Independent Auditors' Report
The Board of Directors
Bank of Mecklenburg:
We have audited the accompanying consolidated balance sheets of Bank of
Mecklenburg and subsidiary (the Bank) as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996, included
on pages 3 through 23 herein. These consolidated financial statements are the
responsibility of the Bank'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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bank of Mecklenburg
and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 2(c) to the consolidated financial statements, the Bank
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on January
1, 1994.
/s/ KPMG Peat Marwick LLP
February 12, 1997
2
BANK OF MECKLENBURG AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
------ ---- ----
Cash and due from banks $ 6,108,977 5,457,236
Federal funds sold 1,000,000 5,095,000
Available-for-sale securities (cost of $136,630,374 in
1996 and $84,299,274 in 1995) (note 4) 136,489,504 84,594,887
Investment securities (market value of $1,000,000 in
1996 and $13,215,749 in 1995) (note 5) 1,000,000 13,167,341
Loans (note 5) 113,855,519 80,822,982
Less allowance for loan losses (note 6) (1,174,940) (973,000)
--------------- ----------------
Loans, net 112,680,579 79,849,982
--------------- ----------------
Accrued interest receivable 1,597,291 1,330,689
Federal Home Loan Bank (FHLB) stock (note 8) 3,934,500 4,024,200
Premises and equipment, net (note 7) 6,245,541 5,599,988
Other assets 1,233,012 1,111,662
--------------- ----------------
$ 270,289,404 200,230,985
=============== ===========
Liabilities and Shareholders' Equity
Deposits:
Demand:
Noninterest bearing $ 14,110,079 11,854,855
Interest bearing 56,537,418 40,000,412
Savings 1,302,706 1,220,496
Time, $100,000 or more 43,285,840 30,500,602
Other time 62,751,830 46,711,589
--------------- ----------------
Total deposits 177,987,873 130,287,954
FHLB advances (note 8) 48,000,000 40,000,000
Other borrowed funds (note 8) 23,018,060 10,291,730
Accrued interest payable 1,991,166 1,665,487
Other liabilities 452,387 522,996
--------------- ----------------
Total liabilities 251,449,486 182,768,167
--------------- -----------
Shareholders' equity (notes 10 and 12):
Common stock, $2 par value; authorized
10,000,000 shares in 1996 and 1995; issued and outstanding
2,118,445 shares in 1996 and 1995 4,236,890 4,236,890
Additional paid-in capital 10,888,830 10,888,830
Retained earnings 3,807,172 2,141,993
Unrealized gain (loss) on available-for-sale securities (92,974) 195,105
--------------- ----------------
Total shareholders' equity 18,839,918 17,462,818
Commitments (notes 11 and 14) --------------- ----------------
$ 270,289,404 200,230,985
=============== ===========
See accompanying notes to consolidated financial statements.
3
BANK OF MECKLENBURG AND SUBSIDIARY
Consolidated Statements of Income
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Interest and dividend income:
Interest and fees on loans $ 8,453,531 6,372,126 4,632,258
Interest on securities 8,151,853 4,749,266 2,748,263
Interest on federal funds sold 73,886 53,170 93,060
Other interest and dividend income 413,819 309,318 88,157
--------------- -------------- ---------------
Total interest and dividend income 17,093,089 11,483,880 7,561,738
--------------- -------------- ---------------
Interest expense:
Interest on deposits 8,239,310 5,623,360 3,178,347
Interest on FHLB advances and other
borrowed funds 3,472,648 1,505,890 573,812
--------------- -------------- ---------------
Total interest expense 11,711,958 7,129,250 3,752,159
--------------- -------------- ---------------
Net interest income 5,381,131 4,354,630 3,809,579
Provision for loan losses (note 5) 229,700 95,432 49,450
--------------- -------------- ---------------
Net interest income after provision
for loan losses 5,151,431 4,259,198 3,760,129
--------------- -------------- ---------------
Other operating income:
Service charges, fees, and other income 223,966 182,561 164,738
Gain (loss) on sale of securities, net 1,158,802 196,571 (66,630)
Gain on sale of loans 25,529 - -
--------------- -------------- --------------
Total other operating income 1,408,297 379,132 98,108
--------------- -------------- ---------------
Other operating expenses:
Salaries and employee benefits (note 11) 1,539,990 1,303,338 1,125,507
Occupancy 313,916 276,385 260,279
Equipment 204,004 236,735 210,534
Advertising and business development 291,761 286,351 134,335
Professional services 330,487 224,476 142,332
Investment advisory fees 197,837 20,000 -
Deposit and other insurance 79,262 177,233 230,256
Other 594,578 357,335 300,469
--------------- -------------- ---------------
Total other operating expenses 3,551,835 2,881,853 2,403,712
--------------- -------------- ---------------
Income before income taxes 3,007,893 1,756,477 1,454,525
Income tax expense (note 9) 1,088,500 500,000 452,800
--------------- -------------- ---------------
Net income $ 1,919,393 1,256,477 1,001,725
=============== ============== ===============
Per share amounts $ .91 .59 .48
============== ============ =============
Weighted average shares outstanding 2,118,445 2,116,849 2,078,500
=============== ============== ===============
See accompanying notes to consolidated financial statements.
