Filed by The South Financial Group, Inc.
Pursuant to Rule 425 under the
Securities Act of 1933, as amended,
and deemed filed
pursuant to Rule 14a-12
under the Securities Exchange Act of 1934.
Subject Company: Mountainbank Financial Corporation
Commission File No. 0-32547
[Picture of J.W. Davis]
June, 2003
Dear Stockholder:
I begin this year's message by dedicating this report to the employees of
MountainBank. During 2002, our company prospered like none other at this stage
in their life cycle. This report validates MountainBank as the most successful
start-up community bank in the history of North Carolina, with the financial
success achieved a tribute to the men and women of Team MountainBank. I will
review their operating results with you and will conclude with a brief
commentary on our recently announced merger agreement with The South Financial
Group. While this is a 2003 event, it occurred prior to this message going to
the press and should certainly be addressed. Let me also say at the outset that
our annual stockholder's meeting will be held later this year to coincide with
your meeting to approve this proposed merger transaction. You will be notified
when this date is determined.
Even though economic uncertainty characterized 2002 with financial
irregularities and unethical corporate behavior causing significant market
turbulence, your company's operating performance mirrored the prolific gains
registered each year since our 1997 inception. For the year ended December 31,
2002, net income totaled $6.2 million, a 148% increase when compared to $2.5
million earned in 2001. This strong bottom line performance translated into
fully diluted earnings per share of $1.58, as compared to $1.01 during 2001, a
56 % increase. I am pleased to report that MountainBank stockholders began 2002
at a $19 market valuation per share and ended the year at $26 per share, a 37%
increase in market value per share for the year, while the Dow Jones Industrial
average tumbled 18%. Total assets grew to $841.1 million, a 50% gain over our
$561.1 million asset level at 2001 year end.
We continued expanding our western North Carolina franchise during the year with
new offices opened in Tryon and Rutherfordton. Since inception, the
preponderance of our company's growth has been organic, and in 2002, total asset
growth was achieved internally. We announced two acquisitions in southwest
Virginia - Cardinal Bankshares in Floyd, Virginia and CNB Holdings, Inc. in
Pulaski, Virginia - but neither impacted 2002 asset growth. The Cardinal
transaction failed to pass stockholder approval, and while CNB Holdings, Inc.
received almost unanimous support from stockholders, it did not close prior to
year-end.
While it is customary to confine this message to prior year end events, I will
include remarks relative to a board directed action which occurred recently. On
May 14, 2003, our company entered into a merger agreement with The South
Financial Group, a $9 billion financial institution headquartered in Greenville,
South Carolina. MountainBank's business model bears a very strong resemblance to
that of The South Financial Group, and in your board's judgment, this strategic
partnership best serves your financial interests. Our charge on June 26, 1997
was to deliver for stockholders, and we feel this transaction does just that. In
fact, you would be hard pressed to find a 51/2 year old community bank where
charter stockholder investment grew so much in such little time. Based upon the
deal price which forged this strategic decision, our charter stockholders will
realize a 538% return on their investment and a 14.2% cash dividend yield when
factoring in the exchange ratio with The South Financial Group. Your board also
feels this alignment will allow MountainBank stockholders to participate in a
significant upside investment opportunity, as was the case over the past 51/2
years. With this financial partner, MountainBank will garner a much larger
capital base that will translate into a much greater lending capacity for the
markets we serve as well as facilitate our franchise expansion in western North
Carolina. And just as compelling is the stock liquidity this transaction
provides which would not otherwise be available at this stage in MountainBank's
life cycle.
I will conclude by expressing my appreciation to all the MountainBankers who
have shared my vision in building a company whose passion for the customer
resonated throughout the marketplace and caused both large and small competitors
alike to mimic our culture of traditional banking values and old-fashioned
service. MountainBankers elevated the standard for customer service throughout
our franchise, and in so doing, created a special company whose mark will be
everlasting. And I say to our stockholders, our journey continues. We will
embark upon it with the same fervor and dedication to you with the belief that
even greater rewards lie ahead. MountainBank will always be alive in my heart,
as will your friendship and ongoing support.
Sincerely,
/s/ J.W. Davis
J.W. Davis
President and Chief Executive Officer
EVENTS
DURING 2002, WE WERE PROUD TO SPONSOR MANY EVENTS WITHIN THE COMMUNITIES WE
SERVE, INCLUDING THE FOLLOWING:
o N.C. Apple Festival, HENDERSONVILLE
o Block House Steeplechase, TRYON
o North Carolina BBQ Festival, TRYON
o Maggie Valley Moonlight Race
o N.C. Rhododendron Festival, BAKERSVILLE
o N.C. Gem and Mineral Show, SPRUCE PINE
o Diamond Jubilee Celebration,
LAKE LURE AND CHIMNEY ROCK
o Mountain Glory Festival, MARION
o The Historic Morganton Festival
FINANCES
"MOUNTAINBANK HAS BUILT ONE OF THE MOST VALUABLE BANK FRANCHISES IN THE
SOUTHEAST IN JUST FIVE YEARS."
- - CARSON MEDLIN BANK REVIEW
"BEING LISTED ON NASDAQ WILL OPEN MOUNTAINBANK TO A WIDER GROUP OF INVESTORS.
THE TRACK RECORD THEY HAVE BUILT SINCE THEY OPENED THEIR DOORS HAS BEEN VERY
IMPRESSIVE. THAT WILL APPEAL TO INVESTORS."
- - ROGER AIKEN, A.G. EDWARDS
MAKING NEWS
During 2002, the MountainBank story appeared in numerous publications including
BUSINESS WEEK, AMERICAN BANKER, BUSINESS NORTH CAROLINA, TAR HEEL BANKER and has
been featured frequently on WLOS-TV.
GROWTH
Growth continued to surge during 2002 as Team MountainBank added seven new
branch offices, and moved into a new two story facility to serve the rapidly
growing south Hendersonville market.
Definitive agreements were executed during 2002 for the purchase of CNB
Holdings, Inc. in Pulaski, Virginia and TrustCo Holdings in Greenville, South
Carolina.
To better serve our local realtor base and growing market share of home loans,
MountainBank centralized its residential mortgage loan operation in downtown
Hendersonville.
MERGERS AND ACQUISITIONS
Upon consummation of these transactions, MountainBank Financial Corporation will
become a multi-state holding company with total assets nearing $1 billion.
NET INCOME ASSETS
[Graph] [Graph]
1998 $200 1998 $50,000
1999 $500 1999 $110,000
2000 $1050 2000 $260,000
2001 $2400 2001 $590,000
2002 $6200 2002 $875,000
EPS (DILUTED) DEPOSITS
[Graph] [Graph]
1998 $0.10 1998 $50,000
1999 $0.20 1999 $110,000
2000 $0.45 2000 $240,000
2001 $1.00 2001 $590,000
2002 $1.60 2002 $700,000
(Dollar amounts in thousands, except EPS)
- --------------------------------------------------------------------------------
2002 BOARD OF DIRECTORS - MOUNTAINBANK FINANCIAL CORP.
- --------------------------------------------------------------------------------
WILLIAM A. BANKS .............................President, Banco Lumber; Co-owner,
Mountain Air Country Club
WILLIAM H. BURTON, III ..................President & CEO, Cafe Enterprises, Inc.
J. W. DAVIS .......................................President & CEO, MountainBank
KEN FEAGIN .........................President, Ken Feagin Truck & Trailer Sales;
Partner, Martin-Feagin Ford Lincoln Mercury
DANNY FORD ...........................Rancher; Former Head Football Coach, Univ.
of Arkansas and Clemson University
GREG GIBSON ...........................Executive Vice President, Chief Financial
Officer, MountainBank
BOYD L. HYDER ................President/Owner, B & A Hyder Trucking; Chairman of
the Board of Directors, MountainBank
J. EDWARD JONES ................President, Sutherland Insurance & Realty Company
RONALD LAMB ...........................................Owner, Lamb Fruit Company
H. STEVE MCMANUS ..................President, Beacon Food Service, Inc.; McManus
Development, LLC; Moon McManus Developers, LLC
VAN F. PHILLIPS ....................Vice President, Great Meadows, Inc.; General
Partner, Spruce Pine Shopping Center, Ltd.
CATHERINE SCHROADER .........................Co-Owner/Manager, Schroader's Honda
MAURICE SCOTT ...................Retired; former Plant Manager, Monsanto Company
2002 ANNUAL REPORT
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Independent Auditor's Report.................................................2
Consolidated Balance Sheets..................................................3
Consolidated Statements of Income............................................4
Consolidated Statements of Changes in Stockholders' Equity...................5
Consolidated Statements of Cash Flows........................................7
Notes to Consolidated Financial Statements..................................10
Management's Discussion and Analysis........................................36
- --------------------------------------------------------------------------------
MARKET FOR THE COMMON STOCK, STOCK PRICES AND DIVIDENDS
The Company's common stock is listed with the Nasdaq SmallCap Market under the
symbol MBFC. As of December 31, 2002, the Company had issued and outstanding
3,200,364 shares of common stock which were held by approximately 2,100
stockholders of record.
The following table lists high and low published closing prices of the Company's
common stock for each calendar quarter since April 1, 2001, and, prior to that,
the high and low published prices for MountainBank's common stock for each
calendar quarter since January 1, 2000. All prices have been restated
retroactively to reflect the effect of the five-for-four stock split which
became effective on March 30, 2001, and the six-for-five stock split effected in
the form of a 20% stock dividend, which became effective on March 11, 2002.
2002 2001 2000
------------ ----------- -----------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
First Quarter 23.00 16.88 20.67 15.33 14.67 9.67
Second Quarter 26.00 19.75 26.25 16.67 12.93 10.00
Third Quarter 26.23 23.00 25.83 20.08 14.26 12.67
Fourth Quarter 26.23 23.50 20.83 16.67 17.08 12.67
To date, the Company has not paid any cash dividends on common stock. The
Company may only pay dividends from dividends received from the Bank.
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
MountainBank Financial Corporation
We have audited the accompanying consolidated balance sheets of MountainBank
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MountainBank
Financial Corporation and subsidiaries as of December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
Galax, Virginia
February 13, 2003, except for Note 22, as to which the
date is March 7, 2003
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ASSETS 2002 2001
--------------- ----------------
Cash and due from banks $ 10,229 $ 10,126
Interest bearing deposits with banks 16,393 525
Investment securities available for sale 64,738 34,626
Equity investment securities available for sale 8,993 8,703
Restricted equity securities 3,746 2,058
Loans, net of allowance for loan losses $11,192
in 2002 and $7,113 in 2001 666,432 470,647
Loans held for sale 32,857 13,225
Property and equipment, net 9,051 7,204
Accrued income 3,932 3,249
Intangible assets, net 4,244 2,820
Other assets 20,525 7,940
--------------- ----------------
Total assets $ 841,140 $ 561,123
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing deposits $ 64,607 $ 41,188
Interest-bearing deposits 612,662 426,319
--------------- ----------------
Total deposits 677,269 467,507
Federal funds purchased and securities
sold under agreements to repurchase 14,204 5,240
Short-term debt 25,000 1,250
Long-term debt 46,210 42,633
Guaranteed preferred beneficial interests
in the Company's junior subordinated debentures 20,000 -
Obligations under capital lease 718 736
Accrued interest payable 3,787 4,778
Other liabilities 1,484 1,964
--------------- ----------------
Total liabilities 788,672 524,108
--------------- ----------------
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, Series A, 6%, non-cumulative, non-voting, no par value;
3,000,000 shares authorized; 419,243 and 92,667 shares issued and
outstanding with liquidation preferences of $10,062
and $2,224 at December 31, 2002 and 2001, respectively 10,062 2,224
Common stock, $4 par value; 10,000,000 shares
authorized; 3,200,364 and 3,112,699 shares issued
and outstanding in 2002 and 2001, respectively 12,802 12,451
Paid in capital 20,038 18,584
Retained earnings 9,397 3,692
Accumulated other comprehensive income 169 64
--------------- ----------------
Total stockholders' equity 52,468 37,015
--------------- ----------------
Total liabilities and stockholders' equity $ 841,140 $ 561,123
=============== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (DOLLARS IN THOUSANDS
EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
INTEREST AND DIVIDEND INCOME
Loans and fees on loans $ 43,479 $ 27,106 $ 13,210
Federal funds sold 183 286 241
Investment securities, taxable 2,000 1,698 1,840
Investment securities, nontaxable 25 76 7
Deposits with banks 168 242 505
Dividends 119 412 18
Other 309 86 -
---------------- --------------- ----------------
Total interest and dividend income 46,283 29,906 15,821
---------------- --------------- ----------------
INTEREST EXPENSE
Deposits 16,407 15,281 8,796
Federal funds purchased and securities
sold under agreements to repurchase 145 196 153
Other borrowed funds 2,391 1,144 67
---------------- --------------- ----------------
Total interest expense 18,943 16,621 9,016
---------------- --------------- ----------------
Net interest income 27,340 13,285 6,805
PROVISION FOR LOAN LOSSES 5,300 3,347 1,905
---------------- --------------- ----------------
Net interest income after provision
for loan losses 22,040 9,938 4,900
---------------- --------------- ----------------
NONINTEREST INCOME
Service charges on deposit accounts 2,431 940 461
Mortgage origination income 3,095 1,435 499
Gain on sale of loans 34 165 151
Net realized gain on sale of securities 265 121 -
Other service charges and fees 212 128 60
Other income 215 205 147
---------------- --------------- ----------------
Total noninterest income 6,252 2,994 1,318
---------------- --------------- ----------------
NONINTEREST EXPENSE
Salaries and employee benefits 9,674 4,793 2,417
Occupancy 1,157 571 316
Equipment 1,466 662 349
Data processing 1,089 521 298
Amortization of intangible assets 331 18 -
Other general and administrative 4,552 2,641 1,199
---------------- --------------- ----------------
Total noninterest expense 18,269 9,206 4,579
---------------- --------------- ----------------
Income before income taxes 10,023 3,726 1,639
INCOME TAX EXPENSE 3,865 1,216 583
---------------- --------------- ----------------
Net income 6,158 2,510 1,056
Preferred stock dividends declared 453 - -
---------------- --------------- ----------------
Net income available to common stockholders $ 5,705 $ 2,510 $ 1,056
================ =============== ================
BASIC EARNINGS PER SHARE $ 1.82 $ 1.11 $ .52
================ =============== ================
DILUTED EARNINGS PER SHARE $ 1.58 $ 1.01 $ .48
================ =============== ================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 3,128,805 2,256,780 2,041,711
================ =============== ================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 3,888,963 2,473,340 2,237,145
================ =============== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
ACCUMULATED
STOCK OTHER
---------------------- PAID IN RETAINED COMPREHENSIVE
PREFERRED COMMON CAPITAL EARNINGS INCOME (LOSS) TOTAL
--------- ------ ------- -------- ------------- -----
BALANCE, DECEMBER 31, 1999 $ - $ 5,770 $ 4,386 $ 126 $ (59) $ 10,223
COMPREHENSIVE INCOME
Net income - - - 1,056 - 1,056
Net change in unrealized
appreciation on
investment securities
available for sale,
net of taxes of $102 - - - - 198 198
------------
TOTAL COMPREHENSIVE INCOME 1,254
Fractional shares
purchased - - - - - -
Shares sold - 1,705 5,005 - - 6,710
Stock options exercised - 13 10 - - 23
---------- ------------ ------------ ------------- ------------- ------------
BALANCE, DECEMBER 31, 2000 - 7,488 9,401 1,182 139 18,210
COMPREHENSIVE INCOME
Net income - - - 2,510 - 2,510
Net change in unrealized
appreciation on
investment securities
available for sale,
net of taxes of $2 - - - - 5 5
Realized gains on securities,
net of taxes of $(41) - - - - (80) (80)
------------
TOTAL COMPREHENSIVE INCOME 2,435
Shares sold 2,224 - - - - 2,224
Shares issued to acquire
PremierMortgage
Associates, Inc. - 80 220 - - 300
Shares issued to acquire
First Western Bank - 2,751 11,006 - - 13,757
Stock options exercised - 57 32 - - 89
Stock split, effected in
