 1996 and 1995,
respectively 76,670 76,423
Retained earnings 29,052 19,363
Net unrealized gains on securities available for sale 14 1,084
---------- ----------
Total shareholders' equity 105,736 96,870
---------- ----------
$1,241,394 $1,054,045
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Supplemental Consolidated Statements of Income
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $ 67,633 $ 56,497 $ 44,652
Federal funds sold and securities purchased under
resale agreements 296 525 601
Securities 21,557 16,281 12,507
Deposits with other financial institutions 473 421 266
-------- -------- --------
Total interest income 89,959 73,724 58,026
-------- -------- --------
Interest expense:
Large denomination certificates of deposit 11,796 9,223 5,273
Other deposits 27,181 22,065 16,162
Borrowed funds 5,345 2,981 2,181
-------- -------- --------
Total interest expense 44,322 34,269 23,616
-------- -------- --------
Net interest income 45,637 39,455 34,410
Provision for loan losses 2,330 523 1,299
-------- -------- --------
Net interest income after provision for loan losses 43,307 38,932 33,111
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 5,920 4,870 4,876
Other service charges, commissions and fees 1,842 2,046 2,296
Gain (loss) on sales of securities 1,144 284 (1,694)
Other operating income 996 1,245 378
-------- -------- --------
Total noninterest income 9,902 8,445 5,856
-------- -------- --------
Noninterest expense:
Salaries 12,607 12,239 12,051
Employee benefits 2,302 2,143 2,287
Occupancy expense 3,007 2,313 2,331
Equipment expense 2,667 2,628 2,352
Amortization of intangible assets 1,518 1,176 727
Merger expenses 494 2,582 880
Legal and professional fees 1,365 1,969 1,276
Stationery, printing and supplies 973 1,065 896
Other operating expense 7,787 7,486 8,322
-------- -------- --------
Total noninterest expense 32,720 33,601 31,122
-------- -------- --------
Income before income taxes 20,489 13,776 7,845
Income tax expense 7,269 4,662 2,661
-------- -------- --------
Net income $ 13,220 $ 9,114 $ 5,184
======== ======== ========
Primary earnings per share $ 1.02 $ .72 $ .42
======== ======== ========
Fully diluted earnings per share $ 1.01 $ .71 $ .42
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Supplemental Consolidated Statements
of Changes in Shareholders' Equity
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss)
Common Stock on Securities Total
------------------------- Undivided Available Shareholders'
Shares Amount Profits for Sale Equity
------ ------ ------- -------- ------
(in thousands, except share and per share data)
<S> <C>
Balance, December 31, 1993, as previously
reported 9,281,438 $54,260 $ 7,190 $ 61,450
Adjustments for pooling-of-interests 2,641,010 18,106 804 18,910
---------- ------- ------- ------- --------
Balance, December 31, 1993 11,922,448 72,366 7,994 80,360
Adjustment to beginning balance for change in
accounting principle, net 324 324
Shares issued under stock plans 301,655 1,995 1,995
Common shares issued to the public 85,834 515 515
Cash dividends paid (914) (914)
Change in unrealized gain (loss), net (4,577) (4,577)
Net income 5,184 5,184
---------- ------- ------ ------- -------
Balance, December 31, 1994 12,309,937 74,876 12,264 (4,253) 82,887
Shares issued under stock plans 65,604 446 446
Common shares issued to the public 175,000 1,300 1,300
Repurchased shares (15,000) (188) (188)
Cash payments for fractional shares (1,018) (11) (11)
Cash dividends paid (2,015) (2,015)
Change in unrealized gain (loss), net 5,337 5,337
Net income 9,114 9,114
---------- ------- ------ ------ --------
Balance, December 31, 1995 12,534,523 76,423 19,363 1,084 96,870
Shares issued under stock plans 71,069 527 527
Repurchased shares (18,900) (277) (277)
Cash payments for fractional shares (211) (3) (3)
Cash dividends paid (3,531) (3,531)
Change in unrealized gain (loss), net (1,070) (1,070)
Net income 13,220 13,220
---------- ------- ------- ------- --------
Balance, December 31, 1996 12,586,481 $76,670 $29,052 $ 14 $105,736
========== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Supplemental Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C>
Cash flows from operating activities:
Net income $ 13,220 $ 9,114 $ 5,184
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 3,603 2,723 2,491
Writedown of fixed assets 0 1,358 118
Accretion of discount on securities, net of
amortization of premiums 724 281 984
Provision for loan losses 2,330 523 1,299
Loss (gain) on sales of securities (1,144) (284) 1,694
Loss (gain) on market valuation of loans held for
sale (25) 0 402
Loss (gain) on sale of premises and equipment 239 (146) 0
Gain on sale of mortgage servicing portfolio 0 (529) 0
Gain on sale of branch (558) 0 0
Loans held for sale:
Originations (21,798) (20,422) (51,011)
Sales 25,934 17,876 58,195
Provision (benefit) for deferred taxes (279) 672 1,548
Gain on sales of foreclosed assets (14) (66) (51)
Changes in assets and liabilities:
Interest receivable (1,459) (1,739) (1,459)
Other assets 233 461 (798)
Interest payable 337 3,221 951
Other liabilities (366) (855) (466)
--------- --------- ---------
Net cash provided by operating activities 20,977 12,188 19,081
--------- --------- ---------
Cash flows from investing activities:
Increase in intangible assets 0 0 (1,101)
Proceeds from maturity and principal paydowns of
securities available for sale 39,664 41,719 38,381
Proceeds from maturity and principal paydowns of
securities held to maturity 24,918 9,454 7,073
Proceeds from sales of securities available for sale 307,826 99,982 56,820
Proceeds from sales of securities held to maturity 14,645 0 10,953
Purchase of securities available for sale (422,127) (169,548) (112,206)
Purchase of securities held to maturity (43,796) (34,428) (39,278)
Purchase of FHLB stock (730) (3,018) (1,008)
Sales of FHLB stock 820 282 0
Net increase in loans (118,196) (95,401) (73,873)
Net capital expenditures, premises and equipment (7,058) (5,265) (2,791)
Proceeds from sales of foreclosed assets 307 382 928
Proceeds from sale of premises and equipment 475 218 0
Proceeds from sale of mortgage servicing portfolio 0 1,467 0
Net cash acquired in acquisitions and divestitures 74,281 32,164 0
--------- --------- ---------
Net cash used in investing activities (128,971) (121,992) (116,102)
--------- --------- ---------
</TABLE>
(Continued)
5
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Supplemental Consolidated Statements of Cash Flows (Continued)
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C>
Cash flows from financing activities:
Net increase in deposit accounts $101,451 $ 52,867 $ 63,087
Net increase (decrease) in short-term debt (33,458) 33,010 5,568
Net increase (decrease) in other borrowings 22,726 (10,949) 4,431
Proceeds from common stock issuance 0 1,300 515
Proceeds from FHLB advances, net 8,000 30,000 10,000
Repurchase of stock (277) (188) 0
Cash payments for fractional shares (3) (11) 0
Shares issued under stock plans 527 446 1,995
Cash dividends paid (3,531) (2,015) (914)
-------- -------- --------
Net cash provided by financing activities 95,435 104,460 84,682
-------- -------- --------
Net decrease in cash and cash
equivalents (12,559) (5,344) (12,339)
Cash and cash equivalents at beginning of year 56,174 61,518 73,857
-------- -------- --------
Cash and cash equivalents at end of year $ 43,615 $ 56,174 $ 61,518
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 43,657 $ 30,957 $ 22,637
======== ======== ========
Income taxes $ 7,432 $ 3,098 $ 2,445
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Triangle Bancorp, Inc. (the "Company") is a bank holding company incorporated in
November 1991 under the laws of the State of North Carolina, with two wholly
owned subsidiaries, Triangle Bank and Bank of Mecklenburg (the "Banks").
Triangle Bank, ("Triangle") was organized and incorporated under the laws of the
State of North Carolina on January 4, 1988. Triangle has two wholly-owned
subsidiaries, Triangle Bank Leasing Corp. ("Leasing"), (currently inactive) and
Triangle Investment Services ("TIS"), which provides discount brokerage
services.
Bank of Mecklenburg ("Mecklenburg") was incorporated on September 8, 1988, and
began operations on July 12, 1989. Bank of Mecklenburg is engaged in general
commercial banking in Mecklenburg County, North Carolina.
Mecklenburg Financial Services, Inc., a wholly-owned subsidiary of Bank of
Mecklenburg, was incorporated on March 7, 1994 to provide investment and trust
services through agreements with outside parties.
The consolidated financial statements have been restated to include the accounts
and operations of companies acquired and accounted for as poolings of interests
as discussed in Note 2.
The accounting and reporting policies of the Company, the Banks and their
subsidiaries follow generally accepted accounting principles and general
practices within the financial services industry. Following is a summary of the
more significant policies.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company, the
Banks and their subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
SECURITIES
The Company classifies its securities into three types as follows:
(a) Securities Held to Maturity - Debt securities that the Company has the
positive intent and ability to hold to maturity which are reported at
amortized cost,
(b) Trading Securities - Debt and equity securities that are bought and held
principally for the purpose of selling in the near term which are reported
at fair value, with unrealized gains and losses included in earnings, or
(c) Securities Available for Sale - Debt and equity securities not classified
as either Securities Held to Maturity or Trading Securities which are
reported at fair value, with unrealized gains and losses reported as a
separate component of shareholders' equity.
7
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SECURITIES (Continued)
The classification of securities is generally determined at the date of
purchase. Gains and losses on sales of securities, computed based on specific
identification of adjusted cost of each security, are included in other income
at the time of the sales. Premiums and discounts on debt securities are
recognized in interest income on the interest method over the period to
maturity.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of cost or estimated market value,
determined on an aggregate basis. Net unrealized losses are recognized in a
valuation allowance by charges to income. Prior to 1995 the Company serviced the
loans sold, paying the buyer an agreed upon yield which was normally less than
the interest rate paid by the borrowers, the difference being retained by the
Company as a service fee. These service fees are included in other service
charges, commissions and fees in the consolidated statements of income. During
December 1995, the Company sold its mortgage servicing portfolio, which amounted
to approximately $135,000,000 and recognized a gain of approximately $529,000 on
the sale.
LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses, unearned discounts and net deferred loan origination fees and
costs. Interest on loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding. Deferred loan fees and costs
are amortized to interest income over the contractual life of the loan using a
method that approximates the level yield method.
A loan is considered impaired, based on current information and events, if it is
probable that the Company 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 original
contractual interest rate, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. During 1996 and 1995 there
were no loans material to the consolidated financial statements that were
impaired as defined.
The Company uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation of
related data. This data includes loan payment status, borrowers' financial data
and borrowers' operating factors such as cash flows, operating income or loss,
etc.
8
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
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. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluations of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans, and current economic conditions and trends that may affect the
borrowers' ability to pay.
INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. Loans that are on a current payment status or past due less than 90
days may also be classified as nonaccrual if repayment in full of principal
and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time, and there is a sustained period of
repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to the principal outstanding, except in the
case of loans with scheduled amortizations where the payment is generally
applied to the oldest payment due. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially charged-off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate.
Receipts in excess of that amount are recorded as recoveries to the allowance
for loan losses until prior charge-offs have been fully recovered.
FORECLOSED ASSETS
Assets acquired as a result of foreclosure are valued at the lower of the
recorded investment in the loan or fair value less estimated costs to sell. The
recorded investment is the sum of the outstanding principal loan balance and
foreclosure costs associated with the loan. Any excess of the recorded
investment over the fair value of the property received is charged to the
allowance for loan losses. Any subsequent write-downs are charged against other
expenses.
9
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the straight-line
method based on estimated service lives of assets. Useful lives range from 10 to
40 years for substantially all premises and from 3 to 20 years for equipment and
fixtures. The cost of leasehold improvements is being amortized using the
straight-line method over the terms of the related leases. Repairs and
maintenance are charged to expense as incurred. Upon disposition, the asset and
related accumulated depreciation or amortization are relieved and any gains or
losses are reflected in operations.