the form of a dividend - 2,075 (2,075) - - -
---------- ------------ ------------ ------------- ------------- ------------
BALANCE, DECEMBER 31, 2001 2,224 12,451 18,584 3,692 64 37,015
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY, CONTINUED FOR THE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
ACCUMULATED
STOCK OTHER
---------------------- PAID IN RETAINED COMPREHENSIVE
PREFERRED COMMON CAPITAL EARNINGS INCOME (LOSS) TOTAL
--------- ------ ------- -------- ------------- -----
BALANCE, DECEMBER 31, 2001 $ 2,224 $ 12,451 $ 18,584 $ 3,692 $ 64 $ 37,015
COMPREHENSIVE INCOME
Net income - - - 6,158 - 6,158
Net change in unrealized
appreciation on
investment securities
available for sale,
net of taxes of $144 - - - - 280 280
Realized gains on securities,
net of taxes of $(90) - - - - (175) (175)
------------
TOTAL COMPREHENSIVE INCOME 6,263
Dividends declared on preferred
shares ($1.08 per share) - - - (453) - (453)
Shares sold 7,838 - - - - 7,838
Shares issued to acquire
TrustCo Holdings, Inc. - 237 1,249 - - 1,486
Stock options exercised - 117 215 - - 332
Shares redeemed - (2) (8) - - (10)
Fractional shares purchased - (1) (2) - - (3)
----------- ------------ ------------ ------------- ------------- ------------
BALANCE, DECEMBER 31, 2002 $ 10,062 $ 12,802 $ 20,038 $ 9,397 $ 169 $ 52,468
=========== ============ ============ ============= ============= ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
2002 2001 2000
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,158 $ 2,510 $ 1,056
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 1,619 502 298
Provision for loan losses 5,300 3,347 1,905
Deferred income taxes (965) (1,052) (536)
Net realized gains on securities (265) (121) -
Accretion of discount on securities, net of
amortization of premiums 25 5 (33)
Changes in assets and liabilities:
Accrued income (707) (820) (1,184)
Loans held for sale (19,632) (12,760) 412
Other assets (4,290) (283) (18)
Accrued interest payable (991) 1,623 2,014
Other liabilities (108) (717) 587
--------- --------- ---------
Net cash provided by operating activities (13,856) (7,766) 4,501
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in federal funds sold - 9,220 (7,650)
Net (increase)decrease in interest-bearing deposits with banks (15,868) 3,143 7,593
Purchases of investment securities (79,740) (48,054) (24,435)
Sales of investment securities 36,023 34,311 -
Maturities of investment securities 11,824 12,713 7,624
Net increase in loans (202,582) (195,630) (111,192)
Purchases of property and equipment (3,039) (1,372) (984)
Acquisition of First Western Bank - 2,931 -
Acquisition of PremierMortgage Associates, Inc. - 4 -
Acquisition of TrustCo Holding, Inc. 1,460 - -
Investment in BOLI (8,000) (4,900) -
--------- --------- ---------
Net cash used in investing activities (259,922) (187,634) (129,044)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing deposits 23,419 14,455 8,749
Net increase in interest-bearing deposits 186,343 148,302 110,703
Net increase in federal funds purchased and
securities sold under agreements to repurchase 8,964 1,181 1,878
Net (decrease) increase in notes payable (6,500) 6,500 -
Net increase in FHLB advances 33,827 25,000 -
Net increase in junior subordinated debentures 20,000 - -
Repayment of obligations under capital lease (27) (24) (21)
Proceeds from the issuance of common stock, net 319 90 6,734
Proceeds from the issuance of preferred stock 7,838 2,224 -
Dividends paid (302) - -
--------- --------- ---------
Net cash provided by financing activities 273,881 197,728 128,043
--------- --------- ---------
Net increase in cash and cash equivalents 103 2,328 3,500
--------- --------- ---------
CASH AND DUE FROM BANKS, BEGINNING 10,126 7,798 4,298
--------- --------- ---------
CASH AND DUE FROM BANKS, ENDING $ 10,229 $ 10,126 $ 7,798
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 19,934 $ 14,998 $ 7,003
========= ========= =========
Income taxes paid $ 5,842 $ 2,612 $ 621
========= ========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
SCHEDULE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS:
2002 2001 2000
------- ----- -------
ACQUISITION OF TRUSTCO HOLDINGS, INC.
Assets acquired:
Property and equipment, net $ 96 $ - $ -
Other assets 19 - -
Goodwill 1,755 - -
------- ----- -------
1,870 - -
------- ----- -------
LIABILITIES ASSUMED
Borrowings 1,497 - -
Other liabilities 347 - -
------- ----- -------
1,844 - -
------- ----- -------
Net non-cash assets acquired $ 26 $ - $ -
======= ===== =======
PAYMENT FOR NET ASSETS ACQUIRED
Cash paid at closing $ 200 $ - $ -
Less cash acquired at closing (1,660) - -
------- ----- -------
(1,460) - -
Notes issued to stockholders of acquired corporation - - -
Stock issued to stockholders of acquired corporation 1,486 - -
------- ----- -------
$ 26 $ - $ -
======= ===== =======
ACQUISITION OF PREMIERMORTGAGE ASSOCIATES, INC.
Assets acquired:
Property and equipment, net $ - $ 4 $ -
Goodwill - 292 -
------- ----- -------
- 296 -
------- ----- -------
LIABILITIES ASSUMED
Other liabilities - - -
------- ----- -------
- - -
------- ----- -------
Net non-cash assets acquired $ - $ 296 $ -
======= ===== =======
PAYMENT FOR NET ASSETS ACQUIRED
Cash paid at closing $ - $ - $ -
Less cash acquired at closing - 4 -
------- ----- -------
(4) -
Notes issued to stockholders of acquired corporation - - -
Stock issued to stockholders of acquired corporation - 300 -
------- ----- -------
$ - $ 296 $ -
======= ===== =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8
MOUNTAINBANK FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
ACQUISITION OF FIRST WESTERN BANK 2002 2001 2000
---------------- --------------- ----------------
Assets acquired:
Investment securities $ - $ 8,487 $ -
Loans, net of allowance for
loan losses $1,230 - 80,521 -
Property and equipment, net - 4,007 -
Other assets - 1,218 -
Acquired loan write-up - 935 -
Core deposit intangible - 2,546 -
---------------- --------------- ----------------
- 97,714 -
---------------- --------------- ----------------
LIABILITIES ASSUMED
Deposits - 70,902 -
Federal funds purchased and
securities sold under agreements
to repurchase - 914 -
Borrowings - 12,750 -
Other liabilities - 2,181 -
Acquired deposit valuation - 509 -
Debt valuation allowance - (367) -
---------------- --------------- ----------------
- 86,889 -
---------------- --------------- ----------------
Net non-cash assets acquired $ - $ 10,825 $ -
================ =============== ================
PAYMENT FOR NET ASSETS ACQUIRED
Cash paid at closing $ - $ - $ -
Less cash acquired at closing - 2,932 -
---------------- --------------- ----------------
- (2,932) -
Notes issued to stockholders of acquired corporation - - -
Stock issued to stockholders of acquired corporation - 13,757 -
---------------- --------------- ----------------
$ - $ 10,825 $ -
================ =============== ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
MountainBank Financial Corporation (the Company) was incorporated as a North
Carolina corporation on January 10, 2001 to acquire the stock of MountainBank
(the Bank). The Bank was acquired by the Company on March 30, 2001.
MountainBank was organized and incorporated under the laws of the State of North
Carolina on June 25, 1997 and commenced operations on June 26, 1997. The Bank
currently serves nine western North Carolina counties and surrounding areas
through seventeen full service banking offices. As a state chartered bank,
MountainBank is subject to regulation by the State of North Carolina Banking
Commission and the Federal Deposit Insurance Corporation.
MountainBanc Mortgage Corporation was organized and incorporated under the laws
of the State of North Carolina on July 19, 2001. MountainBanc Mortgage
Corporation operates as a wholly-owned subsidiary of MountainBank and provides
mortgage banking services to its customers in North and South Carolina.
MountainBanc Mortgage Corporation commenced operations on October 1, 2001.
TrustCo Holding, Inc., parent company of Trust Company of the South and Asset
Management of the South, was acquired effective December 31, 2002 and merged
into the Company with Trust Company of the South and Asset Management of the
South becoming wholly-owned subsidiaries of the Company. Trust Company of the
South, a state chartered trust company, provides trust and estate planning
services to its customers in South Carolina. Asset Management of the South is a
registered investment advisor providing fee only investment services to its
customers.
The accounting and reporting policies of the Company and its subsidiaries follow
generally accepted accounting principles and general practices within the
financial services industry. All data presented in these notes to consolidated
financial statements are expressed in thousands, except where specifically
identified. Following is a summary of the more significant policies.
CRITICAL ACCOUNTING POLICIES
The notes to the Company's audited consolidated financial statements contain a
summary of significant accounting policies. Management believes the policies
with respect to the methodology for the determination of the allowance for loan
losses, and asset impairment judgments, including the recoverability of
intangible assets, involve a high degree of complexity. Management must make
difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or
estimates could cause reported results to differ materially. These critical
policies and their application are periodically reviewed with the Audit
Committee and Board of Directors.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany transactions and balances have been
eliminated in consolidation.
BUSINESS SEGMENTS
The Company reports its activities as a single business segment. In determining
proper segment definition, the Company considers the materiality of a potential
segment and components of the business about which financial information is
available and regularly evaluated, relative to resource allocation and
performance assessment.
USE OF ESTIMATES
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.
10
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES, CONTINUED
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
valuation of foreclosed real estate, management obtains independent appraisals
for significant properties.
Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse, but influenced to an extent by the
retirement, manufacturing and agricultural segments.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowance may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require additions to the allowance
based on their judgments about information available to them at the time of
their examinations. Because of these factors, it is possible that the allowance
for loan losses and valuation of foreclosed real estate may change materially in
the future.
CASH AND CASH EQUIVALENTS
For the purpose of presentation in the statements of cash flows, cash and cash
equivalents are defined as those amounts included in the balance sheet caption
"cash and due from banks."
TRADING SECURITIES
The Company does not hold securities for short-term resale and therefore does
not maintain a trading securities portfolio.
SECURITIES HELD TO MATURITY
Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. No securities held by the Company at
December 31, 2002 and 2001 were classified as held to maturity.
SECURITIES AVAILABLE FOR SALE
Available for sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available for sale
securities are reported as a net amount in a separate component of stockholders'
equity. Realized gains and losses on the sale of available for sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held to maturity and available for sale
securities below cost, that are other than temporary, are reflected as
write-downs of the individual securities to fair value. Related write-downs are
included in earnings as realized losses.
11
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANS HELD FOR SALE
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
LOANS RECEIVABLE
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs and any deferred fees
or costs on originated loans and unamortized premiums or discounts on purchased
loans.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment to the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When facts and circumstances indicate the borrower has
regained the ability to meet required payments, the loan is returned to accrual
status. Past due status of loans is determined based on contractual terms.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, 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. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures.
12
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Buildings, furniture and equipment, and leasehold improvements are carried at
cost, less accumulated depreciation and amortization computed principally by the
straight-line method over the following estimated useful lives:
Years
-----
Buildings and improvements 5-40
Furniture and equipment 3-10
For assets recorded under the terms of capital leases, the present value of
future minimum lease payments is treated as cost.
FORECLOSED PROPERTIES
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of carrying
amount or fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in operations on foreclosed real
estate.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting had been applied.
TRANSFERS OF FINANCIAL ASSETS
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
INCOME TAXES
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.
13
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
BASIC EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and stock dividends.
DILUTED EARNINGS PER SHARE
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.
COMPREHENSIVE INCOME
Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investment by and
distributions to shareholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholder's equity rather than as income or expense.
FINANCIAL INSTRUMENTS
Derivatives that are used as part of the asset/liability management process are
linked to specific assets or liabilities and have high correlation between the
contract and the underlying item being hedged, both at inception and throughout
the hedge period. In addition, forwards and option contracts must reduce an
exposure's risk, and for hedges of anticipatory transactions, the significant
terms and characteristics of the transaction must be identified and the
transactions must be probable of occurring. All derivative financial instruments
held or issued by the Company are held or issued for purposes other than
trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit. Such financial
instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
CASH AND DUE FROM BANKS: The carrying amounts reported in the balance sheet for
cash and cash equivalents approximate their fair values.
14
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
INTEREST-BEARING DEPOSITS WITH BANKS: Fair values for time deposits are
estimated using a discounted cash flow analyses that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
MORTGAGE LOANS HELD FOR SALE: Fair values of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
DEPOSIT LIABILITIES: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
SHORT-TERM BORROWINGS: The carrying amounts of short-term debt approximate their
fair values.
LONG-TERM BORROWINGS: The fair values of the Company's long-term borrowings are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowings arrangements.
OTHER LIABILITIES: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current year. Net income
and stockholders' equity previously reported were not affected by these
reclassifications.
15
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, that superseded Accounting Principles Board (APB) Opinion No. 17. Under
SFAS 142, goodwill and intangible assets deemed to have indefinite lives are no
longer amortized, but are to be reviewed at least annually for impairment. SFAS
142 also changes the amortization methodology in intangible assets that are
deemed to have finite lives, and adds to required disclosures regarding goodwill
and intangible assets. SFAS 142 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS 142 on January 1, 2002 by the Company
did not have a material impact on the consolidated financial statements, and is
not anticipated to have a material impact in the future. Under guidance in SFAS
142 management expects to conduct an annual analysis concerning potential
impairment of the goodwill existing on the Company's balance sheet. Any goodwill
determined to be impaired at that time will be written off at the time of the
analysis. The net carrying amount of goodwill at December 31, 2002 on the
Company's balance sheet was $1,956. The other intangible assets on the Company's
books at that date were core deposit intangible assets associated with the
acquisition of First Western Bank. These CDI intangibles amounted to $2,288 at
December 31, 2002 and were amortized $258.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, that superseded SFAS No. 121 and APB Opinion No.
30. SFAS 144 provides guidance on differentiating between assets held and used,
held for sale, and held for disposal other than by sale, and the required
valuation of such assets. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. The adoption of SFAS No. 144 on January 1, 2002 did not have
a material impact on the consolidated financial statements, and is not
anticipated to have a material impact in the future.
In April 2002, the FASB issued SFAS No. 145, Rescission of SFAS Statements No. 4
(Reporting Gains and Losses from Extinguishment of Debt), No. 44 (Accounting for
Intangible Assets of Motor Carriers), and No. 64 (Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements), Amendment of SFAS No. 13 (Accounting for
Leases), and Technical Corrections. This statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. SFAS 145 is
effective for transactions occurring after May 15, 2002. The adoption of SFAS
145 on May 15, 2002 by the Company did not have a material impact on the
consolidated financial statements, and is not anticipated to have a material
impact in the future.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires recognition of a liability for a cost
associated with an exit or disposal activity when the liability is incurred, as
opposed to being recognized at the date an entity commits to an exit plan under
EITF 94-3. SFAS 146 also establishes that fair value is the objective for
initial measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002, with earlier application
encouraged.
NOTE 3. BUSINESS COMBINATIONS
On December 31, 2002, the Company acquired TrustCo Holding, Inc. in exchange for
59,261 shares of MountainBank Financial Corporation common stock, valued at
$1,486, and $200 in cash for TrustCo Holdings, Inc. outstanding preferred stock.
In conjunction with the acquisition, TrustCo Holding, Inc., parent company of
Trust Company of the South and Asset Management of the South, was merged into
MountainBank Financial Corporation with the two subsidiaries becoming
subsidiaries of MountainBank Financial Corporation.
On October 1, 2001, the Company acquired PremierMortgage Associates, Inc. in
exchange for 20,000 shares of MountainBank Financial Corporation common stock in
a transaction valued at $300. In conjunction with the acquisition,
PremierMortgage Associates, Inc. was merged as a subsidiary of MountainBank and
was renamed MountainBanc Mortgage Corporation.
16
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. BUSINESS COMBINATIONS, CONTINUED
On December 31, 2001, the Company acquired First Western Bank in exchange for
687,841 shares of MountainBank Financial Corporation common stock valued at
$13,757. In conjunction with the acquisition, First Western Bank was merged with
and into the Company's subsidiary, MountainBank.
The acquisitions were accounted for as purchase transactions, and accordingly,
the results of operations attributable to the acquired companies are included in
the consolidated financial statements only from the dates of acquisition. The
excess of purchase price over fair value of net tangible and identified
intangible assets acquired will be evaluated annually for impairment and written
down as those values become impaired. Identified intangible assets will be
amortized over their expected useful life. The acquisitions are summarized as
follows:
TRUSTCO FIRST PREMIERMORTGAGE
HOLDING, INC. WESTERN BANK ASSOCIATES, INC.
----------------- ------------------ ------------------
Purchase price $ 1,686 $ 13,757 $ 300
----------------- ------------------ ------------------
Loans, net - 81,456 -
Investment securities - 8,487 -
Identified intangible assets - 2,546 -
Other assets 1,775 8,157 8
Deposits - (71,411) -
Other liabilities (1,844) (15,478) -
----------------- ------------------ ------------------
Net tangible and identified intangible
assets acquired (at fair market value) (69) 13,757 8
----------------- ------------------ ------------------
Excess of purchase price over net tangible and
identified intangible assets acquired (at fair
market value) $ 1,755 $ - $ 292
================= ================== ==================
Results of operations for the year ending December 31, 2002, as if the
combination with TrustCo Holdings, Inc. had occurred on January 1, 2002, are
summarized below.
MOUNTAINBANK
FINANCIAL
CORPORATION TRUSTCO PRO FORMA
& SUBSIDIARIES HOLDINGS, INC. ADJUSTMENTS COMBINED
--------------- ---------------- --------------- ----------------
2002
- ----
Interest income $ 46,283 $ - $ - $ 46,283
Interest expense 18,943 - - 18,943
--------------- ---------------- --------------- ----------------
Net interest income 27,340 - - 27,340
Provision for credit loss 5,300 - - 5,300
Other income 6,252 689 - 6,941
Other expense 18,269 1,072 - 19,341
--------------- ---------------- --------------- ----------------
Income (loss) before income taxes 10,023 (383) - 9,640
Income taxes (benefit) 3,865 (148) - 3,717
--------------- ---------------- --------------- ----------------
Net income (loss) 6,158 (235) - 5,923
Preferred stock dividends declared 453 - - 453
--------------- ---------------- --------------- ----------------
Net income (loss) available
to common shareholders $ 5,705 $ (235) $ - $ 5,470
=============== ================ =============== ================
17
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. BUSINESS COMBINATIONS, CONTINUED
Results of operations for the year ending December 31, 2001, as if the
combination with First Western Bank had occurred on January 1, 2001, are
summarized below.
MOUNTAINBANK
FINANCIAL FIRST
CORPORATION WESTERN PRO FORMA
& SUBSIDIARIES BANK ADJUSTMENTS COMBINED
--------------- ---------------- --------------- ----------------
2001
- ----
Interest income $ 29,906 $ 6,237 $ 281 $ 36,424
Interest expense 16,621 2,665 - 19,286
--------------- ---------------- --------------- ----------------
Net interest income 13,285 3,572 281 17,138
Provision for credit loss 3,347 905 - 4,252
Other income 2,994 771 - 3,765
Other expense 9,206 4,303 133 13,642
--------------- ---------------- --------------- ----------------
Income (loss) before income taxes 3,726 (865) 148 3,009
Income taxes (benefit) 1,216 (294) 58 980
--------------- ---------------- --------------- ----------------
Net income (loss) $ 2,510 $ (571) $ 90 $ 2,029
=============== ================ =============== ================
NOTE 4. RESTRICTIONS ON CASH
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $4,190 and $1,508 for the periods including December 31, 2002 and
2001, respectively.
NOTE 5. SECURITIES
Debt and equity securities have been classified in the balance sheets according
to management's intent. The carrying amounts of securities (all
available-for-sale) and their approximate fair values at December 31 follow:
AMORTIZED UNREALIZED UNREALIZED FAIR
2002 COST GAINS LOSSES VALUE
- ---- --------------- ---------------- --------------- ----------------
AVAILABLE FOR SALE
U.S. Government agency securities $ 3,000 $ 16 $ - $ 3,016
State and municipal securities - - - -
Mortgage-backed securities 61,397 343 18 61,722
Equity securities 9,078 - 85 8,993
------------- -------------- ------------- --------------
$ 73,475 $ 359 $ 103 $ 73,731
============= ============== ============= ==============
18
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. SECURITIES, CONTINUED
2001
- ----
AVAILABLE FOR SALE
U.S. Government agency securities $ 7,177 $ - $ 15 $ 7,162
State and municipal securities 3,721 40 6 3,755
Mortgage-backed securities 23,632 239 162 23,709
Equity securities 8,703 - - 8,703
------------- -------------- ------------- --------------
$ 43,233 $ 279 $ 183 $ 43,329
============= ============== ============= ==============
Restricted equity securities consist of investments in stock of the Federal Home
Loan Bank of Atlanta ("FHLB") and The Bankers Bank which are upstream
correspondents of the Bank. The FHLB requires financial institutions to make
equity investments in the FHLB in order to borrow from it. The Bank is required
to hold that stock so long as it borrows from the FHLB. The Bank's stock in The
Bankers Bank is restricted in the fact that the stock may only be repurchased by
that company.
Investment securities with amortized cost of approximately $30,000 and $13,000
at December 31, 2002 and 2001, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
Gross realized gains and losses for the years ended December 31 were as follows:
2002 2001 2000
---------------- --------------- ----------------
Realized gains, available for sale securities $ 314 $ 121 $ -
Realized losses, available for sale securities (49) - -
---------------- --------------- ----------------
$ 265 $ 121 $ -
================ =============== ================
The scheduled maturities of investment securities (all available for sale) at
December 31, 2002 were as follows:
AMORTIZED FAIR
COST VALUE
--------------- ----------------
Due in one year or less $ - $ -
Due after one year through five years 10,903 10,917
Due after five years through ten years 402 404
Due after ten years 53,092 53,417
Equity securities 9,078 8,993
--------------- ----------------
$ 73,475 $ 73,731
=============== ================
19
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. LOANS RECEIVABLE
The major components of loans, including loans held for sale, in the balance
sheets at December 31 were as follows:
2002 2001
--------------- ----------------
Commercial $ 93,360 $ 81,388
Real estate:
Construction and land development 119,944 89,587
Residential, 1-4 families 158,945 99,227
Residential, 5 or more families 11,009 4,326
Farmland 1,846 1,959
Nonfarm, nonresidential 290,811 177,319
Agricultural 110 403
Consumer 25,371 32,468
Other 9,988 5,607
--------------- ----------------
711,384 492,284
Unearned loan origination fees, net of costs (903) (1,299)
--------------- ----------------
710,481 490,985
Allowance for loan losses (11,192) (7,113)
--------------- ----------------
$ 699,289 $ 483,872
=============== ================
NOTE 7. ALLOWANCE FOR LOAN LOSSES
An analysis of the changes in the allowance for loan losses is as follows:
2002 2001 2000
---------------- --------------- ----------------
BALANCE, BEGINNING $ 7,113 $ 3,007 $ 1,247
Provision charged to expense 5,300 3,347 1,905
Recoveries of amounts charged off 228 15 5
Amounts charged off (1,449) (486) (150)
Allowance of acquired bank at date
of acquisition - 1,230 -
---------------- --------------- ----------------
BALANCE, ENDING $ 11,192 $ 7,113 $ 3,007
================ =============== ================
20
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. ALLOWANCE FOR LOAN LOSSES, CONTINUED
The following is a summary of information pertaining to impaired loans at
December 31:
2002 2001
--------------- ----------------
Impaired loans without a valuation allowance $ - $ -
Impaired loans with a valuation allowance 1,563 1,712
--------------- ----------------
Total impaired loans $ 1,563 $ 1,712
=============== ================
Valuation allowance related to impaired loans $ 551 $ 806
=============== ================
Nonaccrual loans and loans past due more than 90 days at December 31, 2002 were
approximately $2,900 and $18, respectfully. The average annual recorded
investment in impaired loans and interest recognized on impaired loans is
summarized below:
2002 2001 2000
---------------- --------------- ----------------
Average investment in impaired loans $ 1,569 $ 532 $ 21
================ =============== ================
Interest income recognized for the year $ 126 $ 121 $ 1
================ =============== ================
Interest income recognized on a cash basis for the year $ 126 $ 121 $ 1
================ =============== ================
The Company is not committed to lend additional funds to debtors whose loans
have been modified.
NOTE 8. PROPERTY AND EQUIPMENT
COMPONENTS OF PROPERTY AND EQUIPMENT
Components of property and equipment and total accumulated depreciation at
December 31 are as follows:
2002 2001
--------------- ----------------
Land, buildings and improvements $ 5,112 $ 5,071
Furniture and equipment 6,374 3,286
--------------- ----------------
Property and equipment, total 11,486 8,357
Less accumulated depreciation 2,435 1,153
--------------- ----------------
Property and equipment, net of depreciation $ 9,051 $ 7,204
=============== ================
21
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. PROPERTY AND EQUIPMENT, CONTINUED
CAPITAL LEASE
The Bank leases its original banking office under the provisions of an agreement
with the Chairman of the Company's Board of Directors which is accounted for as
a capital lease. Minimum lease payments relating to the building have been
capitalized as its cost. The lease calls for monthly payments of $7 per month
for the first five years of the term with five-year segment adjustments based on
changes in the CPI, and expires June 30, 2017. The lease also provides the Bank
an option for two consecutive five-year renewal periods at the expiration of the
original 20 year term. The banking office under capital lease at December 31,
2002 has a cost of $837, accumulated amortization of $231 and a net book value
of $606. Amortization relating to the leased property is included in
depreciation expense.
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at December 31 are as follows:
2002 2001
--------------- ----------------
Total minimum lease payments $ 1,317 $ 1,246
Amount representing interest (599) (510)
--------------- ----------------
Obligation under capital lease $ 718 $ 736
=============== ================
OPERATING LEASES
The Bank leases fourteen branch facilities under agreements accounted for as
operating leases. These leases will expire between March 2003 and August 2008.
The Bank also leases a branch and its operations center under agreements
accounted for as operating leases with the Chairman of the Company's Board of
Directors. These leases will expire December 31, 2003 and April 30, 2011,
respectively. The monthly lease payments are $5 and $3.
Rental expense under operating leases was $499, $307 and $168 for 2002, 2001 and
2000, respectively. Future minimum commitments under noncancellable leases are
as follows:
OPERATING CAPITAL
LEASES LEASES
---------------- ---------------
2003 $ 604 $ 99
2004 516 90
2005 510 90
2006 413 90
2007 226 90
Thereafter 243 858
---------------- ---------------
$ 2,512 $ 1,317
================ ===============
22
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. DEPOSITS
The aggregate amount of time deposits in denominations of $100 or more at
December 31, 2002 and 2001 was $180,216 and $120,512, respectively.
At December 31, 2002, the scheduled maturities of time deposits are as follows:
2003 $ 416,288
2004 through 2005 12,372
2006 through 2008 1,782
----------------
$ 430,442
================
NOTE 10. SHORT-TERM DEBT
Short-term debt consists of overnight borrowings from the Federal Home Loan
Bank, fed funds purchased, and securities sold under agreements to repurchase,
which generally mature within one to four days from the transaction date.
Additional information is summarized below:
2002 2001
--------------- ----------------
Outstanding balance at December 31 $ 39,204 $ 6,490
=============== ================
Year-end weighted average rate 1.24% 1.93%
=============== ================
Daily average outstanding during the period $ 9,765 $ 5,374
=============== ================
Average rate for the period 1.49% 3.65%
=============== ================
Maximum outstanding at any month-end during the period $ 39,204 $ 10,840
=============== ================
The Company has established various credit facilities to provide additional
liquidity if and as needed. These consist of unsecured lines of credit in the
aggregate amount of $18,500 and secured lines of credit of approximately
$62,500.
NOTE 11. LONG-TERM DEBT
Components of long-term debt at December 31 are as follows:
2002 2001
------------ ------------
Federal Home Loan Bank advances $ 46,500 $ 36,500
Other borrowings - 6,500
Debt valuation allowance resulting from merger (290) (367)
------------ ------------
$ 46,210 $ 42,633
============ ============
The advances from the Federal Home Loan Bank of Atlanta consist of three
separate notes of $11,500, $25,00 and $10,000 that bear interest at fixed rates
of 4.25%, 4.53% and 1.15%, respectively. The notes mature October 3, 2011, April
18, 2011 and December 24, 2007, respectively. These notes are collateralized by
commercial real estate and 1-4 family mortgage loans in the amount of $331,017.