INTANGIBLE ASSETS
Intangible assets are composed primarily of goodwill and core deposit premiums.
Amortization of goodwill and core deposit premiums is computed using the
straight-line method based on the estimated useful lives of assets. Useful lives
range from 10 to 15 years for the core deposit premiums and range from 15 to 25
years for goodwill.
The Company evaluates intangible assets for potential impairment by analyzing
the operating results, trends and prospects of the Company. The Company also
takes into consideration recent acquisition patterns within the banking industry
and any other events or circumstances which might indicate potential impairment.
INTEREST RATE SWAPS, FLOORS AND CAPS
Mecklenburg uses interest rate swaps, floors and caps for interest rate risk
management. These instruments are designated as hedges of specific assets and
liabilities when purchased. The net interest payable or receivable on swaps,
caps, and floors is accrued and recognized as an adjustment to interest income
or interest expense of the related asset or liability. Premiums paid for
purchased caps and floors are amortized over the term of the liability. Upon the
early termination of swaps, floors and caps, the net proceeds received or paid,
including premiums, are deferred and included in other assets or liabilities and
amortized over the shorter of the remaining contract life or the maturity of the
related asset or liability. Upon disposition or settlement of the asset or
liability being hedged, deferral accounting is discontinued and any related
premium or change in fair value of the hedge instrument is recognized in
earnings. If the hedge instrument is retained subsequent to the disposition or
settlement of the underlying asset or liability, it will be redesignated to
specific assets or liabilities and any change in fair value of the instrument
recognized in earnings in connection with the previous disposition of the
underlying asset or liability will be recorded as a purchase premium and
amortized into interest income over the contract term as a yield adjustment of
the related asset or liability.
10
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company files a consolidated Federal income tax return. State income tax
returns are filed for each corporation.
Deferred tax asset and liability balances are determined by application to
temporary differences of the tax rate expected to be in effect when taxes will
become payable or receivable. Temporary differences are differences between the
tax basis of assets and liabilities and their reported amounts in the financial
statements that will result in taxable or deductible amounts in future years.
The effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
NET INCOME PER COMMON SHARE
Primary and fully diluted net income per common share is computed by dividing
net income by the weighted average number of shares of common stock and common
stock equivalents of dilutive stock options. The weighted average numbers of
shares were as follows:
1996 1995 1994
---- ---- ----
Primary 12,937,173 12,714,594 12,286,344
Fully diluted 13,006,815 12,867,117 12,289,849
The Company will adopt Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", on December 31, 1997. SFAS No. 128 requires the
Company to change its method of computing, presenting and disclosing earnings
per share information. Upon adoption, all prior periods data presented will be
restated to conform to the provisions of SFAS No. 128. If the Company had
applied the provisions of SFAS No. 128 for the years ended December 31, 1996,
1995 and 1994, basic earnings per share would have been $1.05, $0.73, and $0.43,
respectively and earnings per share assuming dilution would have been $1.02,
$0.72, and $0.42, respectively.
CASH FLOW
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and Federal funds sold. Generally, Federal funds
are purchased and sold for one-day periods.
RECLASSIFICATIONS
Certain items included in the 1995 and 1994 financial statements have been
reclassified to conform to the 1996 presentation. These reclassifications have
no effect on the net income or shareholders' equity previously reported.
11
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, the Company will adopt the applicable
provisions of Statement of Financial Accounting Standards No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". The impact of adopting this statement is not expected to be
material to the Company's consolidated financial statements.
The Company will adopt SFAS No. 130, "Reporting
Comprehensive Income" on January 1, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive
income and its components in a full set of general-purpose
financial statements.
The Company will adopt SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" on January 1, 1998. SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and the type
and level of financial information to be disclosed. The impact of adopting this
statement is not expected to be material to the Company's consolidated financial
statements.
Use of Estimates in the Preparation of the Financial
Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. MERGERS AND ACQUISITIONS
The supplemental consolidated financial statements of Triangle
Bancorp, Inc. and subsidiaries have been prepared to give retroactive effect to
the merger with Bank of Mecklenburg on October 2, 1997. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of Triangle Bancorp,
Inc. and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
On October 24, 1996, the Company completed the merger of Granville
United Bank ("Granville") with and into the Bank through the issuance of 1.75
shares of the Company's common stock for each share of the outstanding common
stock of Granville, or 752,289 shares. On October 2, 1997 the Company completed
the acquisition of Bank of Mecklenburg ("Mecklenburg") through the issuance of
one share of the Company's common stock for each share of the outstanding common
stock of Mecklenburg, or 2,185,068 shares. The mergers were accounted for as
poolings of interests.
12
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS (Continued)
Separate results of the pooled entities for the year ended December
31, 1996, in thousands, are as follows:
Company(1) Mecklenburg Combined
Total income $81,360 $18,501 $99,861
Net interest income 40,256 5,381 45,637
Net income 11,301 1,919 13,220
(1) Prior to applicable mergers.
Granville, prior to its merger with the Company, reported total
income of $3,408,000, net interest income of $1,554,000 and net income of
$470,000 for the nine months ended September 30, 1996.
Separate results of the pooled entities for the years ended December
31, 1995 and 1994, in thousands, are as follows:
Company(1) Granville Mecklenburg Combined
1995:
Total income $65,977 $ 4,330 $11,862 $82,169
Net interest income 33,309 1,792 4,354 39,455
Net income 7,388 470 1,256 9,114
1994:
Total income $53,468 $ 2,755 $ 7,659 $63,882
Net interest income 29,316 1,285 3,809 34,410
Net income 3,841 341 1,002 5,184
(1) Prior to applicable mergers.
On December 8, 1995, Mecklenburg signed a definitive agreement to
purchase certain assets and assume deposit liabilities of a branch office from
Essex Savings Bank. The agreement become effective March 15, 1996 at which time
the Bank assumed approximately $28,100,000 in deposits including accrued
interest thereon, acquired approximately $800,000 in assets consisting of cash
on hand, installment loans and premises and equipment, and received
approximately $26,200,000 in cash. Deposit base premium was approximately
$1,100,000 and is being amortized straight-line over seven years.
13
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
2. MERGERS AND ACQUISITIONS (Continued)
In February 1995, the Bank acquired two branches with approximately
$17,000,000 in deposits and paid a premium of approximately $550,000. In
November 1995, the Bank acquired three branches from NationsBank, N. A., which
included approximately $40,000,000 in deposits and $18,000,000 in loans. As part
of the acquisition, the Bank paid a core deposit premium of approximately
$3,338,000. In January 1996, the Bank acquired four branches from Raleigh
Federal Savings Bank, which included approximately $55,000,000 in deposits. As
part of the acquisition, the Bank paid a core deposit premium of approximately
$3,500,000. During May 1996, the Bank completed a branch swap transaction which
included divesting of net deposits of $3,700,000. A gain was recognized on the
sale of the deposits of $558,000 and a core deposit premium was paid of
$286,000. These acquisitions were accounted for as purchases and, accordingly,
the results of operations of the branches have been included in the consolidated
financial statements from the dates of acquisition. The proforma effects of
these transactions were immaterial.
3. SECURITIES
The amortized cost and estimated market value of securities at
December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
1996:
Available for sale:
U.S. Treasury securities $117,732 $ 481 $ 311 $117,902
U.S. Agency obligations 12,179 47 69 12,157
Mortgage-backed securities 127,818 491 279 128,030
Obligations of states and political subdivisions 14,369 80 108 14,341
Collateralized mortgage obligations 2,145 0 37 2,108
Equity securities 64 0 0 64
End-user derivatives 4,293 473 916 3,850
Other investments 4,124 0 0 4,124
--------- -------- -------- --------
$282,724 $ 1,572 $ 1,720 $282,576
========= ======== ======== ========
Held to maturity:
U.S. Agency obligations $ 72,134 $ 680 $ 231 $ 72,583
Mortgage-backed securities 8,711 5 152 8,564
Obligations of states and political subdivisions 13,663 296 41 13,918
Collateralized mortgage obligations 3,050 0 25 3,025
Other investments 554 23 0 577
--------- -------- -------- --------
$ 98,112 $ 1,004 $ 449 $ 98,667
========= ======== ======== ========
</TABLE>
14
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
3. SECURITIES (Continued)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
(in thousands)
<S> <C> <C> <C> <C>
1995:
Available for sale:
U.S. Treasury securities $ 92,966 $ 1,260 $ 113 $ 94,113
U.S. Agency obligations 23,471 130 194 23,407
Mortgage-backed securities 85,888 449 118 86,219
Obligations of states and political subdivisions 2,587 17 8 2,596
Collateralized mortgage obligations 2,766 0 51 2,715
Other investments 3,449 0 0 3,449
-------- -------- -------- ---------
$211,127 $ 1,856 $ 484 $212,499
======== ======== ======== ========
Held to maturity:
U.S. Agency obligations $ 49,047 $ 3,257 $ 114 $ 52,190
Mortgage-backed securities 13,598 34 103 13,529
Obligations of states and political subdivisions 8,934 359 7 9,286
Collateralized mortgage obligations 3,068 15 16 3,067
Municipal bonds 13,167 165 116 13,216
Other investments 1,638 42 0 1,680
-------- -------- -------- ---------
$ 89,452 $ 3,872 $ 356 $ 92,968
======== ======== ======== ========
</TABLE>
The amortized cost and estimated market value of securities at
December 31, 1996 by contractual maturities are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
(in thousands)
Available for sale:
Due in one year or less $ 38,024 $ 38,079
Due after one year through five years 87,248 87,423
Due after five years through ten years 4,443 3,858
Due after ten years 152,945 153,152
Equity securities 64 64
-------- --------
$282,724 $282,576
======== ========
Held to maturity:
Due in one year or less $ 29,075 $ 29,072
Due after one year through five years 47,849 48,156
Due after five years through ten years 11,572 11,829
Due after ten years 9,616 9,610
-------- --------
$ 98,112 $ 98,667
======== ========
15
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
3. SECURITIES (Continued)
Gross realized gains and losses on sales of securities for the years
ended December 31, 1996, 1995 and 1994 are summarized below:
1996 1995 1994
(in thousands)
Gross realized gains $3,728 $ 848 $ 356
====== ====== ======
Gross realized losses $2,584 $ 564 $2,050
====== ====== ======
In addition, in 1996, gross gains of $1,188,801 and gross losses of
$682,049 were realized on terminations or marks to market of end-user
derivatives in available for sale securities. Gross gains of $700,250 were
realized on terminations or marks to market of end-user derivatives designated
to investment securities sold.
In connection with the Company's merger transactions, the acquired
entities sold certain held to maturity securities in late 1994 as part of a plan
to restructure their portfolios so as to comply with the investment policies of
the Company. These securities had an amortized cost of $12,016,000 and the
Company realized losses totaling $1,063,000 on the sales. The Company also
transferred securities with an amortized cost of $17,398,000 from the available
for sale category to the held to maturity category during the year ended
December 31, 1995.
During 1996, the Company, upon evaluation of the Granville investment
portfolio, transferred securities with an amortized cost of $4,557,000 and an
estimated market value of $4,400,000 from the available for sale category to the
held to maturity category.
On December 29, 1995, the Company transferred securities between
categories under a one-time amnesty provision from SFAS No. 115. Securities with
a carrying value of $15,982,000 and a market value of $16,236,000 were
transferred from the held to maturity category to the available for sale
category. The carrying values of these securities were adjusted to market upon
transfer. Securities with a carrying value of $12,295,000 and a market value of
$12,532,000 were transferred from the available for sale category to the held to
maturity category.
Securities with an amortized cost of approximately $153,529,000 and $59,896,000
as of December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, FHLB advances and for other banking purposes.
16
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans as of December 31, 1996 and 1995, are
summarized as follows:
1996 1995
(in thousands)
Commercial
Real estate: $ 183,889 $ 168,055
Construction and land development 56,077 43,173
Residential, 1-4 families 279,290 193,025
Residential, 5 or more families 3,554 5,782
Farmland 7,326 9,339
Nonfarm, nonresidential 133,546 125,486
Agricultural production 10,674 12,964
Installment 82,580 81,622
Other 6,751 9,980
Net deferred loan fees (398) (211)
--------- ---------
763,289 649,215
Less allowance for loan losses 10,890 9,658
--------- ---------
$ 752,399 $ 639,557
========= =========
A summary of the allowance for loan losses for the years ended
December 31, 1996, 1995 and 1994, is as follows:
1996 1995 1994
(in thousands)
Balance, beginning of year $ 9,658 $ 10,161 $ 11,769
Provision charged against income 2,330 523 1,299
Loans charged off, net of recoveries (1,000) (1,026) (3,005)
Allowance on purchased (sold) loans (98) -- 98
-------- -------- --------
Balance, end of year $ 10,890 $ 9,658 $ 10,161
======== ======== ========
Nonperforming assets at December 31, 1996 and 1995, consist of the following:
1996 1995
(in thousands)
Loans past due ninety days or more $2,107 $1,033
Nonaccrual loans 1,666 1,533
Foreclosed assets (included in other assets) 507 499
------ ------
$4,280 $3,065
====== ======
17
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1996 and 1995,
are as follows:
1996 1995
(in thousands)
Premises $16,895 $10,583
Equipment and fixtures 12,787 12,674
Leasehold improvements 550 588
------- -------
30,232 23,845
Less accumulated depreciation and amortization 9,734 10,131
------- -------
20,498 13,714
Construction in process 684 2,867
Land 5,244 4,573
------- -------
$26,426 $21,154
======= =======
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1996 and 1995 and the related
amortization expense for the years ended December 31, 1996, 1995 and 1994 are as
follows:
1996 1995
(in thousands)
Intangible assets:
Core deposit premiums $14,737 $ 9,842
Goodwill 1,433 1,327
------- -------
16,170 11,169
Less accumulated amortization 3,563 2,045
------- -------
$12,607 $ 9,124
======= =======
1996 1995 1994
(in thousands)
Amortization expense:
Core deposit premiums $1,436 $ 751 $ 365
Goodwill 82 87 79
Purchased mortgage servicing rights 338 283
------ ------ ------
$1,518 $1,176 $ 727
====== ====== ======
18
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
7. SHORT-TERM DEBT AND OTHER BORROWINGS
Short-term debt of $46,638,000 and $69,322,000 outstanding at
December 31, 1996 and 1995, respectively, consists of securities sold under
agreements to repurchase ("repurchase agreements"), Federal funds purchased and
Federal Home Loan Bank ("FHLB") advances. These amounts included $34,738,000 and
$23,666,000 of repurchase agreements at December 31, 1996 and 1995,
respectively, $3,900,000 and $16,155,000 of Federal funds purchased at December
31, 1996 and 1995, respectively, and $8,000,000 and $19,500,000 of FHLB advances
at December 31, 1996 and 1995, respectively. The weighted average interest rate
on such outstanding borrowings was 5.43% and 5.51% at December 31, 1996 and
1995, respectively. The maximum amount outstanding at the end of any month
during 1996 and 1995 was approximately $109,711,000 and $66,019,000,
respectively.
The Company has pledged certain securities to collateralize the
repurchase agreements. These agreements generally mature and are renewed daily.
Other borrowings at December 31, 1996 and 1995 consist of advances
from the FHLB of $50,000,000 and $30,000,000, respectively, and treasury tax and
loan note option accounts of $342,000 and $391,000, respectively. At December
31, 1996, FHLB borrowings include two $5,000,000 advances with interest rates of
5.86% and 6.14% with due dates of January 1998 and 1999, respectively, one
$30,000,000 advance with an interest rate of 5.42% due in February 1998, and one
$10,000,000 advance with an interest rate of 5.53% due in March 1998.
8. INCOME TAXES
The components of income tax expense for the years ended December 31,
1996, 1995 and 1994 are as follows:
1996 1995 1994
(in thousands)
Current expense $ 7,548 $ 3,990 $ 1,113
Deferred expense (benefit) (279) 672 1,548
------- ------- -------
$ 7,269 $ 4,662 $ 2,661
======= ======= =======
19
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
8. INCOME TAXES (Continued)
The reconciliation of expected income tax at the statutory Federal
rate (35% in 1996 and 1995 and 34% in 1994) with income tax expense for the
years ended December 31, 1996, 1995 and 1994, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Expected income tax expense at statutory rate $ 7,171 $ 4,822 $ 2,668
Increase (decrease) in income tax expense
resulting from:
State taxes, net of federal tax benefit 582 338 51
Benefit of net operating loss carryforward (229) (217) (34)
Tax exempt interest (389) (342) (267)
Non-deductible interest 13 34 17
Other, net 121 27 226
------- ------- -------
Income tax expense $ 7,269 $ 4,662 $ 2,661
======= ======= =======
</TABLE>
The components of net deferred tax assets at December 31, 1996 and
1995 are as follows:
1996 1995
(in thousands)
Allowance for loan losses $ 2,976 $ 2,150
Accumulated depreciation 1,631 2,050
Deferred compensation 190 213
Net operating loss carryforwards 2,038 1,861
Depreciable basis of fixed assets (368) (338)
Other 175 428
Unrealized securities (gains) losses 173 (457)
------- -------
$ 6,815 $ 5,907
======= =======
The Company has federal net operating loss carryforwards of
approximately $6,000,000, which expire in years 2003 through 2008. Use of the
net operating loss carryforwards is limited to approximately $600,000 each year.
9. EMPLOYEE BENEFIT PLAN
Triangle maintains a 401(k) plan for employees 21 years of age or
over with at least three months of service, which covers substantially all
employees. Under the plan, employees may contribute from 2% to 15% of
compensation, subject to an annual maximum as determined under the Internal
Revenue Code. Employees may elect for up to 25% of their contributions to be
invested in the Company's common stock. The Company matches, in contributions of
the Company's common stock, 100% of the employee's first 2% of contributions and
50% of the next 4% of contributions. Mecklenburg also maintains a 401(k) Plan
which covers substantially all employees. Employees may contribute up to 6% of
their salary with the employer matching up to 6% of eligible contributions, It
is expected. The Company contributed approximately $504,905, $411,700 and
$392,400 to the plan in 1996, 1995 and 1994, respectively.
20
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
10. COMMON STOCK
On May 23, 1996, the shareholders of the Company approved an
amendment to the Company's articles of incorporation to increase the authorized
shares of its common stock to 20,000,000.
The Company has a Long-Term Incentive Plan which allows the Board of
Directors to award any combination of stock options, restricted stock and cash.
During 1996, the Company issued 2,000 shares of restricted stock.
The Company also has qualified incentive stock option plans for the
benefit of certain of the Company's key officers and employees. Additionally,
the Company has non-qualified stock option plans for directors and certain
officers. The Company may grant options under these plans for up to 1,194,513
shares of common stock. Options under these plans are exercisable at no less
than fair market value at the date of grant and are subject to a prorated
five-year vesting requirement. The options are exercisable as they vest and
expire no later than ten years after that date.
On January 1, 1996 the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS
123). As permitted by SFAS 123, the Company has chosen to continue to apply APB
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its Plans. Accordingly, no compensation cost
has been recognized for options granted under the Plan. Had compensation cost
for the Company's Plan been determined based on the fair value at the grant
dates for awards under the Plan consistent with the method of SFAS 123, the
impact on the Bank's net income and net income per share would not have been
material.
A summary of the status of the Company Plans as of December 31, 1996,
1995 and 1994, and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 869,250 $ 7.97 808,444 $ 7.53 552,350 $ 9.42
Pooling adjustment 241,320 7.47
Granted 286,480 12.69 124,387 9.73 188,706 6.98
Exercised (55,144) 6.18 (33,604) 4.77 (108,047) 5.89
Forfeited (43,695) 11.05 (29,977) 7.08 (65,885) 9.59
--------- --------- ------- -------- ------- --------
Outstanding at end of year 1,056,891 $ 9.21 869,250 $ 7.97 808,444 $ 7.53
========= ========= ======= ======== ======= ========
</TABLE>
21
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
10. COMMON STOCK (Continued)
The following table summarizes information about the Plans' stock
options at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted -
Average
Remaining Weighted - Weighted -
Number Contractual Average Number Average
Outstanding Term Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/96 (in years) Price at 12/31/96 Price
<S> <C> <C> <C> <C> <C>
4.00 - 5.99 49,043 4.35 $ 5.54 44,963 $ 5.55
6.00 - 7.00 352,433 4.74 6.47 257,205 6.57
7.01 - 8.00 102,383 4.87 7.44 74,613 7.36
8.01 - 9.00 121,468 4.50 8.57 94,164 8.61
9.01 - 10.00 102,600 8.10 9.73 22,120 9.75
10.01 - 17.00 284,744 9.41 12.56 2,240 11.24
17.01 - 19.00 44,220 3.17 18.18 44,220 18.18
--------- ---- ------ ------- --------
1,056,891 6.22 $ 9.21 539,525 $ 8.06
========= ==== ====== ======= ========
</TABLE>
At December 31, 1996, the Company had outstanding warrants to
purchase 12,000 shares of its common stock at a purchase price of $9.17 per
share. While these warrants are currently exercisable, none have been, and they
expire on December 31, 2000.
11. REGULATORY RESTRICTIONS
The Banks, as North Carolina banking corporations, may pay dividends
only out of undivided profits as determined pursuant to North Carolina General
Statutes Section 53-87. However, regulatory authorities may limit payment of
dividends by any bank when it is determined that such a limitation is in the
public interest and is necessary to ensure the financial soundness of the bank.
Under regulations of the Federal Reserve, banking affiliates are
required to maintain certain minimum average reserve balances which include both
cash on hand and deposits with the Federal Reserve. These deposits are included
in cash and cash equivalents in the accompanying balance sheets. At December 31,
1996 and 1995, the Banks were required to maintain such balances aggregating
approximately $8,432,000 and $11,159,000, respectively.
The Banks are subject to various regulatory capital
requirements administered by the federal and state banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Bank's financial
statements. Management believes, as of December 31, 1996, that
the Banks meet all capital adequacy requirements to which they
are subject.
22
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
11. REGULATORY RESTRICTIONS (Continued)
As of December 31, 1996 and 1995, the most recent notification from
the FDIC categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Banks must maintain minimum amounts and ratios, as set forth in the table
below. There are no conditions or events since that notification that management
believes have changed the Banks' category.
A summary of the Company's required and actual capital components
follows (amounts in thousands):
<TABLE>
<CAPTION>
To Be Well Capitalized
Under Prompt
For Capital Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital ( to Risk Weighted Assets) $102,851 12.6 % $65,196 8.0 % $ 81,495 10.0 %
Tier I Capital ( to Risk Weighted Assets) 93,241 11.4 32,598 4.0 48,897 6.0
Tier I Capital (to Average Assets) 93,241 7.9 47,098 4.0 58,873 5.0
As of December 31, 1995:
Total Capital ( to Risk Weighted Assets) $ 93,326 12.8 % $58,160 8.0 % $ 72,701 10.0 %
Tier I Capital ( to Risk Weighted Assets) 84,683 11.6 29,080 4.0 43,620 6.0
Tier I Capital ( to Average Assets) 84,683 9.1 37,276 4.0 46,595 5.0
</TABLE>
12. LEASE OBLIGATIONS
The Company leases a portion of its facilities under various
operating leases. Rental expense related to such leases amounted to
approximately $1,100,000, $825,000 and $827,000 in 1996, 1995 and 1994,
respectively.
A summary of noncancelable, long-term lease commitments at December
31, 1996 follows:
1997 $ 951,000
1998 932,000
1999 923,000
2000 772,000
2001 676,000
Thereafter 2,882,000
----------
$7,136,000
==========
23
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
lines of credit and standby letters of credit. These instruments involve
elements of credit risk in excess of amounts recognized in the accompanying
financial statements.