NOTE 12. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES
MountainBank Capital Trust I, a statutory business trust (the "Trust"), was
created by the Company on June 28, 2002, at which time the Trust issued $20,000
in aggregate liquidation amount of $1 par value preferred capital trust
securities which mature June 30, 2032. Distributions are payable on the
securities at a floating rate equal to the 3-month London Interbank Offered Rate
("LIBOR") plus 3.65%, capped at 12%, and the securities may be prepaid at par by
the Trust at any time after June 30, 2007. The principal assets of the Trust are
$20.6 million of the Company's junior subordinated debentures which mature on
June 30, 2032, and bear interest at a floating rate equal to the 3-month LIBOR
plus 3.65%, capped at 12%, and which are callable by the Company after June 30,
2007. All $619 thousand in aggregate liquidation of the Trust's common
securities are held by the Company.
23
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S JUNIOR
SUBORDINATED DEBENTURES, CONTINUED
The Trust's preferred securities and common securities may be included in the
Company's Tier I capital for regulatory capital adequacy purposes to the extent
that they do not exceed 33.3% of the Company's total Tier I capital excluding
these securities. Amounts in excess of this ratio will not be considered Tier I
capital but may be included in the calculation of the Company's total risk-based
capital ratio. The Company's obligations with respect to the issuance of the
Trust's preferred securities and common securities constitute a full and
unconditional guarantee by the Company of the Trust's obligations with respect
to the preferred securities and common securities. Subject to certain exceptions
and limitations, the Company may elect from time to time to defer interest
payments on its junior subordinated debentures, which would result in a deferral
of distribution payments on the Trust's preferred trust securities and common
securities.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments are as follows:
DECEMBER 31, 2002 DECEMBER 31, 2001
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- -------------- ------------- --------------
FINANCIAL ASSETS
Cash and cash equivalents $ 10,229 $ 10,229 $ 10,126 $ 10,126
Interest-bearing deposits 16,393 16,393 525 525
Securities, available-for-sale 73,731 73,731 43,329 43,329
Restricted equity securities 3,746 3,746 2,058 2,058
Loans, net of allowance for loan losses 699,289 708,692 483,872 492,331
FINANCIAL LIABILITIES
Deposits 677,269 680,285 467,507 464,777
Short-term debt 39,204 39,204 6,490 6,490
Long-term debt 46,928 47,657 43,369 45,868
Junior subordinated debentures 20,000 20,000 - -
OFF-BALANCE-SHEETS ASSETS (LIABILITIES)
Commitments to extend credit and
standby letters of credit - - - -
NOTE 14. EARNINGS PER SHARE
The following table details the computation of basic and diluted earnings per
share:
2002 2001 2000
---------------- --------------- ----------------
Net income available to common stockholders $ 5,705 $ 2,510 $ 1,056
================ =============== ================
Net income $ 6,158 $ 2,510 $ 1,056
================ =============== ================
Weighted average common shares outstanding 3,128,805 2,256,780 2,041,711
EFFECT OF DILUTIVE SECURITIES, OPTIONS 760,158 216,560 195,434
---------------- --------------- ----------------
Weighted average common shares outstanding, diluted 3,888,963 2,473,340 2,237,145
================ =============== ================
Basic earnings per share $ 1.82 $ 1.11 $ .52
================ =============== ================
Diluted earnings per share $ 1.58 $ 1.01 $ .48
================ =============== ================
24
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. STOCK OPTIONS
The Company maintains a qualified incentive stock option plan which reserves up
to 224,502 common shares for the benefit of certain of the Company's employees.
Options granted under this plan are exercisable at no less than fair market
value of the Company's common stock at the date of grant, vest according to the
terms of each particular grant and expire in no more than ten years.
The Company also maintains a non-qualified stock option plan which reserves up
to 224,502 common shares for purchase by directors. Options granted under this
plan are exercisable at no less than fair market value of the Company's common
stock at the date of grant, vest according to the terms of each particular grant
and expire in no more than ten years.
Options have been adjusted to reflect stock splits and dividends.
Activity under Company plans during the periods ended December 31 is summarized
below:
QUALIFIED PLAN NON-QUALIFIED PLAN
------------------------- --------------------------
AVAILABLE AVAILABLE
FOR GRANT GRANTED FOR GRANT GRANTED
--------- ------- --------- -------
BALANCE, DECEMBER 31, 1999 - 85,651 - 73,693
Amendment to plan 63,268 - 63,268 -
Granted (51,864) 51,864 (63,268) 63,268
Exercised - (2,201) - -
Forfeited 4,260 (4,260) - -
Stock split 3,916 32,764 - 34,240
------- ------- ------- -------
BALANCE, DECEMBER 31, 2000 19,580 163,818 - 171,201
Options converted at acquisition - 47,333 - 68,750
Granted - - - -
Exercised - (1,967) - (12,170)
Forfeited 4,595 (4,595) - -
Stock split 4,835 40,918 - 45,560
------- ------- ------- -------
BALANCE, DECEMBER 31, 2001 29,010 245,507 - 273,341
Granted (10,000) 10,000 - -
Exercised - (18,711) - (10,460)
Forfeited 25,179 (25,179) 8,320 (8,320)
------- ------- ------- -------
BALANCE, DECEMBER 31, 2002 44,189 211,617 8,320 254,561
======= ======= ======= =======
25
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15. STOCK OPTIONS, CONTINUED
Additional information related to options is detailed below:
2002 2001 2000
---------------- --------------- ----------------
OUTSTANDING OPTIONS:
Weighted average exercise price, beginning of the year $ 11.17 $ 8.78 $ 6.49
Weighted average exercise price, end of the year $ 11.28 $ 11.17 $ 8.78
Range of exercise prices:
From $ 5.09 $ 5.09 $ 5.09
To $ 25.00 $ 18.33 $ 13.33
Weighted averaged remaining contractual life in months 75 100
EXERCISABLE OPTIONS OUTSTANDING AT DECEMBER 31:
Number 367,470 349,687 213,964
Weighted average exercise price $ 10.69 $ 10.18 $ 5.97
WEIGHTED AVERAGE EXERCISE PRICE OF OPTIONS:
Granted during the year $ 25.00 $ - $ 13.33
Exercised during the year $ 11.37 $ 5.28 $ 5.93
Forfeited during the year $ 15.53 $ 12.30 $ 8.98
Expired during the year $ - $ - $ -
GRANT-DATE FAIR VALUE:
Options granted during the year $ 78 $ - $ 919
SIGNIFICANT ASSUMPTIONS USED IN DETERMINING FAIR
VALUE OF OPTIONS GRANTED:
Risk-free interest rate 3.75% - 5.25%
Expected life in years 10 - 10
Expected dividends - - -
Expected volatility 0.16% - 0.85%
RESULTS OF OPERATIONS:
Compensation cost recognized in income for all
stock-based compensation awards $ - $ - $ -
================ =============== ================
Pro forma net income, based on SFAS No. 123 $ 5,654 $ 2,510 $ 450
================ =============== ================
Pro forma basic earnings per common share,
based on SFAS No. 123 $ 1.81 $ 1.11 $ 0.22
================ =============== ================
Pro forma diluted earnings per common share,
based on SFAS No. 123 $ 1.45 $ 1.01 $ 0.20
================ =============== ================
NOTE 16. BENEFIT PLANS
DEFINED CONTRIBUTION PLANS
The Company maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees at least 21
years of age who have completed three months of service. Participants may
contribute a percentage of compensation, subject to a maximum allowed under the
Code. In addition, the Company may make additional contributions at the
discretion of the Board of Directors. The Company contribution was approximately
$74, $33, and $25 for 2002, 2001 and 2000, respectively.
26
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16. BENEFIT PLANS, CONTINUED
CAFETERIA PLAN
The Company adopted a cafeteria plan which provides its employees with a choice
between compensation and certain qualified benefit plans including medical
reimbursement, group accident and health insurance, dependent care assistance,
and group term life insurance. The Company's only expense relating to this plan
relates to administration costs.
NOTE 17. INCOME TAXES
CURRENT AND DEFERRED INCOME TAX COMPONENTS
The components of income tax expense are as follows:
2002 2001 2000
---------------- --------------- ----------------
Current $ 4,830 $ 2,268 $ 1,119
Deferred (965) (1,052) (490)
Deferred tax asset valuation allowance change - - (46)
---------------- --------------- ----------------
$ 3,865 $ 1,216 $ 583
================ =============== ================
RATE RECONCILIATION
A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income follows:
2002 2001 2000
---------------- --------------- ----------------
Tax at statutory federal rate $ 3,408 $ 1,267 $ 557
State income tax, net of federal benefit 498 196 81
Tax exempt income (192) (138) (6)
Other 151 (109) (3)
Deferred tax asset valuation allowance change - - (46)
---------------- --------------- ----------------
$ 3,865 $ 1,216 $ 583
================ =============== ================
27
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 17. INCOME TAXES, CONTINUED
DEFERRED INCOME TAX ANALYSIS
The significant components of net deferred tax assets are summarized as follows:
2002 2001
--------------- ----------------
Deferred tax assets
Allowance for loan losses $ 4,071 $ 2,476
Pre-opening expenses - 32
Net operating losses of acquired company - 260
Accrued expenses 118 26
Other - 8
--------------- ----------------
Deferred tax asset 4,189 2,802
--------------- ----------------
Deferred tax liabilities
Net unrealized appreciation on securities
available for sale (87) (33)
Other securities basis adjustment (330) (414)
Purchase accounting adjustments (406) (336)
First Home Loan Bank stock dividends (50) (51)
Depreciation (546) (80)
Accretion of bond discount - (33)
Other (4) -
--------------- ----------------
Deferred tax liabilities (1,423) (947)
--------------- ----------------
Net deferred tax asset $ 2,766 $ 1,855
=============== ================
NOTE 18. COMMITMENTS AND CONTINGENCIES
LITIGATION
In the normal course of business the Company is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the financial
statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the balance sheets.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as for on-balance-sheet instruments. A summary of
commitments (approximately) at December 31 is as follows:
2002 2001
--------------- ----------------
Commitments to extend credit $ 96,723 $ 74,678
Standby letters of credit 590 5,294
--------------- ----------------
$ 97,313 $ 79,972
=============== ================
28
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 18. COMMITMENTS AND CONTINGENCIES, CONTINUED
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary upon extension of credit, is based on management's credit
evaluation of the party. Collateral held varies, but may include accounts
receivable, inventory, property and equipment, residential real estate and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances which the Company deems
necessary.
CONCENTRATIONS OF CREDIT RISK
Substantially all of the Company's loans, commitments to extend credit, and
standby letters of credit have been granted to customers in the Company's market
area and such customers are generally depositors of the Bank. The concentrations
of credit by type of loan are set forth in the Loans Receivable note. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. The Company generally does not extend credit to any single
borrower or group of related borrowers in excess of approximately $4,500.
Although the Company has a reasonably diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon
economic conditions in and around its market area. A significant amount of the
real estate loans set forth in the Loans Receivable note are secured by
commercial real estate. In addition, the Bank has a loan concentration relating
to customers who are in the business of land development and loans secured by
commercial real estate. Total loans to this industrial group amounted to
approximately $374,500 at December 31, 2002 and $242,500 at December 31, 2001.
The Company from time to time has cash and cash equivalents on deposit with
financial institutions which exceed federally-insured limits.
OTHER COMMITMENTS
The Company has entered into employment agreements with certain of its key
officers covering duties, salary, benefits, provisions for termination and
Company obligations in the event of merger or acquisition.
NOTE 19. REGULATORY RESTRICTIONS
DIVIDENDS
The Company's dividend payments are made from dividends received from the Bank.
The Bank, as a North Carolina chartered bank, may pay dividends only out of its
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 financial soundness of the Bank.
29
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19. REGULATORY RESTRICTIONS, CONTINUED
INTERCOMPANY TRANSACTIONS
The Bank's legal lending limit on loans to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $6,500 at December 31, 2002.
No 23A transactions were deemed to exist between the Company and the Bank at
December 31, 2002.
CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by
federal 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. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2002, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2002, the Bank met the criteria to be considered well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table.
30
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 19. REGULATORY RESTRICTIONS, CONTINUED
CAPITAL REQUIREMENTS, CONTINUED
The Company and Bank's actual capital amounts and ratios are also presented in
the table.
MINIMUM
MINIMUM TO BE WELL
REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------------- ------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
DECEMBER 31, 2002
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 76,864 10.84% $ 56,737 8.00% n/a n/a
MountainBank $ 70,986 10.01% $ 56,725 8.00% $ 70,906 10.00%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 63,960 9.02% $ 28,369 4.00% n/a n/a
MountainBank $ 62,094 8.76% $ 28,363 4.00% $ 42,544 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 63,960 8.09% $ 31,608 4.00% n/a n/a
MountainBank $ 62,094 7.85% $ 31,644 4.00% $ 39,555 5.00%
DECEMBER 31, 2001
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 40,570 8.01% $ 40,542 8.00% n/a n/a
MountainBank $ 44,842 8.87% $ 40,443 8.00% $ 50,554 10.00%
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 34,230 6.75% $ 20,271 4.00% n/a n/a
MountainBank $ 38,507 7.62% $ 20,222 4.00% $ 30,332 6.00%
Tier I Capital
(to Average Assets)
Consolidated $ 34,230 7.49% $ 18,269 4.00% n/a n/a
MountainBank $ 38,507 8.43% $ 18,269 4.00% $ 22,836 5.00%
31
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 20. TRANSACTIONS WITH RELATED PARTIES
LOANS
The Company has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
Aggregate loan transactions with related parties were as follows:
2002 2001
--------------- ----------------
BALANCE, BEGINNING $ 7,484 $ 3,339
New loans 21,580 6,386
Repayments (9,881) (4,884)
Relationship changes (1,600) 2,643
--------------- ----------------
BALANCE, ENDING $ 17,583 $ 7,484
=============== ================
At December 31, 2002, the balance included $8,500 to an individual director and
the director's related interests.
BUILDING LEASE
The Company has entered into certain lease agreements with the Chairman of the
Company's Board of Directors for the rental of bank buildings and office space
for bank operations. (See also the Property and Equipment note).