The Company's risk of loss in the event of nonperformance by the
other party to the commitment to extend credit, line of credit and standby
letter of credit is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making commitments under such
instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of the
counterparty. Collateral held varies, but may include accounts receivable,
inventory, real estate and time deposits with financial institutions. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
As of December 31, 1996 and 1995, outstanding financial instruments
whose contract amounts represent credit risk were as follows:
1996 1995
(in thousands)
Unfunded loans and lines of credit $149,789 $130,530
======== ========
Standby letters of credit $ 4,435 $ 2,323
======== ========
The Company's lending is concentrated primarily in North Carolina.
Credit has been extended to certain of the Company's customers through multiple
lending transactions.
The Company maintains two Interest Rate Floor contracts, one at 4% with a
notional amount of $8,000,000 and one at 4.25% with a notional amount of
$4,000,000. The contracts extend to September 1997.
Mecklenburg uses off-balance sheet financial contracts to assist in
managing interest rate risk. Instruments used for this purpose include interest
rate swaps, interest rate caps and interest rate floors. Interest rate swap
transactions generally involve the exchange of fixed and floating rate interest
payment obligations without the exchange of the underlying principal or notional
amounts. Entering into interest rate swap agreements involves both the risk of
dealing with counterparties and their ability to meet the terms of the contracts
and also interest rate risk. Interest rate caps and floors are option contracts
for which an initial premium is paid and for which no ongoing interest rate risk
is present. The ability of counterparties to meet their obligation under the
terms of these contracts is the primary risk involved with purchased interest
rate caps and floors. Mecklenburg manages the counterparty credit risk
associated with these instruments through credit approvals, limits and
monitoring procedures.
24
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES (Continued)
For interest rate swaps, interest rate caps and interest rate floors,
notional principal amounts often are used to express the volume of transactions
however, the amount potentially subject to credit risk are much smaller. As of
December 31, 1996, the aggregate notional amount of all outstanding financial
instrument contracts used for interest rate management totaled approximately
$256 million. At December 31, 1996, the carrying amount of financial instruments
used for interest rate risk management was approximately $4,320,000 while the
market value for these instruments was approximately $4,070,000.
The carrying values for off-balance sheet investment products, such
as interest rate swaps, floors and caps represent deferred amounts arising from
these financial instruments. Where possible, the fair values are based upon
quoted market prices. Where such prices do not exist, these values are based on
dealer quotes and generally represent an estimate of the amount that the Bank
would receive or pay to terminate the agreement at the reporting date, taking
into account current interest rates and the current creditworthiness of the
counterparties.
All these instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the consolidated
financial statements. At December 31, 1996, off-balance sheet financial
instruments and their related fair value methods and assumptions, and fair
values are as follows:
<TABLE>
<CAPTION>
Estimated Contract or
Carrying Fair Notional
Amount Value Amount
<S> <C> <C> <C>
Financial instruments used for interest rate
risk management, the designated asset or
liability and terms (in thousands):
Interest rate swap agreements:
Available-for-sale-securities (receive 3 month
LIBOR, pay fixed 6.25%, November 1995 -
November 2002) $ 212 $ 108 $ 10,000
(Receive 3 month LIBOR, pay fixed 5.53%,
February 1996 - February 2001) -- 282 10,000
(Receive 3 month LIBOR, pay fixed 6.54%,
March 2003) 449 (40) 20,000
(Receive 3 month LIBOR, pay fixed 5.93%,
January 2006) 350 293 6,000
-------- ------- --------
$ 1,011 $ 643 $ 46,000
======== ======= ========
</TABLE>
25
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
13. COMMITMENTS AND CONTINGENCIES (Continued)
<TABLE>
<CAPTION>
Estimated Contract or
Carrying Fair Notional
Amount Value Amount
<S> <C> <C> <C>
Purchased interest rate caps (in thousands):
Available-for-sale-securities (Strike price 7%,
3 month LIBOR index, December 1995 -
December 2002) $ 400 $ 434 $ 15,000
(Strike price 4%, 3 month LIBOR index,
October 1995 - October 2000) 291 380 5,000
(Strike price 6%, 3 month LIBOR index,
March 1996 - March 2001) 632 581 20,000
(Strike price 7%, 3 month LIBOR index,
March 1996 - March 2001) 307 323 20,000
(Strike price 7%, 3 month LIBOR index, April
1996 - April 2003) 769 782 25,000
-------- -------- --------
$ 2,399 $ 2,500 $ 85,000
======== ======== ========
Purchased interest rate floors (in thousands):
Variable rate loans (Strike price 6.5%, 1
month LIBOR index, January 1996 -
January 1997) $ -- $ -- $ 25,000
(Strike price 6.38%, 1 month LIBOR index,
January 1997 - January 1998) 26 197 25,000
Available-for-sale-securities (Strike price 5%,
3 month LIBOR index, March 1996 - March
2000) 352 137 40,000
(Strike price 5%, 3 month LIBOR index, April
1996 - April 2006) 531 570 35,000
-------- -------- --------
$ 909 $ 904 $125,000
======== ======== ========
</TABLE>
Various legal proceedings against the Company and its subsidiaries
have arisen from time to time in the normal course of business. Management
believes liabilities arising from these proceedings, if any, will have no
material adverse effect on the financial positions or results of operations of
the Company or its subsidiaries.
Triangle has been named as a defendant in a lender
liability suit currently pending in state court in North
Carolina in which the plaintiff claims that Triangle breached an
oral commitment to make a $100,000 loan to plaintiff. The
plaintiff is asserting that he is entitled to $5 million in
damages and is seeking to have these damages trebled and an
award of attorneys fees. This suit is scheduled to go to trial
in June 1997. Triangle disputes the plaintiff's theories of
liability and damages and intends to continue to defend the suit
vigorously.
26
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
14. RELATED PARTY TRANSACTIONS
In the normal course of business certain directors and executive
officers of the Company, including their immediate families and companies in
which they have an interest, were loan customers.
Activity in these loans is summarized as follows :
1996 1995
(in thousands)
Balance, beginning of year $ 4,827 $ 11,604
Loans made 2,705 3,344
Payment received (3,100) (4,244)
Changes in composition (424) (5,877)
-------- --------
Balance, end of year $ 4,008 $ 4,827
======== ========
15. PARENT COMPANY FINANCIAL DATA
The Company's principal asset is its investment in the Bank. Condensed financial
statements for the parent company as of December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994 are as follows:
1996 1995
(in thousands)
Condensed Balance Sheets
Cash $ 368 $ 331
Investments in wholly-owned subsidiaries 105,136 96,578
Other assets 365 56
-------- --------
Total assets $105,869 $ 96,965
======== ========
Other liabilities $ 133 $ 95
Shareholders' equity 105,736 96,870
-------- --------
Total liabilities and shareholders' equity $105,869 $ 96,965
======== ========
Condensed Statements of Income 1996 1995 1994
Dividends from wholly-owned subsidiary $ 3,447 $ 588 $ 967
Miscellaneous expenses 109 236 274
------- ------- -------
Income before equity in earnings of wholly-owned
subsidiary 3,338 352 693
Equity in undistributed earnings of wholly-owned
subsidiary 9,882 8,762 4,491
------- ------- -------
Net income $13,220 $ 9,114 $ 5,184
======= ======= =======
27
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
15. PARENT COMPANY FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flows 1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 13,220 $ 9,114 $ 5,184
Equity in undistributed earnings of wholly-owned
subsidiary (9,882) (8,762) (4,491)
Decrease (increase) in other assets (309) 378 (361)
Increase (decrease) in other liabilities 38 (44) 84
-------- -------- --------
Net cash provided by operating activities 3,067 686 416
-------- -------- --------
Cash flows used in investing activities -
Investment in subsidiary 254 (1,070) (927)
-------- -------- --------
Cash flows from financing activities:
Common shares issued to the public 527 1,300 515
Shares issued under stock plans (3,531) 446 1,995
Dividends (3) (2,015) (914)
Cash issued for fractional shares (277) (11) --
Repurchased shares (188) --
-------- -------- --------
Net cash provided by (used in) financing
activities (3,284) (468) 1,596
-------- -------- --------
Net increase (decrease) in cash 37 (852) 1,085
Cash at beginning of year 331 1,183 98
-------- -------- --------
Cash at end of year $ 368 $ 331 $ 1,183
======== ======== ========
Non-cash transactions:
Change in unrealized gain (loss) on securities
available for sale, net $ (1,070) $ 5,337 $ (4,577)
======== ======== ========
</TABLE>
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107"), requires the disclosure of
estimated fair values for financial instruments. Quoted market prices, if
available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, these estimates are only indicative of
individual financial instruments' values and should not be considered an
indication of the fair value of the Company taken as a whole.
Cash and due from banks, Federal funds sold and interest-bearing deposits in
banks are equal to the fair value due to the nature of the financial
instruments. The fair value of securities is estimated based upon bid quotations
received from various securities dealers. Loans held for sale are considered
short term assets that are carried at market value at December 31, 1996 and
1995. The fair value of the Company's loans is determined by discounting the
scheduled cash flows through the loan's estimated maturity using estimated
market discount rates that most reflect the credit and interest rate risk
inherent in the loan. The estimate of maturity is based upon the stated average
maturity of management's estimates of prepayments considering current economic
conditions and prevailing interest rates.
28
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The fair value of deposits with no stated maturities, such as
noninterest-bearing deposits, interest checking, money market and savings
accounts, are equal to the amount payable as required by SFAS No. 107. The fair
value of time deposits, such as certificates of deposit and Individual
Retirement Accounts, are based on the discounted contractual cash flows. The
discount rate is estimated using rates currently offered for deposits of similar
maturities.
Short-term debt includes repurchase agreements and Federal funds
purchased, which reprise daily or monthly to allow for their market value to
equal their carrying value. The fair value of FHLB advances in short-term debt
was determined using discounted contractual cash flows. Other borrowings at
December 31, 1996 consists of debt with maturities ranging from one to two
years. The fair values of these liabilities are estimated using the discounted
values of the contractual cash flows. The discount rate is estimated using the
rates currently in effect for similar borrowings.
The fair value of off-balance sheet financial instruments has not
been considered in determining on balance sheet fair value. The fair value of
unfunded loans and lines of credit and standby letters of credit approximates
the stated value since they are either short term in nature or subject to
immediate repricing.
The following table presents information for financial assets and liabilities as
of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
Carrying Fair Carrying Fair
Value Value Value Value
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 40,725 $ 40,725 $ 47,136 $ 47,136
Federal funds sold 2,011 2,011 7,910 7,910
Interest-bearing deposits in banks 879 879 1,128 1,149
Securities 380,688 385,177 301,951 309,491
Loans held for sale 2,413 2,413 3,497 3,497
Loans, less allowance for loan losses 752,399 754,160 639,557 641,486
Interest receivable 10,410 10,410 8,950 8,950
---------- ---------- ---------- ----------
Total financial assets $1,189,525 $1,195,775 $1,010,129 $1,019,619
========== ========== ========== ==========
Financial liabilities:
Deposits $1,025,752 $1,026,872 $ 844,878 $ 845,989
Short-term debt 46,638 46,638 69,322 69,322
Other borrowings 50,342 50,342 30,391 30,391
Interest payable 8,584 8,584 7,919 7,919
---------- ---------- ---------- ----------
Total financial liabilities $1,131,316 $1,132,436 $ 952,510 $ 953,621
========== ========== ========== ==========
</TABLE>
The Company's remaining assets and liabilities are not considered financial
instruments.
29
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended
December 31, 1996 and 1995 is as follows:
1996
Fourth Third Second First
(in thousands, except per share data)
Interest income $23,564 $23,481 $22,262 $20,652
Interest expense 11,473 11,847 11,037 9,965
Provision for loan losses 828 348 747 407
Noninterest income 2,026 2,298 3,116 2,462
Noninterest expense 8,223 8,417 8,068 8,012
Income tax expense 1,724 1,923 1,906 1,716
------- ------- ------- -------
Net income $ 3,342 $ 3,244 $ 3,620 $ 3,014
======= ======= ======= =======
Primary earnings per share $ .26 $ .25 $ .28 $ .23
======= ======= ======= =======
Fully diluted earnings per share $ .26 $ .25 $ .28 $ .23
======= ======= ======= =======
1995
Fourth Third Second First
(in thousands, except per share data)
Interest income $19,859 $18,950 $17,930 $16,985
Interest expense 9,376 9,184 8,349 7,360
Provision for loan losses 168 98 103 154
Noninterest income 2,840 2,004 1,884 1,717
Noninterest expense 8,909 7,526 7,788 9,378
Income tax expense 1,519 1,414 1,148 581
------- ------- ------- -------
Net income $ 2,727 $ 2,732 $ 2,426 $ 1,229
======= ======= ======= =======
Primary earnings per share $ .21 $ .21 $ .19 $ .10
======= ======= ======= =======
Fully diluted earnings per share $ .21 $ .21 $ .19 $ .10
======= ======= ======= =======
30
<PAGE>
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Notes to Supplemental Consolidated Financial Statements
18. OTHER INVESTING AND FINANCING ACTIVITIES
Excluded from the consolidated statements of cash flows was the
effect of the following noncash activities:
<TABLE>
<CAPTION>
1996 1995 1994
(in thousands)
<S> <C> <C> <C>
Change in unrealized gain (loss) on securities
available for sale, net $ (1,070) $ 5,337 $ (4,577)
======== ======== ========
Transfers to securities available for sale $ 44,332 $146,285
======== ========
Transfers to securities held to maturity $ 4,557 $ 22,149 $ 11,150
======== ======== ========
Loans transferred from held for sale to mortgage
loans $ 3,921
========
</TABLE>
The Company acquired five branches and divested of one branch in
1996 and acquired three branches in 1995. In conjunction with these
transactions, assets acquired and liabilities assumed were as follows (in
thousands):
1996 1995
(in thousands)
Deposits $ 80,195 $ 55,257
Loans 117 (18,683)
Premium paid on deposits and goodwill (5,026) (3,888)
Premises and equipment (1,015) (552)
Other assets (132) (40)
Other liabilities 142 70
-------- --------
Net cash acquired $ 74,281 $ 32,164
======== ========
19. SUBSEQUENT EVENTS
On June 3, 1997 a wholly owned subsidiary, Triangle Capital Trust issued
corporation-obligated manditorily redeemable capital securities aggregating
$20,000,000. These securities are expected to be exchanged for equivalent
registered securities in the fourth quarter of 1997. The securities mature in
2017.
On August 15, 1997 the Company completed an acquisition of ten branches from
United Carolina Bank/Branch Banking & Trust. Under this agreement the Company
assumed approximately $195 million in deposits, $61 million in loans and paid a
premium on the deposits of approximately $16 million.
The Company has completed an agreement to acquire Coastal Leasing Corporation
for 325,000 shares of common stock. This transaction is expected to close in the
fourth quarter of 1997.
On October 16, 1997, the Company entered into a definitive agreement to merge
with Guaranty State Bancorp. It is anticipated that the merger will be accounted
for as a pooling of interests and will close in the second quarter of 1998.
31
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Triangle Bancorp, Inc.:
We consent to the incorporation by reference in the registration statements of
Triangle Bancorp, Inc. on Form S-8 (File Nos. 33-82020, 33-82022, 333-17511,
333-23131, and 333-30091) of our report dated October 30, 1997, on our audit of
the supplemental consolidated financial statements of Triangle Bancorp, Inc. as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, giving retroactive effect to the merger consummated on
October 2, 1997, which report has been included in this Current Report of Form
8-K dated October 31, 1997.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
October 31, 1997
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
HIGHLIGHTS
In October of 1997, Triangle Bancorp, Inc. (the "Company") acquired, as a
wholly-owned subsidiary, Bank of Mecklenburg ("Mecklenburg") with assets of
approximately $250 million. In addition, during 1996, the Company acquired
Granville United Bank with assets of approximately $60 million. These
acquisitions were accounted for using the pooling-of-interests method of
accounting, therefore, all historical information has been restated to reflect
the operations of the combined institutions.
Also in early 1996, the Company completed the purchase of four branch offices
and approximately $55 million in deposits from First Union of North Carolina
("First Union"). and Mecklenburg acquired one branch office and $26 million in
deposits from Essex Savings Bank. These transactions were accounted for as
purchases, therefore, the operations of these branches are reflected only from
the date of purchase.
During 1996, the Company's total assets grew to $1.2 billion from $1.1 billion
at December 31, 1995. The growth in assets of 18% reflects internal deposit
growth as well as the acquisition of the deposits. These funds were principally
invested in loans as demand was strong for most of the year. The remaining funds
were invested in securities as the liquidity of the balance sheet increased
through the year. In addition, a leveraged investment program was employed by
Mecklenburg to more effectively utilize capital. This strategy is described
further under the securities section below.
Earnings increased $4.1 million or 45% due to increased earning assets,
increased service charges on deposit accounts, increased gains on sales of
investment securities and a reduction in non interest expenses.
The returns on average assets and equity were 1.13% and 13.16%, respectively,
for 1996, as compared to .97% and 10.12%, respectively, for 1995. Fully diluted
earnings per share were $1.01 and $0.71 for 1996 and 1995, respectively, an
increase of 44%.
EARNINGS ANALYSIS
NET INTEREST INCOME
Net interest income, the principal source of the Company's earnings, is the
amount of income generated by earning assets (primarily loans and investment
securities) less the total interest cost of the funds obtained to carry them
(primarily deposits). The volume, rate and mix of both earning assets and
related funding sources determine net interest income.
1
<PAGE>
Net interest income for 1996 increased to $45.6 million from $39.5 million for
1995. This 15% increase primarily reflects an increase in the volume of average
earning assets of $222 million while average interest-bearing liabilities
increased only $207 million. This positive impact was offset by a decrease in
the net interest margin from 4.58% to 4.21%.
For 1995, the Company's net interest income was $39.5 million, an increase of
15% or $5.0 million over 1994. Net interest income was favorably impacted by
growth in the volume of average earning assets, which exceeded the volume growth
in average interest bearing liabilities by $29 million. This volume growth was
offset somewhat by the fact that the yield on interest earning assets rose 79
basis points, whereas the cost of interest bearing liabilities increased by 103
basis points.
PROVISION FOR LOAN LOSSES
The provision for loan losses for 1996 was $2.3 million, a significant increase
over the provision for 1995. This increase reflects the significant growth in
the loan portfolio during 1996. The Company continues to maintain adequate
levels of coverage for nonperforming assets as well as general reserves for the
portfolio as described further in the loans section below.
The 1995 provision for loan losses of $523,000 was 60% lower than the 1994
provision of $1.3 million. The Company's loan loss reserve calculation continued
to show adequate reserve levels in 1995 as the loan portfolio demonstrated
improving quality and reductions in nonperforming assets.
NONINTEREST INCOME
Noninterest income for 1996 was $9.9 million versus $8.4 million for 1995, an
18% increase. This increase resulted primarily from an increase in service
charges on deposit accounts as transaction deposit accounts increased
significantly during 1996. Other service charges decreased from 1995 as the
mortgage servicing portfolio was sold during late 1995. The gain on the sale of
that portfolio of $529,000 was matched by a gain of $558,000 on the sale of
deposits of approximately $8 million during the second quarter of 1996. Other
operating income was reduced during 1996 as a result of the loss on the sale of
certain fixed assets of acquired organizations.
Also during 1996, noninterest income was impacted by an increase of $860,000 in
gains on sales of investment securities due primarily to gains on off-balance
sheet derivative products in connection with the leveraged investment portfolio
strategy implemented during late 1995 by Mecklenburg.
2
<PAGE>
Noninterest income increased $2.6 million or 44% in 1995 because of a decrease
in losses on sales of securities of $2 million and a $529,000 gain on the sale
of the mortgage servicing portfolio in 1995. In addition, the Company incurred a
$402,000 market valuation loss on loans held for sale during 1994 that did not
reoccur in 1995. Other service charges, commission and fees were down $250,000
due primarily to a decrease in origination income on mortgage loans.
NONINTEREST EXPENSE
Noninterest expenses of $32.7 million for 1996 decreased from $33.6 million for
1995. This decrease is due to the reduction of merger expenses and other
professional services. Absent the merger expenses, noninterest expenses
increased by 4%. This small increase relative to a 18% increase in assets, is
primarily a result of increased intangible amortization expenses from the
deposit acquisition transactions, increased facilities expenses as a new main
office was purchased and 4 additional branch office sites acquired or
constructed during 1996. These increases were offset by gaining the efficiencies
of combining the operations of merged companies.
Noninterest expenses in 1995 were $33.6 million, an increase of $2 million or 6%
over 1994. The increase was primarily in merger related expenses as they
exceeded the 1994 level by $1.7 million. Other increases were seen in equipment
(due to investment in technological improvements), amortization of intangible
assets, professional fees, advertising and office expenses. Noninterest expenses
that decreased included salaries and benefits, occupancy, Federal deposit
insurance expense and other expenses. These decreases are due to efficiencies
seen as a result of merging five institutions into one and a deposit insurance
rate decrease during the year.
INCOME TAXES
The Company's income tax expense for 1996 was approximately 35% of income. This
level is less than the expected combined state and federal statutory rates due
to tax exempt securities, held as well as the adjustment of the deferred tax
asset to reflect current tax rates.
During 1995 and 1994, the Company's income tax expense approximated the federal
statutory rate. No state tax expense was recorded due to the use of net
operating loss carryforwards, which were fully utilized in 1995.
3
<PAGE>
BALANCE SHEET ANALYSIS
The Company's total assets increased from $1.05 billion in 1995 to $1.24 billion
in 1996, an 18% increase. This growth, reflected primarily in the loan and
investment portfolios, was funded by additional deposits. The Company continued
to have a strong ratio of average earning assets to total average assets of 92%.
LOANS
The loan portfolio constitutes the Company's largest earning asset. During 1996,
average net loans increased by $129 million over the 1995 level of $580 million.
This increase was due to strong loan demand throughout the year in many of the
Company's service areas.
Nonperforming assets at December 31, 1996 of $4.3 million increased by $1.2
million from December 31, 1995. Net charge-offs for 1996 were .10% of average
loans versus .18% for 1995. As a percentage of gross loans and other real estate
owned, nonperforming assets were .56% as of December 31, 1996 versus .47% at
December 31, 1995. While nonperforming assets have increased slightly, these
levels are considered to be relatively low compared to industry averages. The
components of nonperforming assets are nonaccrual loans, loans over 90 days or
more past due and other real estate owned.
The classification "nonaccrual" identifies those loans which management
recognizes as collection problems, but which have not been identified as losses.
Loans are placed on nonaccrual status when payments of interest and/or principal
have remained delinquent for a period of 90 days or more or when management's
evaluation indicates probable default prior to the 90 day delinquency period,
unless the loan is both well secured and in the process of collection. The
Company's credit policy does not allow new funds to be committed to borrowers
who have credits in nonaccrual status.
A loan is considered impaired based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that collateral-dependent loans are measured for
impairment based on the fair value of the collateral. During 1996 and 1995, the
Company did not have a significant investment in loans determined to be
impaired.
4
<PAGE>
There are no loans, other than those included in nonperforming assets, that (i)
represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
The adequacy of the allowance for loan losses is monitored by management through
an internal loan review process. Among the factors determining the level of the
allowance are loan growth, projected net charge-offs, the amount of
nonperforming and past due loans and current and anticipated economic
conditions.
The allowance for loan losses at December 31, 1996 was 1.43% of gross loans
(1.49% in 1995) and 254% of nonperforming assets (315% in 1995). While
nonperforming assets have increased slightly during 1996 and the coverage ratios
noted above have decreased during 1996, based on information currently available
to management as described in the previous paragraph, the allowance for loan
losses is believed to be adequate. However, future additions to the allowance
may be necessary based on changes in economic conditions or the circumstances of
individual borrowers which may impact borrowers' ability to repay their loans.