32
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
--------------- ----------------
ASSETS
Cash due from banks $ 546 $ 2,231
Investment in affiliates 70,712 41,292
Other assets 1,561 164
--------------- ----------------
Total assets $ 72,819 $ 43,687
=============== ================
LIABILITIES
Junior subordinated debentures $ 20,000 $ -
Long-term debt - 6,500
Interest payable - 69
Other liabilities 351 103
--------------- ----------------
Total liabilities 20,351 6,672
--------------- ----------------
STOCKHOLDERS' EQUITY
Preferred stock 10,062 2,224
Common stock 12,802 12,451
Surplus 20,038 18,584
Retained earnings 9,397 3,692
Accumulated other comprehensive income 169 64
--------------- ----------------
Total stockholders' equity 52,468 37,015
--------------- ----------------
Total liabilities and stockholders' equity $ 72,819 $ 43,687
=============== ================
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------------- ----------------
INCOME
Dividends from affiliate bank $ 350 $ -
Other income 4 -
--------------- ----------------
354 -
--------------- ----------------
EXPENSES
Professional fees 303 113
Interest 802 223
Other expenses 146 156
--------------- ----------------
Total expenses 1,251 492
--------------- ----------------
Loss before tax benefit and equity in
undistributed income of affiliate (897) (492)
INCOME TAX BENEFIT (416) (161)
--------------- ----------------
Loss before equity in
undistributed income of affiliate (481) (331)
EQUITY IN UNDISTRIBUTED INCOME OF AFFILIATE 6,639 2,841
--------------- ----------------
Net income $ 6,158 $ 2,510
=============== ================
33
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 21. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001
2002 2001
--------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,158 $ 2,510
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of affiliates (6,639) (2,841)
Net change in other assets (1,397) (164)
Net change in interest payable (69) 69
Net change in other liabilities 96 103
--------------- ----------------
Net cash used by operating activities (1,851) (323)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in affiliate (21,189) (6,249)
--------------- ----------------
Net cash used by investing activities (21,189) (6,249)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in long-term debt (6,500) 6,500
Junior subordinated debentures 20,000 -
Preferred stock issued 7,838 2,224
Common stock issued 319 79
Dividends paid (302) -
--------------- ----------------
Net cash provided by financing activities 21,355 8,803
--------------- ----------------
Net (decrease) increase in cash and cash equivalents (1,685) 2,231
CASH AND DUE FROM BANKS, BEGINNING 2,231 -
--------------- ----------------
CASH AND DUE FROM BANKS, ENDING $ 546 $ 2,231
=============== ================
34
MOUNTAINBANK FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 22. QUARTERLY DATA
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2001
----------------------------------------- -----------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
Interest and dividend income $ 13,096 $ 11,785 $ 10,863 $ 10,539 $ 7,868 $ 8,969 $ 7,125 $ 5,944
Interest expense (5,006) (5,204) (4,440) (4,293) (4,013) (4,947) (4,182) (3,479)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income 8,090 6,581 6,423 6,246 3,855 4,022 2,943 2,465
Provision for loan losses (1,900) (1,150) (950) (1,300) (1,150) (705) (865) (627)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income, after
provision for loan losses 6,190 5,431 5,473 4,946 2,705 3,317 2,078 1,838
Noninterest income 1,815 1,587 1,450 1,400 1,339 784 504 367
Noninterest expenses (5,829) (4,550) (4,208) (3,682) (3,254) (2,382) (2,080) (1,490)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 2,176 2,468 2,715 2,664 790 1,719 502 715
Provision for income taxes (751) (941) (1,048) (1,125) (167) (629) (210) (210)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income 1,425 1,527 1,667 1,539 623 1,090 292 505
Preferred stock
dividends declared (151) (151) (151) - - - - -
--------- --------- --------- --------- --------- --------- --------- ---------
Net income available
to common stockholders $ 1,274 $ 1,376 $ 1,516 $ 1,539 $ 623 $ 1,090 $ 292 $ 505
========= ========= ========= ========= ========= ========= ========= =========
Earnings per common share:
Basic $ 0.40 $ 0.44 $ 0.49 $ 0.49 $ 0.27 $ 0.48 $ 0.13 $ 0.23
========= ========= ========= ========= ========= ========= ========= =========
Diluted $ 0.35 $ 0.39 $ 0.43 $ 0.41 $ 0.24 $ 0.45 $ 0.12 $ 0.20
========= ========= ========= ========= ========= ========= ========= =========
NOTE 23. SUBSEQUENT EVENTS
During 2002, the Company entered into an agreement to merge with CNB Holdings,
Inc. CNB is headquartered in Pulaski, Virginia, and is the bank holding company
for Community National Bank, which operates two banking offices in Pulaski. The
transaction is structured whereby CNB will be merged into the Company, Community
National Bank will become a wholly-owned subsidiary of the Company, and CNB's
shareholders will receive a combination of the Company's common stock and cash
(approximately 50% each) valued at approximately $13.50 for each of their shares
of CNB common stock, with the actual number of shares of the Company's common
stock to be issued for each CNB share to be based on the market value of the
Company's common stock immediately prior to completion of the merger. The
transaction was approved by CNB's shareholders on March 7, 2003. Consummation of
the merger is subject to receipt of required state and federal bank regulatory
approvals. Subject to those contingencies, it is expected that the transaction
will be completed during the second quarter of 2003.
During 2002, the Company also entered into an agreement to merge with Cardinal
Bankshares Corporation. Cardinal is headquartered in Floyd, Virginia, and is the
holding company for Bank of Floyd, which operates five banking offices in five
southwestern Virginia communities. The Company's shareholders approved the
proposed merger at a special meeting held on February 26, 2003. However, at
Cardinal's special meeting held on the same date, Cardinal's shareholders failed
to approve the transaction. Cardinal terminated the merger agreement on March 5,
2003.
35
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998. Dollar amount totals, except
per share data, are presented in thousands (PERIODS PRIOR TO 2001 REFLECT
MOUNTAINBANK'S OPERATIONS ONLY). Per share data reflects all stock dividends.
DECEMBER 31,
-------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS 2002 2001 2000 1999 1998
-------------- --------------- ---------------- --------------- ----------------
Interest income $ 46,283 $ 29,906 $ 15,822 $ 6,752 $ 3,479
Interest expense 18,943 16,621 9,016 3,561 1,765
-------------- --------------- ---------------- --------------- ----------------
Net interest income 27,340 13,285 6,805 3,191 1,714
Provision for credit losses 5,300 3,347 1,905 827 471
Other income 6,252 2,994 1,318 782 469
Other expense 18,269 9,206 4,579 2,820 1,582
Income taxes 3,865 1,216 583 0 0
-------------- --------------- ---------------- --------------- ----------------
Net income $ 6,158 $ 2,510 $ 1,056 $ 326 $ 130
============== =============== ================ =============== ================
PER SHARE DATA
Basic earnings (loss) $ 1.82 $ 1.11 $ 0.52 $ 0.22 $ 0.10
Diluted earnings 1.58 1.01 0.48 0.19 0.09
Book value 13.25 11.55 9.73 7.09 5.62
Tangible book value 11.92 11.18 9.73 7.09 5.62
Cash dividends declared n/a n/a n/a n/a n/a
BALANCE SHEET
Loans and loans held
for sale, net $ 699,289 $ 483,872 $ 197,373 $ 88,498 $ 47,608
Investment securities 77,477 45,388 35,869 18,755 6,171
Total assets 841,140 561,123 259,109 127,211 58,634
Deposits 677,269 467,507 233,338 113,886 50,360
Stockholders' equity 52,468 37,015 18,210 10,222 6,177
Interest-earning assets 804,351 536,897 249,137 121,330 54,851
Interest-bearing liabilities 718,794 476,178 221,712 109,152 47,075
SELECTED RATIOS
Return on average assets 0.90% 0.66% 0.57% 0.37% 0.30%
Return on average equity 13.07% 12.71% 7.14% 3.93% 2.13%
Cash dividends declared
per common share n/a n/a n/a n/a n/a
Efficiency ratio 54.4% 56.6% 56.4% 71.0% 72.4%
Net interest margin 4.12% 3.60% 3.86% 3.81% 4.16%
36
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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FORWARD LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS. The
following discussion contains certain forward-looking statements about the
Company's financial condition and results of operations, which are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those reflected in the forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's judgment only as of the date hereof. The Company undertakes
no obligation to publicly revise these forward-looking statements to reflect
events and circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from those
contemplated by such forward-looking statements include, among others, the
following possibilities: (1) projected growth rates of the company may be lower
than historical rates and lower than those projected in our business model; (2)
general economic conditions, in the markets in which the Company does business,
may deteriorate further as the general U.S. domestic economy remains stagnant;
(3) costs or difficulties related to the integration of acquisitions, or
expenses in general, are greater than expected; (4) competitive pressures
increase significantly; (5) risks inherent in making loans, including repayment
risks and risks associated with collateral values, are greater than expected;
(6) changes in the interest rate environment reduce interest margins and affect
funding sources; (7) changes in market rates and prices may adversely affect the
value of financial products; (8) any inability to generate liquidity necessary
to meet loan demand or other cash needs; (9) any inability to accurately predict
the adequacy of the loan loss allowance needs; (10) legislation or regulatory
requirements or changes adversely affect the businesses in which the company is
engaged; and (11) decisions to change the business mix of the Company.
Management's discussion and analysis is provided to assist in the understanding
and evaluation of MountainBank Financial Corporation's (the Company's) financial
condition and its results of operations. The following discussion should be read
in conjunction with the Company's financial statements and related notes.
CRITICAL ACCOUNTING POLICIES. The Company's financial statements are prepared in
accordance with accounting principles generally accepted in the United States
(GAAP). The notes to the audited consolidated financial statements included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2002
contain a summary of its significant accounting policies. Management believes
the Company's policies with respect to the methodology for the determination of
the allowance for loan losses, and asset impairment judgments, such as the
recoverability of intangible assets, involve a higher degree of complexity and
require management to make difficult and subjective judgments that often require
assumptions or estimates about highly uncertain matters. Accordingly, the
Company considers the policies related to those areas as critical.
The allowance for loan losses is an estimate of the losses that may be sustained
in the Company's loan portfolio. The allowance is based on two basic principles
of accounting: (I) Statement of Financial Accounting Standards ("SFAS") 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable, and (II) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market, and the loan
balance.
The Company's allowance for loan losses has three basic components: (I) the
formula allowance, (II) the specific allowance, and (III) the unallocated
allowance. Each of these components is determined based upon estimates that can
and do change when the actual events occur. The formula allowance uses an
historical loss view as an indicator of future losses and, as a result, could
differ from the loss incurred in the future. However, since this history is
updated with the most recent loss information, the errors that might otherwise
occur are mitigated. The specific allowance uses various techniques to arrive at
an estimate of loss. Historical loss information, expected cash flows and fair
market value of collateral are used to estimate these losses. The use of these
values is inherently subjective and the actual losses could be greater or less
than the estimates. The unallocated allowance captures losses that are
attributable to various economic events, industry or geographic sectors whose
impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowance.
37
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Accounting for intangible assets is as prescribed by SFAS 142, Goodwill and
Other Intangible Assets. The Company accounts for recognized intangible assets
based on their estimated useful lives. Intangible assets with finite useful
lives are amortized while intangible assets with an indefinite useful life are
not amortized. Currently, the Company's recognized intangible assets consist
primarily of purchased core deposit intangible assets, having estimated useful
lives of 10 years, which are being amortized. The useful life is the period over
which the assets are expected to contribute directly or indirectly to future
cash flows.
Estimated useful lives of intangible assets are based on an analysis of
pertinent factors, including (as applicable):
o the expected use of the asset;
o the expected useful life of another asset or a group of assets to
which the useful life of the intangible asset may relate;
o any legal, regulatory, or contractual provisions that may limit the
useful life;
o any legal, regulatory, or contractual provisions that enable renewal
or extension of the asset's legal or contractual life without
substantial cost;
o the effects of obsolescence, demand, competition, and other economic
factors; and
o the level of maintenance expenditures required to obtain the expected
future cash flows from the asset.
Straight-line amortization is used to expense recognized amortizable intangible
assets since a method that more closely reflects the pattern in which the
economic benefits of the intangible assets are consumed cannot reliably be
determined. Intangible assets are not written off in the period of acquisition
unless they become impaired during that period.
The Company evaluates the remaining useful life of each intangible asset that is
being amortized each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization. If the
estimate of the intangible asset's remaining useful life is changed, the
remaining carrying amount of the intangible asset shall be amortized
prospectively over that revised remaining useful life.
If an intangible asset that is being amortized is subsequently determined to
have an indefinite useful life, the asset will be tested for impairment. That
intangible asset will no longer be amortized and will be accounted for in the
same manner as intangible assets that are not subject to amortization.
Intangible assets that are not subject to amortization are reviewed for
impairment in accordance with SFAS 121 and tested annually, or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
The impairment test consists of a comparison of the fair value of the intangible
asset with its carrying amount. If the carrying amount of the intangible asset
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. After an impairment loss is recognized, the adjusted carrying
amount of the intangible asset becomes its new accounting basis. Subsequent
reversal of a previously recognized impairment loss is not allowed.
Based on the aforementioned testing, the Company has determined that its
recorded intangible assets are not impaired.
38
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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GOVERNMENT SUPERVISION AND REGULATION. GENERAL. As a registered bank holding
company, the Company is subject to the supervision of and regular inspection by,
the Board of Governors of the Federal Reserve System (the "Federal Reserve").
MountainBank is a North Carolina chartered banking company whose deposits are
insured by the Federal Deposit Insurance Corporation's ("FDIC") Bank Insurance
Fund ("BIF"). MountainBank is subject to extensive regulation and examination by
the Office of the Commissioner of Banks of the State of North Carolina (the "NC
Commissioner") under the direction and supervision of the North Carolina Banking
Commission (the "NC Banking Commission") and by the FDIC, which insures its
deposits to the maximum extent permitted by law.
In addition to state and federal banking laws, regulations and regulatory
agencies, the Company and the Bank are subject to various other laws and
regulations and supervision and examination by other regulatory agencies, all of
which directly or indirectly affect the Company's operations, management and
ability to make distributions. The following discussion summarizes certain
aspects of those laws and regulations that affect the Company.
GRAMM-LEACH BLILEY FINANCIAL MODERNIZATION ACT OF 1999. The Gramm-Leach-Bliley
Financial Modernization Act of 1999 (the "GLB Act") eliminated certain legal
barriers separating the conduct of various types of financial service
businesses, such as commercial banking, investment banking and insurance in
addition to substantially revamping the regulatory scheme within which the
Company operates. Under the GLB Act, bank holding companies meeting management,
capital and Community Reinvestment Act standards, and that have elected to
become a financial holding company, may engage in a substantially broader range
of traditionally nonbanking activities than was permissible before enactment,
including insurance underwriting and making merchant banking investments in
commercial and financial companies. The GLB Act also allows insurers and other
financial services companies to acquire banks; removes various restrictions that
currently apply to bank holding company ownership of securities firms and mutual
fund advisory companies; and establishes the overall regulatory structure
applicable to bank holding companies that also engage in insurance and
securities operations.
In addition, the GLB Act also modifies current law related to financial privacy
and community reinvestment. The privacy provisions generally will prohibit
financial institutions from disclosing nonpublic personal financial information
to nonaffiliated third parties unless the customer has the opportunity to
decline disclosure.
RESTRICTIONS ON BANK HOLDING COMPANIES. The Federal Reserve is authorized to
adopt regulations affecting various aspects of bank holding companies. Under the
BHCA, the Company's activities, and those of companies which it controls or in
which it holds more than five percent of the voting stock, are limited to
banking or managing or controlling banks or furnishing services to or performing
services for its subsidiaries, or any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. In making such determinations, the Federal
Reserve is required to consider whether the performance of such activities by a
bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices. The BHCA, as amended by the GLB Act,
generally limits the activities of a bank holding company (unless the bank
holding company has elected to become a financial holding company) to activities
that are closely related to banking and a proper incident thereto.
Generally, bank holding companies are required to obtain prior approval of the
Federal Reserve to engage in any new activity not previously approved by the
Federal Reserve or to acquire more than five percent of any class of voting
stock of any company. The BHCA also requires bank holding companies to obtain
the prior approval of the Federal Reserve before acquiring more than five
percent of any class of voting stock of any bank which is not already
majority-owned by the bank holding company.