SECURITIES, FEDERAL FUNDS SOLD AND INTEREST BEARING DEPOSITS
Securities, Federal funds sold and interest bearing deposits at the end of 1996
totaled $384 million, compared to $311 million at December 31, 1995. Securities
available for sale increased $70 million and securities held to maturity
increased $9 million. Approximately 53% of the portfolio represents US Treasury
and Agency obligations, while mortgage-backed securities represent approximately
36% of the portfolio.
The increase in the available for sale portfolio is explained primarily by a
strategic leveraging program implemented in the fourth quarter of 1995 by
Mecklenburg. This program consisted of the funding of purchases of additional
securities, primarily mortgage-backed securities, with Federal Home Loan Bank
advances and other borrowings. Mecklenburg used an analytical methodology, known
as "option adjusted spread" or "OAS", for benchmarking the value of various
fixed income instruments. OAS analysis strives to evaluate the relative value of
various market sectors and individual securities by quantifying and pricing
options embedded within securities.
The objective in the use of this strategy is to identify, purchase and hold
assets with wide option adjusted spreads and acquire interest rate swaps and
options to reduce the interest rate risk component of these assets to
approximately the level of the 91 day US Treasury Bill.
5
<PAGE>
DEPOSITS
Deposits increased $181 million to $1.0 billion at December 31, 1996, compared
to $845 million at December 31, 1995. This growth was found in all categories of
deposits. Approximately $81 million of this growth relates to the acquisition of
deposits in early 1996. The remaining increase is a result of steady growth of
the existing offices, including those opened during the year.
OTHER BORROWINGS
Short-term debt and other borrowings decreased 3% from $100 million to $97
million. Such borrowings represent primarily Federal funds purchased, securities
sold under agreement to repurchase such securities and Federal Home Loan Bank
advances.
CAPITAL
The Company's primary source of new capital is retained earnings. Management
feels the Company has other funding sources if needed, including the ability to
issue additional common stock or debt. The adequacy of capital is reviewed
regularly, in light of current plans and economic conditions, to ensure that
sufficient capital is available for current and future needs, to minimize the
Company's cost of capital and to assure compliance with regulatory requirements.
Current Federal regulations require that the Banks maintain a minimum ratio of
total capital to risk weighted assets of 8%, with at least 4% being in the form
of Tier I capital, as defined in the regulations. In addition, the Banks must
maintain a leverage ratio of 4%. As of December 31, 1996, the Banks' capital
exceeded the current capital requirements. The Banks currently expect to
continue to exceed these minimums without altering current operations or
strategy.
The Company recognizes the need to balance the retention of sufficient capital
to support future growth, meet regulatory requirements and provide shareholders
with a current cash return on their investment. As a result, for the years ended
December 31, 1996 and 1995, cash dividends paid were 27% and 22% of earnings,
respectively.
ASSET AND LIABILITY MANAGEMENT
The largest component of the Company's earnings is net interest income, which
can fluctuate widely when significant interest rate movements occur. Management
is responsible for minimizing the Company's exposure to interest rate risk and
assuring an adequate level of liquidity.
6
<PAGE>
To mitigate the impact of interest rate movements, the balance sheet must be
structured so that repricing opportunities exist for both assets and liabilities
in generally equivalent amounts at approximately the same time intervals.
Imbalances in these repricing opportunities at any point in time constitute
interest rate sensitivity. Interest rate sensitivity management measures the
potential exposure to fluctuating interest rates. The Company's objective in
managing interest rate sensitivity is to achieve reasonable stability in the net
interest margin throughout economic and interest rate cycles by maintaining the
proper balance of rate sensitive assets and liabilities. The major factors that
are used to manage interest rate risk include the mix of fixed and floating
interest rates, pricing, and maturity patterns of all asset and liability
accounts. Management regularly reviews the Company's sensitivity position and
evaluates alternative sources and uses of funds.
The Company's interest sensitivity is monitored using computer simulation
programs which analyze the effect of various rate environments on the Company's
net interest margin. In modeling the interest sensitivity of the Company's
balance sheet, assumptions must be made concerning the repricing of nonmaturing
liabilities such as deposit transaction accounts. Management has concluded that
the historical experience of the Company and the industry in general provide the
best basis for determining the repricing characteristics of these accounts.
Accordingly, management places a portion of transaction account balances as
repricing immediately and the remainder in the one to five year time period.
Using these assumptions, the Company's interest sensitivity within a one year
time frame reflects a positive impact on net interest income in a rising
interest rate environment. The Company has historically monitored its interest
sensitivity within an acceptable range in both rising and falling interest rate
environments and keeps its exposure to changing rates to a manageable level.
Mecklenburg uses off-balance sheet derivative instruments to provide a
cost-effective way to manage interest rate sensitivity created primarily by the
repricing mismatch of the leveraged securities portfolio and its funding sources
as well as overall balance sheet interest rate risk.
At December 31, 1996, the off-balance sheet derivative included $50 million in
interest rate floors being utilized to protect its variable rate loan portfolio
against declining interest rates. The aggregate notional value of off-balance
sheet interest rate protection products used to hedge the available for sale
securities portfolio at December 31, `1996 included interest rate swaps of $46
million, interest rate caps of $85 million and interest rate floors of $75
million.
To ensure that sufficient funds are available for loan growth and deposit
withdrawals, as well as to provide for general needs, the Company must maintain
an adequate level of liquidity. Both assets and liabilities provide sources of
liquidity. Asset liquidity comes from the Company's ability to convert
short-term investments into cash and from the maturity and repayment of loans
and investment securities. Liability liquidity is provided by the Company's
ability to attract deposits and borrow against unencumbered assets. The primary
source of liability liquidity is the Company's customer base which provides
7
<PAGE>
core deposit growth. The overall liquidity position of the Company is closely
monitored and evaluated regularly by management. Management believes the
Company's liquidity sources at December 31, 1996 are adequate to meet its
operating needs.
EFFECT OF CHANGING PRICES
The results of operations and financial condition presented in this report are
based on historical cost information and are unadjusted for the effects of
inflation. Since the assets and liabilities of banks are primarily monetary in
nature (payable in fixed, determinable amounts) the performance of the Company
is affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may be inconsistent. While the effect of inflation on banks is
normally not as significant as is its influence on those businesses which have
large investments in plant and inventories, it does have an effect during
periods of high inflation. There are normally corresponding increases in the
money supply, and banks will normally experience above-average growth in assets,
loans and deposits. Also, increases in the price of goods and services generally
will result in increased operating expenses. Inflation has not been a
significant factor in the Company's operations to date as the inflation rate has
been moderate since its inception.
8
TABLE 1
INTEREST INCOME AND AVERAGE BALANCES
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ------------------------------------
Average Interest Average Average Interest Average
Balance Inc/Exp. Yld/Rate Balance Inc/Exp. Yld/Rate
----------------------------------------- ------------------------------------
<S> <C>
INTEREST EARNING ASSETS
Investment Securities and
Interest Bearing Deposits $ 369,179 $ 22,030 5.97% $ 272,551 $ 16,703 6.13%
Federal Funds Sold 5,462 296 5.42% 9,165 525 5.73%
Loans, net** 707,863 67,633 9.55% 580,066 56,497 9.74%
------------------------------------ ----------------------------------
Total Interest Earning Assets 1,082,504 89,959 8.31% 861,782 73,725 8.55%
------------------------------------ ----------------------------------
Noninterest Earning Assets 91,766 78,624
---------- ----------
TOTAL ASSETS $1,174,270 $ 940,406
========== ==========
INTEREST BEARING LIABILITIES
Demand Deposits $ 135,592 3,415 2.52% $ 121,447 3,315 2.73%
Savings Deposits 168,376 5,555 3.30% 131,340 4,431 3.37%
Time Deposits 524,220 30,007 5.72% 416,142 23,542 5.66%
Borrowed Funds 98,467 5,345 5.43% 50,811 2,981 5.87%
------------------------------------ ----------------------------------
Total Interest Bearing Liabilities 926,655 44,322 4.78% 719,740 34,269 4.76%
------------------------------------ ----------------------------------
Noninterest Bearing Liabilities 147,187 130,636
---------- ----------
TOTAL LIABILITIES 1,073,842 850,376
STOCKHOLDERS' EQUITY 100,428 90,030
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $1,174,270 $ 940,406
========== ==========
INTEREST RATE SPREAD 3.53% 3.79%
======== =======
NET YIELD ON INTEREST-BEARING
ASSETS $ 45,637 4.22% $ 39,456 4.58%
===================== =====================
<CAPTION>
1994
--------------------------------------
Average Interest Average
Balance Inc/Exp. Yld/Rate
--------------------------------------
<S> <C>
INTEREST EARNING ASSETS
Investment Securities and
Interest Bearing Deposits $ 232,814 $ 12,774 5.49%
Federal Funds Sold 14,307 601 4.20%
Loans, net** 499,868 44,652 8.93%
---------------------------------
Total Interest Earning Assets 746,989 58,027 7.77%
---------------------------------
Noninterest Earning Assets 74,630
---------
TOTAL ASSETS $ 821,619
=========
INTEREST BEARING LIABILITIES
Demand Deposits $ 113,697 2,578 2.27%
Savings Deposits 128,870 3,658 2.84%
Time Deposits 352,140 15,199 4.32%
Borrowed Funds 38,878 2,181 5.61%
---------------------------------
Total Interest Bearing Liabilities 633,585 23,616 3.73%
---------------------------------
Noninterest Bearing Liabilities 105,889
----------
TOTAL LIABILITIES 739,474
STOCKHOLDERS' EQUITY 82,145
----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 821,619
===========
INTEREST RATE SPREAD 4.04%
=========
NET YIELD ON INTEREST-BEARING
ASSETS $34,411 4.61%
===================
</TABLE>
* Yield is not computed on a tax equivalent basis.
** Includes non-accrual loans and loans held for sale.
<PAGE>
TABLE 2
RATE/VOLUME VARIANCE ANALYSIS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
--------------------- ---------------------
VARIANCE VARIANCE
ATTRIBUTABLE TO ATTRIBUTABLE TO
---------------------- -------------------
INTEREST INTEREST
INCOME INCOME
EXPENSE EXPENSE
VARIANCE RATE VOLUME VARIANCE RATE VOLUME
-------- ---- ------ -------- ---- ------
<S> <C>
INTEREST EARNING ASSETS
Investment Securities and Time Deposits $ 5,327 $ (450) $ 5,777 $ 3,929 $ 1,606 $ 2,168
Federal Funds Sold (229) (27) (202) (76) 179 (255)
Loans, net 11,136 (1,093) 12,229 11,845 4,267 7,578
-------------------------------------- -----------------------------------
TOTAL INTEREST EARNINGS ASSETS $ 16,234 $ (1,570) $ 17,804 $ 15,698 $ 6,052 $ 9,491
====================================== ===================================
INTEREST BEARING LIABILITIES
Demand Deposits $ 100 $ (268) $ 368 $ 737 $ 552 $ 185
Savings Deposits 1,124 (100) 1,224 773 702 71
Time Deposits 6,465 282 6,183 8,343 5,264 3,079
Borrowed Funds 2,364 (238) 2,602 800 104 696
====================================== ===================================
TOTAL INTEREST BEARING LIABILITIES $ 10,053 $ (324) $ 10,377 $ 10,653 $ 6,622 $ 4,031
====================================== ===================================
</TABLE>
<PAGE>
TABLE 3
LOANS
(In Thousands)
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------
ANALYSIS OF LOANS: 1996 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C>
Commercial, Financial and Agricultural $ 194,726 $ 181,024 $ 167,423 $ 152,709 $ 108,548
Real Estate, Construction and Land Development 107,538 81,892 84,391 59,442 41,090
Real Estate, Mortgage 331,986 258,243 178,388 158,441 115,169
Real Estate, Equity Lines of Credit 40,288 36,594 30,666 27,499 21,371
Installment Loans to Individuals 82,505 81,712 65,321 60,659 37,038
Other 6,246 9,750 10,046 2,688 4,889
-----------------------------------------------------------------------
TOTAL $ 763,289 $ 649,215 $ 536,235 $ 461,438 $ 328,105
=======================================================================
<PAGE>
TABLE 3 (CONTINUED)
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
At December 31,
(Dollars in Thousands)
---------------------------------------------------------------------------------------------
1996 1995 1994
---------------------------------------------------------------------------------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
Category to Category to Category to
Amount Total loans Amount Total loans Amount Total loans
--------------------------------------------------------------------------------------------
<S> <C>
Commercial, Financial and
Agricultural $ 4,115 27.88% $ 3,665 31.22% $ 3,632 25.51%
Real Estate, Construction and
Land Development 169 12.61% 272 15.74% 708 14.09%
Real Estate, Mortgage 1,995 39.78% 1,912 33.27% 2,812 43.49%
Real Estate, Equity Lines of Credit 402 5.64% 340 5.72% 274 5.28%
Installment Loans to Individuals 1,289 12.59% 1,220 12.18% 1,006 10.81%
Other 57 1.50% 76 1.87% 23 0.82%
Unallocated 2,863 0.00% 2,173 0.00% 1,706 0.00%
---------------------------------------------------------------------------------------------
TOTAL $ 10,890 100.00% $ 9,658 100.00% $ 10,161 100.00%
=============================================================================================
<CAPTION>
-------------------------------------------------------------
1993 1992
-------------------------------------------------------------
Percent of Percent of
loans in each loans in each
Category to Category to
Amount Total loans Amount Total loans
<S> <C> -------------------------------------------------------------
Commercial, Financial and
Agricultural
$ 4,724 33.09% $ 1,598 33.09%
Real Estate, Construction and
Land Development
653 12.88% 680 12.52%
Real Estate, Mortgage
3,254 34.34% 1,691 35.10%
Real Estate, Equity Lines of Credit
260 5.96% 86 6.51%
Installment Loans to Individuals
823 13.15% 307 11.29%
Other
19 0.58% 23 1.49%
Unallocated
2,036 0.00% 1,087 0.00%
-----------------------------------------------------------
TOTAL $ 11,769 100.00% $ 5,472 100.00%
============================================================
</TABLE>
<PAGE>
TABLE 3 (CONTINUED)
RESERVE FOR LOAN LOSSES AND NON-PERFORMING ASSETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
At December 31
-----------------------------------------------------------------------
Analysis of Reserve for Loan Losses: 1996 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C>
Beginning Balance $ 9,658 $ 10,161 $ 11,769 $ 5,472 $ 5,107
Net Charge-Offs (742) (1,026) (3,005) (874) (1,755)
Additions Charged to Operations 2,072 523 1,299 2,272 2,120
Provision for acquired loans (98) - 98 110 -
Allowance acquired - - - 4,789 -
-----------------------------------------------------------------------
Ending Balance $ 10,890 $ 9,658 $ 10,161 $ 11,769 $ 5,472
=======================================================================
Ratio of Net Charge-Offs During the Period to
Average Loans outstanding during the period 0.10% 0.18% 0.60% 0.24% 0.56%
</TABLE>
<PAGE>
TABLE 3 (CONTINUED)
ANALYSIS OF NONPERFORMING ASSETS
(In Thousands)
<TABLE>
<CAPTION>
At December 31,
1996 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C>
Nonaccrual Loans $ 1,666 $ 1,532 $ 1,934 $ 3,948 $ 1,182
Loans contractually past due 90 or more days as
to principal or interest 2,107 1,033 1,028 220 892
Foreclosed Assets 507 499 799 1,859 2,742
-----------------------------------------------------------------------
$ 4,280 $ 3,064 $ 3,761 $ 6,027 $ 4,816
=======================================================================
</TABLE>
<PAGE>
TABLE 4
SECURITIES
(Dollars in Thousands)
<TABLE>
<CAPTION>
BOOK VALUE AT DECEMBER 31, 1996
--------------------------------------------------------------------
Due After Due After
One Year Five Years
Due in One Through Through Due After Market Average
Year or Less Five Years Ten Years Ten Years Total Value Maturity In Years
--------------------------------------------------------------------------------------------
<S> <C>
AVAILABLE FOR SALE
U.S. Treasury Securities $34,696 $83,206 $ - $ - $118,902 $117,901 1.31
U.S. Agencies 1,511 1,703 - 8,943 12,157 12,157 4.81
Mortgage Backed Securities - - 1,267 125,763 127,030 128,030 13.93
State and Political Subdivisions 675 466 521 12,679 14,391 14,341 6.04
Collateralized Mortgaged Obligations - - 465 1,643 2,108 2,108 12.68
Other Investments - - 4,188 4,188 4,188
End User Derivatives 197 2,048 1,605 - 3,850 3,850
============================================================================================
Total $38,079 $87,423 $ 3,858 $153,216 $282,576 $278,725 7.75
============================================================================================
HELD TO MATURITY
U.S. Agencies $ 26,876 $ 39,356 $ 3,857 $ 2,045 $ 72,134 $ 72,583 4.83
State and Political Subdivisions 1,026 3,725 4,803 4,109 13,663 13,918 5.9
Mortgage Backed Securities 1,173 4,214 875 2,449 8,711 8,564 5.75
Collateralized Mortgaged Obligations - - 2,037 1,013 3,050 3,025 15.67
Other Investments - 554 - - 554 577 3.7
============================================================================================
Total $ 29,075 $ 47,849 $11,572 $ 9,616 $ 98,112 $ 98,667 7.16
============================================================================================
</TABLE>
<PAGE>
TABLE 4 (CONT'D)
SECURITIES
WEIGHTED AVERAGE YIELDS* AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Due After Due After
One Year Five Years
Due in One Through Through Due After
Year or Less Five Years Ten Years Ten Years Total
------------------------------------------------------------------------------
<S> <C>
Available for Sale
U.S. Treasury Securities 5.84% 5.98% - - 5.93%
U.S. Agencies 4.87% 5.52% - 7.41% 6.58%
Mortgage Backed Securities - - 6.07% 7.00% 6.98%
State and Political Subdivisions 3.53% 4.27% 4.78% 5.14% 5.04%
Collateralized Mortgage Obligations - - 5.42% 5.31% 5.43%
Other Investments - - - 6.62% 6.62%
-----------------------------------------------------------------------
Total 5.76% 5.95% 5.42% 6.84% 6.40%
=======================================================================
Held to Maturity
U.S. Agencies 5.63% 6.27% 7.58% 4.80% 6.02%
State and Political Subdivisions 4.83% 5.08% 5.42% 5.59% 5.23%
Mortgage Backed Securities 5.47% 5.92% 5.65% 6.86% 6.20%
Collateralized Mortgage Obligations - - 6.17% 4.66% 5.72%
Other Investments - 8.89% - - 8.89%
-----------------------------------------------------------------------
Total 5.37% 5.66% 6.29% 5.65% 5.89%
=======================================================================
</TABLE>
*Yields are not computed on a tax equivalent basis.
<PAGE>
TABLE 4 (CONT'D)
SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------
1996 1995
AVAILABLE FOR SALE Book Value Market Value Book Value Market Value
------------------------------- ---------------------------
<S> <C>
U.S. Treasury Securities $ 117,732 $ 117,902 $ 92,966 $ 94,113
U.S. Agencies 12,179 12,157 23,471 23,407
State and Political Subdivisions 14,369 14,341 2,587 2,596
Mortgage Backed Securities 127,818 128,030 85,888 86,219
Collateralized Mortgage Obligations 2,145 2,108 2,766 2,715
Other Investments 4,188 4,188 3,449 3,449
End-User Derivatives $ 4,293 $ 3,850
--------------------------------------------------------------------------
$ 282,724 $ 282,576 $211,127 $ 212,499
==========================================================================
HELD TO MATURITY
U.S. Agencies $ 72,134 $ 72,583 $ 49,047 $ 52,190
State and Political Subdivisions 13,663 13,918 22,101 22,502
Mortgage Backed Securities 8,711 8,564 13,598 13,529
Collateralized Mortgage Obligations 3,050 3,025 3,068 3,067
Other Investments 554 577 1,638 1,680
--------------------------------------------------------------------------
$ 98,112 $ 98,667 $ 89,452 $ 92,968
==========================================================================
</TABLE>
<PAGE>
TABLE 5
LARGE TIME DEPOSIT MATURITIES
Analysis of Time Deposits of $100,000 or more at December 31, 1996 (In
Thousands):
Total
-----------
Remaining maturity of three months or less $ 52,427
Remaining maturity of over three through 12 months 42,508
Remaining maturity of over twelve months 10,035
=========
Total time deposits of $100,000 or more $ 104,970
=========
<PAGE>
TABLE 6
SHORT-TERM BORROWINGS
(DOLLARS IN THOUSANDS)
AT DECEMBER 31,
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
1996 1995
------------------------------------------------------ ------------------------------
Securities Securities
Sold Under Federal Home Sold Under
Federal Funds Agreement to Loan Federal Funds Agreement to
Purchased Repurchase Bank Combined Purchased Repurchase
------------------------------------------------------ ------------------------------
<S> <C>
END OF YEAR:
Amount Outstanding $ 3,900 $ 34,738 $ 8,000 $ 46,638 $ 16,155 $ 23,667
Weighted Average
Interest Rate 7.00% 4.90% 6.95% 5.43% 5.98% 4.49%
Maximum amount outstanding
at any month end during
the year $ 35,745 $ 39,466 $ 44,500 $ 119,711 $ 21,125 $ 25,394
AVERAGES:
Average outstanding
balance during the
year $ 10,876 $ 31,502 $ 17,695 $ 60,073 $ 4,544 $ 18,952
Weighted average
interest rate during
the year 5.74% 5.17% 5.70% 5.43% 6.06% 5.10%
<CAPTION>
------------------------- -----------------------------------------------------------------
1995 1994
------------------------- -----------------------------------------------------------------
Securities
Federal Home Sold Under Federal Home
Loan Federal Funds Agreement to Loan
Bank Combined Purchased Repurchase Bank Combined
------------------------- ---------------------------------------------------------------
<S> <C>
END OF YEAR:
Amount Outstanding $ 29,500 $ 69,322 $ 5,900 $ 18,852 $ - $ 24,752
Weighted Average
Interest Rate 5.66% 5.34% 6.35% 5.07% - 5.37%
Maximum amount outstanding
at any month end during
the year $ 29,500 $ 76,019 $ 27,025 $ 17,749 $ - $ 44,774
AVERAGES:
Average outstanding
balance during the
year $ 10,730 $ 34,226 $ 7,989 $ 12,390 $ - $ 20,379
Weighted average
interest rate during
the year 5.82% 5.45% 4.32% 3.73% - 3.96%
</TABLE>
<PAGE>
TABLE 7
SELECTED KEY FINANCIAL RATIOS (1)
1996 1995 1994
---------------- --------------- -------------
Return on Assets 1.13% 0.97% 0.63%
Return on Equity 13.16% 10.12% 6.31%
Dividend Payout Ratio 26.70% 22.10% 17.60%
Equity to Assets 8.55% 9.57% 10.00%
(1) All ratios are computed on average daily balances, except dividend payout.
TABLE 8
INTEREST SENSITIVITY (2)
December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
12/31/96 0-3 4-12 1 to 5 Over
Balance Months Months Years 5 years
-------------------------------------------------------------------------------------
<S> <C>
Federal Funds Sold $ 2,011 $ 2,011
Interest Bearing Deposits in Banks 879 879
Securities 380,688 19,730 $ 56,075 $ 137,553 $ 167,330
Loans Held for Sale 2,413 2,413
Loans 763,289 410,635 107,924 217,027 27,703
-------------------------------------------------------------------------------------
Earning Assets 1,149,280 435,668 163,999 354,580 195,033
-------------------------------------------------------------------------------------
Total Assets $ 1,241,394
=================
Interest Bearing Demand Deposits $ 135,841 108,967 26,874
Savings and Money Market Account 187,619 59,415 113,731 14,473
Time Deposits 548,277 201,200 255,633 88,323 3,121
Other Borrowings 96,980 46,980 50,000
-------------------------------------------------------------------------------------
Costing Liabilities $ 968,717 248,180 315,048 361,021 44,468
-------------------------------------------------------------------------------------
GAP $ 187,488 $ (151,049) $ (6,441) $ 150,565
--------------------------------------------------------------------
% of Total Assets 15.10% -12.17% -0.52% 12.13%
--------------------------------------------------------------------
Cumulative GAP $ 187,488 $ 36,439 $ 29,998 $ 180,563
--------------------------------------------------------------------
% of Total Assets 15.10% 2.94% 2.42% 14.55%
--------------------------------------------------------------------
</TABLE>
(2) Assumptions used include the maturity distribution units for non-maturity
deposits and no pre-payments on loans.