The Company is also subject to the North Carolina Bank Holding Company Act of
1984. As required by this state legislation, the Company, by virtue of its
ownership of MountainBank, has registered as a bank holding company with the NC
Commissioner. The North Carolina Bank Holding Company Act also prohibits the
Company from acquiring or controlling certain non-bank banking institutions
which have offices in North Carolina.
39
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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INTERSTATE BANKING AND BRANCHING LEGISLATION. Pursuant to the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
and Branching Act"), which became effective September 29, 1995, a bank holding
company may acquire banks in states other than its home state, without regard to
the permissibility of such acquisition under state law, but subject to any state
requirement that the bank has been organized and operating for a minimum period
of time, not to exceed five years, and the requirement that the bank holding
company, prior to or following the proposed acquisition, controls no more than
10 percent of the total amount of deposits of insured depository institutions in
the United States and no more than 30 percent of such deposits in that state (or
such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorized banks to merge across
state lines, thereby creating interstate branches. Under such legislation, each
state had the opportunity either to "opt out" of this provision, thereby
prohibiting interstate branching in such states, or to "opt in". The State of
North Carolina elected to "opt in" to such legislation. Furthermore, pursuant to
the Interstate Banking and Branching Act, a bank is now able to open new
branches in a state in which it does not already have banking operations, if the
laws of such state permit such de novo branching.
THE USA PATRIOT ACT. After the September 11, 2001 terrorist attacks in New York
and Washington, D.C., the United States government acted in several ways to
tighten control on activities perceived to be connected to money laundering and
terrorist funding. A series of orders were issued which identify terrorists and
terrorist organizations and require the blocking of property and assets of, as
well as prohibiting all transactions or dealings with, such terrorists,
terrorist organizations and those that assist or sponsor them. The USA Patriot
Act substantially broadens existing anti-money laundering legislation and the
extraterritorial jurisdiction of the United States, imposes new compliance and
due diligence obligations, creates new crimes and penalties, compels the
production of documents located both inside and outside the United States,
including those of foreign institutions that have a correspondent relationship
in the United States, and clarifies the safe harbor from civil liability to
customers. In addition, the United States Treasury Department issued regulations
in cooperation with the federal banking agencies, the Securities and Exchange
Commission, the Commodity Futures Trading Commission and the Department of
Justice to require customer identification and verification, expand the
money-laundering program requirement to the major financial services sectors,
including insurance and unregistered investment companies, such as hedge funds,
and facilitate and permit the sharing of information between law enforcement and
financial institutions, as well as among financial institutions themselves. The
United States Treasury Department also has created the Treasury USA PATRIOT Act
Task Force to work with other financial regulators, the regulated community, law
enforcement and consumers to continually improve the regulations.
SARBANES-OXLEY ACT OF 2002. On July 30, 2002, the Sarbanes-Oxley Act was enacted
which addresses corporate governance and securities reporting requirements.
Among its requirements are changes in auditing and accounting, executive
compensation, certifications by Chief Executive Officers and Chief Financial
Officers of certain securities filings, expanded reporting of information in
current reports filed with the Securities and Exchange Commission, more detailed
reporting information in securities disclosure documents and more timely filings
of corporate information. Nasdaq has also proposed corporate governance rules
that are intended to allow shareholders to more easily and efficiently monitor
the performance of companies and directors.
REGULATION OF MOUNTAINBANK. MountainBank is organized as a North Carolina state
chartered bank subject to regulation, supervision and examination by the NC
Banking Commission and the FDIC. The federal and state laws and regulations are
applicable to required reserves against deposits, allowable investments, loans,
mergers, consolidations, issuance of securities, payment of dividends,
establishment of branches, limitations on credit to subsidiaries and other
aspects of the business of such subsidiaries. The federal and state banking
agencies have broad authority and discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies involving the classification of assets and the establishment of loan
loss reserves for regulatory purposes. Such actions by the regulators prohibit
member banks from engaging in unsafe or unsound banking practices. The Bank is
also subject to certain reserve requirements established by the Federal Reserve
Board and is a member of the Federal Home Loan Bank ("FHLB") of Atlanta, which
is one of the 12 regional banks comprising the FHLB System.
40
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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TABLE 1. NET INTEREST INCOME AND AVERAGE BALANCES (DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
--------------------------- ----------------------------- -----------------------------
AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/ AVERAGE INTEREST YIELD/
BALANCE INC/EXP COST BALANCE INC/EXP COST BALANCE INC/EXP COST
-------- -------- ----- -------- -------- ------- -------- -------- -------
Interest earning assets:
Interest bearing deposits
with other depositories $ 10,209 $ 168 1.65% $ 5,018 $ 242 4.82% $ 8,144 $ 505 6.20%
Investment securities 53,058 2,144 4.04% 38,107 2,186 5.74% 27,436 1,865 6.80%
Bank owned life insurance 5,169 309 5.97% 2,527 86 3.40% - - -
Federal funds sold 10,740 183 1.70% 7,801 286 3.67% 3,944 241 6.11%
Loans 583,917 43,479 7.45% 315,378 27,106 8.59% 136,846 13,210 9.65%
-------- ------- ------ -------- -------- ------ -------- -------- -------
Total interest earning
assets 663,093 46,283 368,831 29,906 176,370 15,821
-------- ------- -------- -------- -------- --------
Yield on average interest
earning assets 6.98% 8.11% 8.97%
====== ====== =======
Noninterest earning assets:
Cash and due from banks 12,616 4,939 5,024
Property and equipment 8,124 3,071 1,886
Interest receivable and other 603 3,605 1,839
-------- --------- --------
Total noninterest earning
assets 21,343 11,615 8,749
-------- --------- --------
Total assets $684,436 $380,446 $185,119
======== ========= ========
Interest bearing liabilities:
Demand deposits $ 59,599 785 1.32% $ 18,433 206 1.12% $ 11,174 152 1.36%
Savings deposits 88,177 1,885 2.14% 49,112 1,672 3.40% 38,241 1,750 4.58%
Time deposits 373,315 13,737 3.68% 234,739 13,404 5.71% 104,427 6,894 6.60%
Obligation under capital lease 723 59 8.18% 749 56 7.48% 776 68 8.76%
FHLB advances 36,968 1,529 4.14% 18,823 864 4.59% - - -
Notes payable 2,808 194 6.88% 5,502 223 4.05% - - -
Trust preferred securities 10,247 609 5.95% - - - - - -
Fed funds purchased/
repurchase agreements 9,696 145 1.50% 4,999 196 3.92% 2,586 152 5.88%
-------- ------- ------ -------- -------- ------ -------- ------- -------
Total interest bearing
liabilities 581,533 18,943 332,357 16,621 157,204 9,016
-------- ------- -------- -------- -------- -------
Cost on average interest
bearing liabilities 3.26% 5.00% 5.74%
====== ====== =======
Noninterest bearing liabilities:
Demand deposits 50,321 23,241 11,079
Interest payable and other 5,457 5,096 2,036
--------- ---------- ---------
Total noninterest bearing
liabilities 55,778 28,337 13,115
-------- -------- --------
Total liabilities 637,311 360,694 170,319
Stockholders' equity 47,125 19,752 14,800
-------- -------- --------
Total liabilities and
stockholders' equity $684,436 $380,446 $185,119
======== ======== ========
Net interest income $27,340 $ 13,285 $ 6,805
======= ======== =======
Net yield on interest
earning assets 4.12% 3.60% 3.86%
====== ====== =======
41
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 2. RATE/VOLUME VARIANCE ANALYSIS (DOLLARS IN THOUSANDS)
2002 COMPARED TO 2001 2001 COMPARED TO 2000
------------------------------------- --------------------------------------
INTEREST INTEREST
INCOME/ INCOME/
INTEREST VARIANCE INTEREST VARIANCE
EXPENSE ATTRIBUTABLE TO EXPENSE ATTRIBUTABLE TO
VARIANCE RATE VOLUME VARIANCE RATE VOLUME
----------- ----------- ----------- ---------- ----------- -----------
Interest earning assets:
Interest bearing deposits in other
depositories $ (74) $ (324) $ 250 $ (263) $ (69) $ (194)
Investment securities (42) (903) 861 321 (492) 813
Bank owned life insurance 223 133 90 86 - 86
Federal funds sold (103) (212) 109 45 (190) 235
Loans 16,373 (6,656) 23,029 13,896 (3,343) 17,239
----------- ----------- ----------- ----------- ----------- -----------
Total 16,377 (7,962) 24,339 14,085 (4,094) 18,179
----------- ----------- ----------- ----------- ----------- -----------
Interest bearing liabilities:
Demand deposits 579 118 461 54 (44) 98
Savings deposits 213 (1,109) 1,322 (78) (578) 500
Time deposits 333 (7,579) 7,912 6,510 (2,089) 8,599
Obligation under capital lease 3 5 (2) (12) (10) (2)
Federal funds purchased/
repurchase agreements (51) (235) 184 44 (98) 142
FHLB advances 665 (168) 833 864 - 864
Trust preferred securities 609 - 609 - - -
Notes payable (29) 80 (109) 223 - 223
----------- ----------- ----------- ----------- ----------- -----------
Total 2,322 (8,888) 11,210 7,605 (2,819) 10,424
----------- ----------- ----------- ----------- ----------- -----------
Net interest income $ 14,055 $ 926 $ 13,129 $ 6,480 $ (1,275) $ 7,755
=========== =========== =========== =========== =========== ===========
ANALYSIS OF FINANCIAL CONDITION. Average earning assets increased 79.78% from
2001 to 2002. Average earning assets represented 96.88% of total average assets
at December 31, 2002 compared to 96.95% at the end of 2001. All categories of
average assets increased during 2002. Average loans increased $268.5 million or
85.15% over 2001. Table 3 illustrates the growth of various balance sheet
components.
TABLE 3. AVERAGE ASSET MIX (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------------- ---------------------------------
AVERAGE AVERAGE
BALANCE % BALANCE %
------------- ---------------- -------------- ----------------
EARNING ASSETS:
Loans, net $ 583,917 85.31% $ 315,378 82.90%
Investment securities 53,058 7.75% 38,107 10.02%
Bank owned life insurance 5,169 0.76% 2,527 0.66%
Federal funds sold 10,740 1.57% 7,801 2.05%
Interest bearing deposits with depositories 10,209 1.49% 5,018 1.32%
------------- ---------------- -------------- ----------------
Total earning assets 663,093 96.88% 368,831 96.95%
------------- ---------------- -------------- ----------------
NON EARNING ASSETS:
Cash and due from banks 12,616 1.84% 4,939 1.29%
Property and equipment 8,124 1.19% 3,071 0.81%
Other assets 603 0.09% 3,605 0.95%
------------- ---------------- -------------- ----------------
Total non earning assets 21,343 3.12% 11,615 3.05%
------------- ---------------- -------------- ----------------
Total assets $ 684,436 $ 100.00% $ 380,446 100.00%
============= ================ ============== ================
42
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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During 2002, average net loans represented 85.31% of total average assets
compared to 82.90% for fiscal 2001. Loan production continued at a rapid pace
during 2002 and as a result, loan assets comprised a larger percentage of the
total asset base for the year. It is management's continued intent to grow the
Company's balance sheet by first growing its loan portfolio, rather than growing
its liability base first and investing in lower yielding assets until loans can
be produced. Management believes this to be the most cost effective strategy for
profitable growth. Management anticipates loan growth to slow considerably
during 2003 as credit standards and underwriting criteria are expected to be
tightened in light of current economic conditions. However, as the Company's
geographic market area continues to expand, access to high quality loans is
expected to continue to drive overall growth.
On December 31, 2001, the Company completed the acquisition of First Western
Bank. In addition to expanding the Company's operations in contiguous markets,
one of the primary reasons for the acquisition was that First Western maintained
excess equity on their balance sheet. As a result of the acquisition, the
Company's equity ratios were enhanced and existing Company shareholders' book
value increased. Also, as a result of completing systems and operations
integration more rapidly than management originally projected and the Company's
ability to leverage First Western's capital more quickly than was originally
projected, this acquisition has not been dilutive to the Company's earnings per
share during 2002.
NET INTEREST INCOME. The Company's primary source of income is net interest
income. It is defined as the difference between income generated by the earning
assets less expense incurred on its interest bearing liabilities. Table 1
summarizes the major components of net interest income for the years ended
December 31, 2002, 2001 and 2000. Compared with 2001, net interest income more
than doubled during 2002, increasing 105.80% or $14.1 million, principally as a
result of overall growth of the Company's balance sheet. During 2002, net
interest income increased primarily as a result of overall increases in balance
volume, coupled with an increased net interest margin. During the period, both
asset yields and liability costs declined along with the general decline
experienced in interest rates over the course of the year. Asset yields fell 113
basis points while liability costs declined 174 basis points resulting in an
increase in the Company's net interest margin of 52 basis points. The increase
in net interest margin was considered by management to be more correlated to
changes in liability mix and pricing than in asset pricing. With interest rates
at their lowest point in decades, management expects deposit rates to be
increasingly difficult to lower if interest rates decline further over the
coming months. Accordingly, while the company experienced an increase in its net
interest margin during 2002, contraction of the company's net interest margin is
anticipated with any further decline in the overall interest rate environment.
During 2002, 85.31% of the Company's average assets were invested in loan assets
as compared with 82.90% on average during 2001. Management continued the effort
to diversify the Company's funding sources which was begun in 2001. In addition
to retail deposits generated through its branch network, management continued to
add wholesale deposits and FHLB advances along with $20 million in trust
preferred securities. These wholesale sources of funding allow for greater
flexibility in managing the Company's liability structure as well as providing
additional tools for interest rate management.
43
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
PROVISION FOR CREDIT LOSSES AND ASSET QUALITY. As a result of the continued
rapid growth of the Company's loan portfolio, the Company's provision for loan
losses remains one of its largest ongoing expenses. During 2002, the Company
provided $5.3 million for possible loan losses. This compares with $3.3 million
provided during 2001 and $1.9 million provided in 2000. These provisions, made
to the Company's allowance for credit losses to provide for possible future
losses are charged directly against the Company's current earnings. On at least
a quarterly basis, management and the Board of Directors evaluates the allowance
for loan losses to determine its adequacy to meet any known or anticipated
future losses based on current and projected conditions. Factors considered in
determining the adequacy of the allowance include the estimated collectability
of past due loans, the volume of new loans, composition of the loan portfolio,
industry standards and current as well as projected economic conditions.
Specific reserves for individual loans are established in addition to the basic
reserve as deemed necessary based on evaluation of individual credits.
Generally, specific reserves are allocated to individual credits following
review by the company's loan review personnel. Loans are selected for this
review process as a result of one or more events. Reviews are normally triggered
as a result of the delinquency of a credit, some change in the status of the
borrower including a change in the borrower or guarantor's financial condition
as indicated by receipt of interim financial statements or as the result of
random selection in the normal course of the company's ongoing loan review
function. Upon review, if the credit is deemed to have deteriorated to a point
that additional and ongoing attention is necessitated, the credit will be
"graded" into one of five "non-standard" categories. These categories include,
in order of increasing severity, watch, "OAEM" or "special mention",
substandard, doubtful or loss. Once reviewed and classified, each loan is
assigned a risk allocation based on the estimated risk of loss determined during
the review. Loans that are not classified are assigned to general categories,
generally based on their type of collateral, and are assigned a risk weighting
by class or category. This risk weighting is based both on the Company's
historical loss ratios and by industry standards as the Company's portfolio is
relatively young and has limited loss history.