TRIANGLE BANCORP, INC.
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED TRIANGLE BANCORP,
TRIANGLE BANK OF
TRIANGLE BANK OF BANCORP AND BANK UCB/BBT MECKLENBURG AND
ASSETS BANCORP MECKLENBURG ADJUSTMENTS OF MECKLENBURG BRANCHES (1) ADJUSTMENTS UCB/BBT BRANCHES
- --------------------------------- -------------------------------------------------------------------------------------------------
<S> <C>
Cash and Due From Banks $ 33,821 $ 15,139 $ - $ 48,960 $ 130,810 $ (15,824) (2) $ 50,649
(113,297) (3)
Investment Securities 243,740 146,800 - 390,540 - 113,297 (3) 503,837
-
Federal Funds Sold 350 - - 350 - - 350
Loans, net 698,906 134,154 - 833,060 61,651 (920) (4) 893,791
Premises and Equipment 19,873 6,440 - 26,313 2,779 29,092
Intangible Assets 11,438 876 - 12,314 - 15,824 (2) 29,058
920 (4)
Other Assets 19,080 2,229 - 21,309 - - 21,309
--------------------------------------------------------------------------------------------------
Total Assets $1,027,208 $ 305,638 $ - $ 1,332,846 $ 195,240 $ - $ 1,528,086
==================================================================================================
LIABILITIES
- ---------------------------------
Noninterest Bearing Demand $ 138,267 $ 14,038 $ - $ 152,305 $ 20,103 $ - $ 172,408
Interest Bearing Demand 69,461 63,887 - 133,348 24,666 - 158,014
Savings and Money Market Deposits 198,234 7,821 - 206,055 31,604 - 237,659
Time Deposits 446,384 111,092 - 557,476 118,867 - 676,343
--------------------------------------------------------------------------------------------------
Total Deposits 852,346 196,838 - 1,049,184 195,240 - (11) 1,244,424
--------------------------------------------------------------------------------------------------
Borrowed Funds 51,526 86,407 - 137,933 - - 137,933
Corporation-obligated
manditorily redeemable
capital securities 19,950 - 19,950 19,950
Other Liabilities 11,744 2,484 - 14,228 - - 14,228
--------------------------------------------------------------------------------------------------
Total Liabilities 935,566 285,729 - 1,221,295 195,240 - 1,416,535
--------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
- ---------------------------------
Common Stock 60,830 4,239 10,895 (5) 75,964 - 75,964
Surplus - 10,895 (10,895)(5) - - - -
Retained Earnings 30,795 4,843 - 35,638 - - 35,638
Unrealized Loss on
Securities AFS 17 (68) - (51) - - (51)
--------------------------------------------------------------------------------------------------
Total Shareholders' Equity 91,642 19,909 - 111,551 - - 111,551
--------------------------------------------------------------------------------------------------
Total Liabilities and
Capital $1,027,208 $ 305,638 $ - $ 1,332,846 $ 195,240 $ - $ 1,528,086
==================================================================================================
$1,027,208 $ 305,638 $ - $ 1,332,846 $ 195,240 $ - $ 1,528,086
--------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Information.
<PAGE>
TRIANGLE BANCORP, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED TRIANGLE BANCORP,
TRIANGLE UCB/BBT, AND
TRIANGLE BANK OF BANCORP AND BANK UCB/BBT AND BANK OF
BANCORP MECKLENBURG ADJUSTMENTS OF MECKLENBURG BRANCHES (1,6) ADJUSTMENTS MECKLENBURG
----------------------------------------------------------------------------------------------
<S> <C>
Interest Income
Loans $ 32,150 $ 5,392 $ - $ 37,542 $ 2,847 $ (153)(9) $ 40,236
Federal Funds Sold 182 202 384 - - 384
Investment Securities 7,234 3,387 10,621 - 3,513 (7) 14,134
----------------------------------------------------------------------------------------------
Total Interest Income 39,566 8,981 - 48,547 2,847 3,360 54,754
----------------------------------------------------------------------------------------------
Interest Expense
Deposits 16,766 4,759 21,525 4,117 - 25,642
Borrowed funds 995 1,451 2,446 - - 2,446
Corporation-obligated
manditorily redeemable
capital securities 139 - 139 - 139
----------------------------------------------------------------------------------------------
Total Interest Expense 17,900 6,210 - 24,110 4,117 - 28,227
----------------------------------------------------------------------------------------------
Net Interest Income
before Provision for Loan
Losses 21,666 2,771 - 24,437 (1,270) 3,360 26,527
Provision for Loan
Losses 1,330 149 1,479 - 100 (8) 1,579
----------------------------------------------------------------------------------------------
Net Interest Income after
Provision for Losses 20,336 2,622 - 22,958 (1,270) 3,260 24,948
Noninterest income 6,101 1,096 7,197 775 7,972
386 (8)
Noninterest expenses 14,151 1,784 15,935 1,319 791 (9) 18,431
----------------------------------------------------------------------------------------------
Net Income before taxes 12,286 1,934 - 14,220 (1,814) 2,083 14,489
Income Taxes 4,535 771 5,306 - 99(10) 5,405
----------------------------------------------------------------------------------------------
Net Income $ 7,751 $ 1,163 $ - $ 8,914 $ (1,819) $ 1,984 $ 9,084
==============================================================================================
Primary Earnings per Share $ 0.72 $ 0.55 $ 0.68 $ 0.70
========================== ================= ===========
Fully diluted earnings per share $ 0.71 $ 0.55 $ 0.67 $ 0.70
========================== ================= ===========
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Information.
<PAGE>
TRIANGLE BANCORP, INC.
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
TRIANGLE COMBINED
BANCORP UCB/BBT TRIANGLE BANCORP,
SUPPLEMENTAL (12) BRANCHES (1,6) ADJUSTMENTS AND UCB/BBT
--------------------------------------------------- --------------------
<S> <C>
Interest Income
Loans $ 67,633 $ 5,693 $ (307) (9) $ 73,019
Federal Funds Sold 296 - - 296
Investment Securities 22,030 - 7,026 (7) 29,056
------------------------------------------------- --------------------
Total Interest Income 89,959 5,693 6,719 102,371
------------------------------------------------- --------------------
Interest Expense
Deposits 38,977 8,234 - 47,211
Borrowed funds 5,345 - - 5,345
------------------------------------------------- --------------------
Total Interest Expense 44,322 8,234 - 52,556
------------------------------------------------- --------------------
Net Interest Income before
Provision for Loan Losses 45,637 (2,541) 6,719 49,815
Provision for Loan
Losses 2,330 - 200 (8) 2,530
------------------------------------------------- --------------------
Net Interest Income after
Provision for Losses 43,307 (2,541) 6,519 47,285
Noninterest income 9,902 1,549 11,451
773 (8)
Noninterest expenses 32,720 2,637 1,582 (9) 37,712
------------------------------------------------- --------------------
Net Income before taxes 20,489 (3,629) 4,164 21,024
Income Taxes 7,269 - 198 (10) 7,467
------------------------------------------------- --------------------
Net Income $ 13,220 $ (3,629) $ 3,966 $ 13,557
------------------------------------------------- --------------------
Primary Earnings per Share $ 1.02
===============
Fully diluted earnings per share $ 1.01
===============
</TABLE>
See Notes to Pro Forma Combined Condensed Financial Information.
<PAGE>
TRIANGLE BANCORP, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(Unaudited)
The following unaudited pro forma combined condensed balance sheet as
of June 30, 1997 and the unaudited pro forma combined condensed statement of
income for the six months ended June 30, 1997 combine 1) the historical
financial statements of Triangle Bancorp, Inc. (the "Company") and Bank of
Mecklenburg ("Mecklenburg") using the pooling-of-interests method of accounting
for business combinations and 2) the Company and Mecklenburg pro forma combined
financial information and the historical financial information of eight branches
of United Carolina Bank and two branches of Branch Banking and Trust
(collectively the "Branch Acquisition") under the purchase method of accounting
for business combinations. The pro forma combined condensed balance sheet gives
effect to Mecklenburg and the Branch Acquisition as if the transactions had
occurred on June 30, 1997. Also included is a December 31, 1996 pro forma income
statement which gives effect to the Branch Acquisition as if the transaction had
occurred on January 1, 1996. The pooling-of-interests method of accounting
requires all assets and liabilities to be carried at their book values. The
purchase method of accounting requires that all assets and liabilities be
adjusted to their estimated fair values as of the date of the acquisition.
The pro forma statements are provided for informational purposes. The
unaudited pro forma financial information presented is not necessarily
indicative of what the actual financial position or results of operations would
have been had such transactions been completed as of June 30, 1997 or as of the
beginning of the period presented and is not indicative of future financial
position or future results. The unaudited pro forma financial information does
not reflect any non-recurring expenses which may be realized in connection with
the transactions. Current estimates of non-recurring expenses for 1997 are $1.2
million after tax. The cost savings associated with the possible operating
efficiencies and synergies have not been quantified, nor are any such savings
assured. The pro forma financial statements should be read in conjunction with
the audited financial statements and the notes thereto of the Company and its
unaudited interim financial statements.
7
<PAGE>
TRIANGLE BANCORP, INC.
Notes to Pro Forma Combined Condensed Financial Information
(Unaudited)
1. Financial information is the sum of the information available on the
branches to be acquired. As the liabilities of the branches to be
assumed exceed the assets, the balance sheet of the branches has been
balanced through the "Cash and Due from Banks" caption.
2. This adjustment records the decrease in cash received by Triangle Bank
(Triangle) due to the premium paid in the branch acquisition
transaction.
3. This adjustment reflects the expected utilization of excess cash
received upon closing of the transactions, less cash needed for branch
operations of $1,689,000.
4. This adjustment reduced the acquired loans to the estimated fair value
based on a preliminary assessment of the loan portfolio yields, mix and
maturities. The estimated fair value is subject to a final evaluation.
5. Adjustment reflects the movement of surplus to common stock as the
Company's stock has no par value.
6. All noninterest income and expense represents the historical charges
and credits and includes no significant intercompany allocations.
Interest income on loans and interest expense on deposits are based on
the acquired balances of loans and deposits multiplied by the
applicable branch's portfolio yields and costs, respectively, as of
December 31, 1996. The average loan yield is 9.23% and the average cost
of deposits is 4.22%.
7. These adjustments represent the estimated incremental revenues on
investments based on the Company's historical investment yields. The
rate utilized of 6.2% represents the Company's tax equivalent yield on
investments for the calendar year 1996.
8. This adjustment reflects anticipated additional expenses as if the
branches had been operating as a stand alone bank for the period
presented. Expenses were estimated considering similar sized Triangle
branches operating expenses as well as additional infrastructure costs.
9. This adjustment represents the amortization of the intangible assets
based on the straight-line method over an estimated ten years for the
deposit premium ($15,824,000) and three years for the loan premium
($920,000).
10. This adjustment represents federal and state income tax expense on
incremental net operating income before taxes.
11. Based on a preliminary review of the types and costs of the deposits to
be acquired, no adjustment to market value appears to be necessary as a
part of the transaction.
12. Supplemental information is derived from the audited supplemental
consolidated financial statements of Triangle Bancorp, Inc. presented
elsewhere herein. See Note 2 of Triangle Bancorp, Inc.'s supplemental
consolidated financial statements.