The Company's loan portfolio is beginning to become more seasoned and historical
trends are beginning to provide more pertinent data for evaluation. However,
with continued growth and expansion into new markets, estimates of future
portfolio performance remain quite subjective. Therefore, while it is the
opinion of management and the Board of Directors that the Company's allowance
for loan losses is adequate to absorb any anticipated loan losses as of the
report date, no assurances can be made that any future losses may not be
significant and may require additional provisions. At December 31, 2002, 2001
and 2000, the Company's allowance for loan losses totaled $11.2 million, $7.1
million and $3.0 million, respectively, representing 1.58%, 1.45% and 1.50% of
gross loans. Excluding sold mortgage loans in the portfolio at December 31,
2002, the Company's allowance totaled 1.65% of total loans.
During 2002, the Company experienced increased loan losses as compared to prior
years. Total loans charged off or charged down amounted to $1.4 million. This
total was comprised of $589 thousand in consumer loans, $372 thousand in
commercial loans and $488 thousand in real estate loans. Recoveries for the year
amounted to $228 thousand, resulting in net charge-offs of $1.2 million for the
year. A sizeable portion of the above referenced consumer loan charge offs
resulted from loans acquired through the company's acquisition of First Western
Bank and its loan portfolio which was completed at year end 2001. Even with the
increase in credit losses in 2002, the Company has experienced relatively
limited credit losses to date. However, with the company's rapid growth and
larger loan portfolio as well as the continuing problems within the U.S.
domestic economy and with relatively high unemployment rates in a number of the
company's market areas, management expects future credit losses to be a closer
approximation of trends experienced within the banking industry as a whole. It
is management's intent to control and limit such losses to the extent possible
through adherence to current policies and procedures which are intended to
maintain a high level of credit quality. Table 4 describes loan charge-offs and
recoveries for the years ended December 31, 2002, 2001, 2000, 1999 and 1998
while table 5 describes the allocation of the loan loss allowance for the years
ended December 31, 2002, 2001 and 2000.
44
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 4. ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
BALANCE, JANUARY 1 $ 7,113 $ 3,007 $ 1,247 $ 752 $ 281
LOAN CHARGE-OFFS:
Commercial, financial and agricultural 372 104 60 201 -
Real estate - construction 157 53 45 75 -
Real estate - 1 to 4 family 109 15 - 44 -
Real estate - Non-farm Non-residential 222 30 - -
Installment 589 284 45 2 -
Other - - - 10 -
-------------------------------------------------------
Total loans charged-off 1,449 486 150 332 -
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial, financial and agricultural 22 1 - - -
Real estate - construction - - - - -
Real estate - 1 to 4 family 11 - - - -
Real estate - Non-farm Non-residential - - - - -
Installment 195 14 5 - -
Other - - - - -
-------------------------------------------------------
Total recoveries of loans previously charged-off 228 15 5 - -
-------------------------------------------------------
Net charge-offs 1,221 471 145 332 -
-------------------------------------------------------
Provision for loan losses 5,300 3,347 1,905 827 471
Allowance of acquired bank - 1,230 - - -
-------------------------------------------------------
BALANCE, DECEMBER 31 $ 11,192 $ 7,113 $ 3,007 $ 1,247 $ 752
========= ========= ========= ========== ========
TABLE 5. ALLOCATION OF ALLOWANCE FOR LOAN LOSSES (DOLLARS IN THOUSANDS)
AT DECEMBER 31,
------------------------------------------------------------------------------
2002 2001 2000
-------------------------- ----------------------- -----------------------
AMOUNT % OF TOTAL AMOUNT % OF TOTAL AMOUNT % OF TOTAL
----------- ----------- -------- ----------- --------- ---------
Real Estate $ 7,512 81.99% $ 4,628 75.85% $ 1,838 74.38%
Commercial, financial and agricultural 1,352 13.16% 898 16.66% 453 15.16%
Consumer 645 3.44% 779 6.31% 241 10.46%
All other loans and unallocated reserves 1,683 1.41% 808 1.18% 475 -
---------- ----------- -------- ----------- --------- ---------
Total $ 11,192 100.00% $ 7,113 100.00% $ 3,007 100.00%
========== =========== ======== =========== ========= =========
45
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
OTHER INCOME. In addition to net interest income, the Company derives revenues
from a variety of financial products and services offered to its customer base.
The majority of noninterest income results from origination fees and released
service rights on sold mortgage loans, from service charges on deposit accounts
including charges for insufficient funds, check sales, and fees charged for
nondeposit services and from premiums generated through the sale of credit
related insurance products. Additionally, the Company may sell various assets
from time to time including loans or securities, which may produce either gains
or losses when sold. During 2002, these transactions resulted in non-recurring
gains totaling $299 thousand, as compared with $286 thousand recorded as a
result of similar transactions during 2001. Mortgage loan origination fees
increased substantially in 2002 as compared with 2001, primarily due to
continued demand for refinancings and to increased capacity in the company's
mortgage division. In addition to increases in deposit service charge fees
attributable to overall increases in the volume of accounts, the company
introduced an overdraft protection product during the fourth quarter of 2001.
This product accounted for a substantial portion of the increase in service
charges on deposit accounts experienced during 2002. Table 6 describes
non-interest income for the years ended December 31, 2002, 2001 and 2000.
TABLE 6. SOURCES OF NONINTEREST INCOME (DOLLARS IN THOUSANDS)
FOR THE PERIODS ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
Service charges on deposit accounts $ 2,431 $ 940 $ 461
Fees on mortgage loans sold 3,095 1,435 499
Gains on sale of assets 299 286 151
Other service charges and fees 212 128 60
Other income 215 205 147
---------------- --------------- ----------------
$ 6,252 $ 2,994 $ 1,318
================ =============== ================
NON-INTEREST EXPENSE. The major components of non-interest expense for the years
ended December 31, 2002, 2001 and 2000 are as follows:
TABLE 7. SOURCES OF NONINTEREST EXPENSE (DOLLARS IN THOUSANDS)
FOR THE PERIODS ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
Salary and benefits $ 9,674 $ 4,793 $ 2,417
Occupancy expenses 1,157 571 316
Furniture/equipment expenses 1,466 662 349
Professional service fees 978 658 148
Data and credit card processing fees 1,089 521 298
Advertising and business promotion 450 416 222
Printing and related supplies 391 301 108
Amortization of intangible assets 331 18 -
Other expenses 2,733 1,266 721
---------------- --------------- ----------------
$ 18,269 $ 9,206 $ 4,579
================ =============== ================
Management calculates the Company's overhead efficiency ratio as noninterest
expense divided by adjusted total revenue (net interest income before provision
for loan losses plus noninterest income). Management places significant
importance on this ratio, as it is the primary measurement used to determine the
efficiency of the Company's overall operation. During 2002, this ratio decreased
to 54.38% as compared with 56.55% in 2001. Management believes this ratio can be
reduced further, however, reductions are expected to be more difficult over the
near term due to continued growth expectations and other possible business
combinations.
46
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
LOANS. Average net loans totaled $583.9 million during the year ended December
31, 2002, representing an increase of 85.1% as compared with 2001. Management
intends to continue the growth of high quality loan assets to the extent
possible as dictated by the Company's capital. With continued expansion of the
Company's geographic market area, aggressive marketing efforts and the strong
acceptance of the Company within the communities it serves, management expects
loan growth, and consequently, the Company's overall growth, to continue at a
relatively rapid rate yet somewhat slower than in prior years.
The majority of growth in the Company's loan portfolio has been centered in real
estate and commercial loans. These loans comprised approximately 95% of the
total loan portfolio at December 31, 2002. The amount of loans outstanding by
type at December 31, 2002, 2001, 2000, 1999, and 1998 and the maturity
distribution for variable and fixed rate loans as of December 31, 2002 are
presented in Tables 8 and 9, respectively.
TABLE 8. LOAN PORTFOLIO SUMMARY (DOLLARS IN THOUSAND)
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
------------------ ----------------- ----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------ ------- ------- ------ -------- ------ ------- ------ -------- ------
Construction and development $ 119,944 16.88% $ 89,587 18.25% $ 32,602 16.27% $13,480 15.02% $ 7,141 14.75%
1-4 family residential 158,945 22.37% 99,227 20.21% 36,963 18.45% 20,480 22.82% 10,520 21.73%
Farmland 1,846 0.26% 1,959 0.40% 385 0.19% 565 0.63% 629 1.30%
Nonfarm, nonresidential 290,811 40.93% 177,319 36.11% 78,489 39.17% 27,799 30.98% 12,794 26.42%
Multifamily residential 11,009 1.55% 4,326 0.88% 596 0.30% 455 0.51% - -%
-------- ------- -------- ------- ------- ------- ------ ------ ------- -------
Total real estate 582,555 81.99% 372,418 75.85% 149,035 74.38% 62,779 69.96% 31,084 64.20%
Loans to finance agricultural
production 110 0.02% 403 0.08% 996 0.50% 218 0.24% - -%
Commercial and industrial 93,360 13.14% 81,388 16.58% 29,381 14.66% 17,471 19.47% 12,057 24.90%
Consumer 24,468 3.44% 31,005 6.31% 20,968 10.46% 9,277 10.33% 5,221 10.78%
Other 9,988 1.41% 5,771 1.18% - - - - 61 0.12%
-------- ------- -------- -------- -------- -------- ------- -------- -------- -------
Total $710,481 100.00% $490,985 100.00% $200,380 100.00% $89,745 100.00% $ 48,423 100.00%
======== ======= ======== ======== ======== ======== ======= ======== ======== =======
47
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 9. MATURITY AND REPRICING SCHEDULE OF LOANS (DOLLARS IN THOUSANDS)
COMMERCIAL RESIDENTIAL TOTAL
FINANCIAL AND REAL -------------------------------
AGRICULTURAL ESTATE OTHERS AMOUNT %
---------------- --------------- ---------------- --------------- --------------
FIXED RATE LOANS:
Three months or less $ 21,659 $ 1,656 $ 1,275 $ 24,590 3.46%
Over three months to
twelve months 38,382 6,624 3,121 48,127 6.78%
Over one year to
five years 191,937 34,172 20,632 246,741 34.73%
Over five years 39,969 48,658 2,609 91,236 12.84%
---------------- --------------- ---------------- --------------- --------------
Total fixed rate loans $ 291,947 $ 91,110 $ 27,637 $ 410,694 57.81%
---------------- --------------- ---------------- --------------- --------------
COMMERCIAL RESIDENTIAL TOTAL
FINANCIAL AND REAL -------------------------------
AGRICULTURAL ESTATE OTHERS AMOUNT %
---------------- --------------- ---------------- --------------- --------------
VARIABLE RATE LOANS:
Three months or less $ 214,124 $ 66,164 $ 6,282 $ 286,570 40.34%
Over three months to
twelve months - 3,335 537 3,872 0.54%
Over one year to
five years - 9,345 - 9,345 1.31%
Over five years - - - - -%
---------------- --------------- ---------------- --------------- --------------
Total variable rate loans $ 214,124 $ 78,844 $ 6,819 $ 299,787 42.19%
---------------- --------------- ---------------- --------------- --------------
TOTAL LOANS:
Three months or less $ 235,783 $ 67,820 $ 7,557 $ 311,160 43.80%
Over three months to
twelve months 38,382 9,959 3,658 51,999 7.32%
Over one year to
five years 191,937 43,517 20,632 256,086 36.04%
Over five years 39,969 48,658 2,609 91,236 12.84%
---------------- --------------- ---------------- --------------- --------------
Total loans $ 506,071 $ 169,954 $ 34,456 $ 710,481 100.00%
================ =============== ================ =============== ==============
Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average, the
Company's loan portfolio yielded 7.45% during 2002 as compared to an average
yield of 8.59% during 2001.
By the end of 2002, variable rate loans had increased to over 42% of total
loans.
INVESTMENT SECURITIES. The Company uses its investment portfolio as a tool to
provide liquidity, manage interest rate risk and provide supplemental earnings.
Management began this process in anticipation of a stabilizing interest rate
environment and projected increases in rates over the next four to six quarters.
Management has continued to focus on maintaining the majority of its investment
securities in floating rate instruments to aid in mitigating interest rate risk
associated with the fixed rate component of the Company's loan portfolio, and
accordingly, has been willing to accept somewhat lower investment yields for
shorter duration within the investment portfolio.
48
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
With the Company's rapid growth since its inception and with continuing growth
expected by management, the need to manage liquidity through the investment
portfolio has been acknowledged by classifying all of its investment securities
as available for sale. Accordingly, these securities may be sold from time to
time to increase liquidity or re-balance the interest rate sensitivity profile
of the Company's balance sheet as deemed necessary. Table 10 presents the
investment portfolio at December 31, 2002 by major type of investments and
maturity and repricing ranges. At December 31, 2002, the market value of the
investment portfolio was $73.7 million, representing market appreciation of $256
thousand as compared to book value at that date. At December 31, 2001 the market
value of the investment portfolio was $42.5 million.
TABLE 10. INVESTMENT SECURITIES (DOLLARS IN THOUSANDS)
DECEMBER 31, 2002 AVAILABLE FOR SALE
ONE YEAR AFTER FIVE
IN ONE YEAR THROUGH FIVE THROUGH AFTER TEN MARKET
OR LESS YEARS TEN YEARS YEARS TOTAL VALUE
------------- -------------- ------------- ----------- ----------- --------------
INVESTMENT SECURITIES:
U.S. Government agencies $ 3,000 $ - $ - $ - $ 3,000 $ 3,016
U.S. Government agency
pools (MBS) - 73 402 60,922 61,397 61,722
Municipals - - - - -
Equity investment securities - 7,830 - 1,248 9,078 8,993
------------- -------------- ------------- ----------- ----------- --------------
Total $ 3,000 $ 7,903 $ 402 $ 65,916 $ 73,475 $ 73,731
============= ============== ============= =========== =========== ==============
WEIGHTED AVERAGE YIELDS:
U.S. Government agencies 4.03% -% -% -% 4.03%
U.S. Government agencies
pools (MBS) -% 5.10% 7.38% 4.07% 4.09%
Municipals (tax equivalent) -% -% -% -% -%
Equity investment securities -% 2.19% -% 0.94% 2.02%
------------- -------------- ------------- ----------- -----------
Consolidated 4.03% 2.21% 7.38% 3.94% 3.78%
============= ============== ============= =========== ===========
DECEMBER 31, 2001 AND DECEMBER 31, 2000 AVAILABLE FOR SALE
2001 2000
-------------------------- ---------------------------
BOOK MARKET BOOK MARKET
VALUE VALUE VALUE VALUE
------------- ----------- ----------- --------------
INVESTMENT SECURITIES:
U.S. Government agencies $ 7,177 $ 7,162 $ 9,385 $ 9,344
U.S. Government agency
pools (MBS) 23,632 23,709 25,006 25,260
Municipals 3,721 3,755 - -
Equity investment securities 8,702 8,702 814 812
------------- ----------- ----------- --------------
Total $ 42,360 $ 42,456 $ 35,205 $ 35,416
============= =========== =========== ==============
49
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Average overnight investments totaled $20.9 million or 3.06% of average assets
for the year ended December 31, 2002. At December 31, 2001, overnight
investments totaled $12.8 million. Federal funds sold and interest bearing
deposits with banks represent the most liquid portion of the Company's invested
funds and generally the lowest yielding portion of earning assets. Management
expects to maintain overnight and other short term investments at levels
sufficient to meet liquidity demands, but at relatively low levels so as to
maximize the Company's earning potential.
DEPOSITS. The primary goal of the Company's expansion of its geographic market
area is the ability to attract and access additional deposits. Retail deposits
gathered through the Company's branch network continues to be its principal
source of funding, although the Company does utilize wholesale funding sources.
Management considers acquisition of core deposits as one of the most fundamental
sources of increased franchise value and intends to continue to expand both the
Company's geographic markets and further penetrate its current markets.
Management believes that generation of quality loan assets can be materially
impacted by the level of service provided to the customer, but that a
significant portion of depositors are viewed as more rate sensitive than service
oriented. Therefore the Company's primary advertising and mass media marketing
efforts are geared toward attracting deposits and it remains the Company's
primary deposit gathering strategy to provide these customers with both
competitive rates and exceptional service.
Due to the popularity of the Company's primary market area as a favored
retirement destination, a higher percentage of its certificates of deposit are
concentrated in CDs over $100 thousand as compared to peer institutions. Due to
the market demographics within the Company's primary area of operations,
management generally differentiates little between jumbo CDs and smaller
denomination certificates in projecting retention rates for certificates. During
2002, certificates of deposit comprised 65.33% of the Company's average deposit
base as compared with 72.12% during 2001. One of management's stated goals for
fiscal 2003 is to increase the volume of non-CD deposits as a ratio of total
deposits. Management expects to substantially increase the actual dollar amount
of these deposits during the next year, however, depending on the funding
requirements dictated by net loan growth, a reduction in non-CD deposits to
total deposits may be nominal until total balance sheet growth moderates
further.
Average deposits for the year ended December 31, 2002 totaled $571.4 million as
compared with $325.5 million for the same period in 2001. The Company's
percentage of interest bearing deposits decreased to 91.19% from 92.86% in 2001.
Management desires to decrease this ratio further as additional emphasis is
placed on the cross-selling of demand deposit accounts and increasing the
Company's account per customer ratio. Demand deposits are generally considered
the most difficult deposit accounts to acquire, however, management remains
intent on emphasizing acquisition of demand deposits as one of the Company's
primary goals. Therefore, it is anticipated that the percentage of interest
bearing deposits will continue to trend downward slowly. Average deposits for
the periods ended December 31, 2002, 2001, and 2000 are summarized in Table 11
below.
TABLE 11. DEPOSIT MIX (DOLLARS IN THOUSANDS)
DECEMBER 31, 2002 DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------ ------------------------ -------------------------
AVERAGE AVERAGE AVERAGE
BALANCE % BALANCE % BALANCE %
----------- ----------- ----------- ----------- ----------- -----------
Interest bearing deposits:
NOW Accounts $ 59,599 10.43% $ 18,433 5.66% $ 11,174 6.78%
Money Market 78,350 13.71% 45,651 14.02% 36,221 21.96%
Savings 9,827 1.72% 3,461 1.06% 2,020 1.22%
Certificates of deposit 373,315 65.33% 234,739 72.12% 104,427 63.32%
----------- ----------- ----------- ----------- ----------- -----------
Total interest bearing deposits 521,091 91.19% 302,284 92.86% 153,842 93.28%
Noninterest bearing deposits 50,321 8.81% 23,241 7.14% 11,079 6.72%
----------- ----------- ----------- ----------- ----------- -----------
Total deposits $ 571,412 100.00% $ 325,525 100.00% $ 164,921 100.00%
=========== =========== =========== =========== =========== ===========
50
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
At December 31, 2002, certificates of deposit denominated in amounts of $100
thousand or more totaled $180.2 million as compared with $120.5 million at
December 31, 2001. This represents an increase of $59.7 million. The percentage
of total deposits represented by these certificates increased to 26.61% at
December 31, 2002 as compared with 25.78% at December 31, 2001. Table 12
provides maturity information relating to Certificates of Deposit of $100
thousand or more at December 31, 2002 and 2001.
TABLE 12. LARGE TIME DEPOSIT MATURITIES
Analysis of time deposits of $100 thousand or more at December 31, 2002 and 2001
(DOLLARS IN THOUSANDS):
2002 2001
--------------- ----------------
Remaining maturity of three months or less $ 67,863 $ 49,645
Remaining maturity over three through twelve months 104,200 65,848
Remaining maturity over twelve months 8,153 5,019
--------------- ----------------
Total time deposits of $100 thousand or more $ 180,216 $ 120,512
=============== ================
CAPITAL ADEQUACY. The Company's rapid growth from the company's inception has
required management and the Board of Directors to modify its capital plan on a
regular basis. During 2002, the Company issued an additional $7.8 million in its
Series A Convertible Preferred stock, bringing the aggregate amount of this
offering to $10.1 million. Additionally, the company completed its first
issuance of Trust Preferred securities in late June 2002 in the amount of $20
million. These capital issuances were utilized to extinguish a short term
borrowing facility and capitalize the continued growth of the Company and
MountainBank throughout the year. The remaining increase in equity resulted from
retention of earnings and exercise of stock options.
The Trust Preferred securities are accounted for as long-term debt in the
accompanying financial statements, however, for regulatory capital purposes, the
majority of this issuance is considered Tier I capital with the remainder
qualifying as Tier II capital. The remaining long-term debt reported on the
Company's balance sheet represents long-term borrowings by MountainBank from the
Federal Home Loan Bank of Atlanta. The following tables illustrate the Company's
and the Bank's respective capital position and ratios along with minimum
regulatory ratios at December 31, 2002.
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. For the Company, risk-based capital
guidelines require minimum ratios of core (Tier 1) capital (common stockholders'
equity) to risk-weighted assets of 4.0% and total regulatory capital (core
capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to
risk-weighted assets of 8.0%. As of December 31, 2002, the Company's Tier 1
risk-weighted capital ratio and total capital ratio were 9.02% and 10.84%,
respectively.
MountainBank also has capital ratio constraints with which to comply. These
ratios are slightly different than those required at the parent company level.
At December 31, 2002, MountainBank's capital ratios were as follows: Tier I
leverage ratio, 7.85%, Tier I risk-based capital ratio, 8.76% and total
risk-based ratio, 10.01%. These capital ratios were sufficient at December 31,
2002 to classify the Company as "well capitalized" in accordance with the FDIC's
regulatory capital rules. At December 31, 2002, the Company had 3,200,364 shares
of common stock outstanding. At that date, the company had approximately 2,100
stockholders of record. The Company's and Bank's actual capital amounts and
ratios are presented in table 13.
51
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 13. CAPITAL REQUIREMENTS
MountainBank Financial Corporation
RISK-BASED CAPITAL
------------------------------------------------------
LEVERAGE CAPITAL TIER I CAPITAL TOTAL CAPITAL
------------------------- ----------------------- --------------------------
AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(2) AMOUNT PERCENTAGE(2)
----------- ------------ ------- ------------ ----------- -------------
Actual $ 63,960 8.09% $ 63,960 9.02% $ 76,864 10.84%
Required 31,608 4.00% 28,369 4.00% 56,737 8.00%
Excess 32,352 4.09% 35,591 5.02% 20,127 2.84%
MountainBank
RISK-BASED CAPITAL
------------------------------------------------------
LEVERAGE CAPITAL TIER I CAPITAL TOTAL CAPITAL
------------------------- ----------------------- --------------------------
AMOUNT PERCENTAGE(1) AMOUNT PERCENTAGE(2) AMOUNT PERCENTAGE(2)
----------- ------------ ------- ------------ ----------- -------------
Actual $ 62,094 7.85% $ 62,094 8.76% $ 70,986 10.01%
Required 31,644 4.00% 28,363 4.00% 56,725 8.00%
Excess 30,450 3.85% 33,731 4.76% 14,261 2.01%
- -----------------------
(1) Percentage of total adjusted average assets. The FRB minimum leverage ratio
requirement is 3 percent to 5 percent, depending on the institution's
composite rating as determined by its regulators. The FRB has not advised
the Company of any specific requirements applicable to it.
(2) Percentage of risk-weighted assets.
NONPERFORMING AND PROBLEM ASSETS. Certain credit risks are inherent in making
loans, particularly commercial and consumer loans. Management's intent with
regard to maintaining a high level of credit quality is to identify, quantify
and assess these risks and to manage them effectively. The Company's internal
credit underwriting policies and procedures are designed to provide a high level
of credit quality while allowing the lending function to be responsive to the
needs of its customers. These policies and procedures include officer and
customer limits, periodic loan documentation review, on-going credit review and
follow up on exceptions to credit policies.
Nonperforming assets at December 31, 2002, 2001, 2000, 1999 and 1998 are
analyzed in Table 14.
52
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
TABLE 14. NONPERFORMING ASSETS (DOLLARS IN THOUSANDS)
DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------- -------------- ------------- ------------- --------------
Nonaccrual loans $ 2,876 $ 1,528 $ 266 $ 270 $ 416
Loans past due 90 days or
more and still accruing interest 18 - - - -
Restructured loans - - - - -
------------- -------------- ------------- ------------- --------------
Total nonperforming loans 2,894 1,528 266 270 416
------------- -------------- ------------- ------------- --------------
Other real estate and repossessed
personal property 1,426 - - - -
------------- -------------- ------------- ------------- --------------
Total nonperforming assets $ 4,320 $ 1,528 $ 266 $ 270 $ 416
============= ============== ============= ============= =============
NONACCRUAL LOANS
Interest income, original terms $ 524 $ 224 $ 7 $ 24 $ 34
============= ============== ============= ============= ==============
Interest income, recognized $ 442 $ 181 $ 1 $ 2 $ 23
============= ============== ============= ============= ==============
RESTRUCTURED LOANS
Interest income, original terms $ - $ - $ - $ - $ -
============= ============== ============= ============= ==============
Interest income, recognized $ - $ - $ - $ - $ -
============= ============== ============= ============= ==============
Nonperforming assets as a percentage of:
Total assets 0.51% 0.27% 0.10% 0.21% 0.71%
Total loans and other real estate 0.62% 0.32% 0.13% 0.30% 0.86%
LIQUIDITY AND INTEREST RATE SENSITIVITY. Liquidity is defined as the Company's
ability to meet all short-term demands for funds on a timely basis. Such demands
include funding of loans and other asset purchases or originations, reduction or
liquidation of deposit accounts by customers and principal and interest payments
on debt of both the Bank and its parent company. Liquidity at the Bank level is
provided by cash flows from maturing investments, loan payments and maturities,
federal funds sold, and unpledged investment securities. Liquidity may also be
provided through accumulation of core deposits, increasing large denomination
certificates from both retail and wholesale sources, federal fund lines from
correspondent banks, borrowings from the Federal Home Loan Bank as well as the
Federal Reserve Bank and also the ability to generate funds through the issuance
of long-term debt and equity. At December 31, 2002, MountainBank had established
unsecured upstream lines of credit totaling $18.5 million. Combined with the
bank's available collateralized borrowing lines with the Federal Home Loan Bank,
management believes that current liquidity levels are satisfactory to meet known
and anticipated liquidity needs.
The Company strives to limit the effect of changes in interest rates on both the
Company's net interest income as well as the market value of its assets and
liabilities while maximizing net interest income under these constraints.
Interest rate risk management aims to manage the pricing and duration of assets
and liabilities so that the effects of interest rate changes do not result in
wide fluctuations of either the Company's net interest income or the market
values of assets and liabilities. Next to credit risk, interest rate risk is
considered one of the more significant risks requiring on-going monitoring and
management. Interest rate risk is defined as the effect that changes in interest
rates would have on net interest income as interest-sensitive assets and
liabilities either reprice or mature. Management attempts to correlate the
repricing of the Company's portfolios of earning assets and interest-bearing
liabilities so as to afford protection from significant erosion of net interest
margin resulting from changes in interest rates. Table 15 shows the sensitivity
of the Company's balance sheet at December 31, 2002 and is not necessarily
indicative of the position on other dates. On that date, the Company appeared to
be cumulatively asset-sensitive (earning assets subject to interest rate changes
exceeding interest-bearing liabilities subject to changes in interest rates).
53
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- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Matching sensitive positions alone does not ensure the Company has limited
interest rate risk. The repricing characteristics of assets are different from
the repricing characteristics of funding sources. Thus, net interest income can
be impacted by changes in interest rates even if the repricing opportunities of
assets and liabilities are matched.
TABLE 15. INTEREST RATE SENSITIVITY (DOLLARS IN THOUSANDS)
DECEMBER 31, 2002 ASSET AND LIABILITY MATURITIES AND REPRICINGS
--------------------------------------------------------------------------------------
1 - 3 4 - 12 13 - 60 OVER 60
MONTHS MONTHS MONTHS MONTHS TOTAL
--------------- --------------- ---------------- --------------- ----------------
EARNING ASSETS:
Loans $ 311,160 $ 51,999 $ 256,989 $ 91,236 $ 711,384
Investments 3,016 - 7,902 66,560 77,478
Interest bearing deposits
with banks 16,393 - - - 16,393
Bank Owned Life Ins. - 13,328 - - 13,328
--------------- --------------- ---------------- --------------- ----------------
Total $ 330,569 $ 65,327 $ 264,891 $ 157,796 $ 818,583
=============== =============== ================ =============== ================
INTEREST BEARING DEPOSITS:
NOW accounts $ 82,818 $ - $ - $ - $ 82,818
Money market 93,152 - - - 93,152
Savings 6,250 - - - 6,250
Certificates of Deposit 152,334 263,812 12,515 1,781 430,442
Repurchase agreements/Fed
funds purchased 14,204 - - - 14,204
Other 55,004 20 129 36,775 91,928
--------------- --------------- ---------------- --------------- ----------------
Total $ 403,762 $ 263,832 $ 12,644 $ 38,556 $ 718,794
=============== =============== ================ =============== ================
Interest sensitivity gap $ (73,193) $ (198,505) $ 252,247 $ 119,240 $ 99,789
Cumulative interest
sensitivity gap $ (73,193) $ (271,698) $ (19,451) $ 99,789 $ 99,789
Ratio of sensitive assets to
sensitive liabilities 81.87% 24.76% 2,094.99% 409.26% 113.88%
Cumulative ratio of
sensitive assets to
sensitive liabilities 81.87% 59.30% 97.14% 113.88% 113.88%
TABLE 16. KEY FINANCIAL RATIOS.
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000
------------ ----------- ------------
Return on average assets 0.90% 0.66% 0.57%
Return on average equity 13.07% 12.71% 7.14%
Equity to assets 6.24% 6.62% 7.03%
54