4
BANK OF MECKLENBURG AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 1996, 1995 and 1994
Unrealized
Additional Gain (loss) on Total
Common Paid-in Retained Available-for- Shareholders'
Stock Capital Earnings Sale Securities Equity
December 31, 1993 $ 4,126,178 10,587,236 342,291 - 15,055,705
Effect of change in
accounting principle - - - (23,746) (23,746)
Proceeds from stock
options exercised 103,530 281,099 - - 384,629
Net income - - 1,001,725 - 1,001,725
Cash dividends
($.096 per share) - - (200,664) - (200,664)
Change in unrealized
gain (loss) on securities
available -for-sale,
net of tax - - - (1,636,687) (1,636,687)
------------- -------------- ------------- -------------- --------------
December 31, 1994 4,229,708 10,868,335 1,143,352 (1,660,433) 14,580,962
Cash paid in lieu of
fractional shares - - (3,731) - (3,731)
Proceeds from stock
options exercised 7,182 20,495 - - 27,677
Net income - - 1,256,477 - 1,256,477
Cash dividends
($.12 per share) - - (254,105) - (254,105)
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax - - - 1,855,538 1,855,538
------------- -------------- ------------- -------------- --------------
December 31, 1995 4,236,890 10,888,830 2,141,993 195,105 17,462,818
Net income - - 1,919,393 - 1,919,393
Cash dividends
($.12 per share) - - (254,214) - (254,214)
Change in unrealized
gain (loss) on securities
available-for-sale,
net of tax - - - (288,079) (288,079)
------------- -------------- ------------- -------------- --------------
December 31, 1996 $ 4,236,890 10,888,830 3,807,172 (92,974) 18,839,918
============= ============== ============= ============== ==============
See accompanying notes to consolidated financial statements.
5
BANK OF MECKLENBURG AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,919,393 1,256,477 1,001,725
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 229,700 95,432 49,450
Premium amortization and discount accretion, net 419,968 94,953 256,465
(Gain) loss on sale of securities, net (1,158,802) (196,571) 66,630
Gain on sale loans 25,529 - -
Depreciation and amortization 361,371 240,462 228,144
Increase in accrued interest receivable (266,602) (430,014) (282,062)
Increase in other assets (65,446) (82,936) (40,914)
Increase in accrued interest payable 104,299 963,697 201,504
Increase in other liabilities 29,899 13,416 30,835
----------------- ----------------- ---------------
Net cash provided by operating activities 1,548,251 1,954,916 1,511,777
----------------- ----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (336,609,613) (115,374,997) (40,737,882)
Purchases of investment securities (2,547,515) (2,635,366) (6,525,042)
Maturities and issuer calls of available-for-sale
securities 18,226,987 21,651,988 10,995,712
Sales of available-for-sale securities 267,813,893 64,158,610 9,763,458
Sales of investment securities 14,644,960 - -
Purchases of FHLB stock (729,900) (3,018,100) (1,008,100)
Sales of FHLB stock 819,600 282,600 -
Increase in loans, net (36,023,307) (21,683,213) (3,971,963)
Sales of loans 3,052,439 - -
Purchase of branch and assumption of deposits, net
of acquired cash equivalents 26,324,972 - -
Capital expenditures for premises and equipment, net (235,161) (52,942) (171,701)
----------------- ----------------- ---------------
Net cash used in investing activities (45,202,645) (56,671,420) (31,655,518)
----------------- ----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 19,799,019 29,175,224 10,381,516
Proceeds from FHLB advances, net 8,000,000 30,000,000 10,000,000
Net increase in other borrowed funds 12,726,330 1,551,007 4,636,818
Cash paid in lieu of fractional shares - (3,731) -
Proceeds from stock options exercised - 27,677 384,629
Cash dividends (254,214) (254,105) (200,664)
----------------- ----------------- ---------------
Net cash provided by financing activities 40,271,135 60,496,072 25,202,299
----------------- ----------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (3,443,259) 5,779,568 (4,941,442)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 10,552,236 4,772,668 9,714,110
----------------- ----------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,108,977 10,552,236 4,772,668
================= ================= ===============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest $ 11,386,279 6,165,553 3,550,655
Income taxes 1,178,060 502,000 375,537
Supplemental schedule of non-cash investing activities:
Investment securities transferred to available-for-sale
securities $ - - 35,893,980
Effect of change in accounting principle (net of tax
effect of $12,233) - - 23,746
Effect on shareholders'equity of an unrealized
gain (loss) on securities available-for-sale
(net of tax effect of $148,404 in 1996,
$955,883 in 1995 and $843,142 in 1994) (288,079) 1,855,538 (1,636,687)
See accompanying notes to consolidated financial statements.
6
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) Organization and Operations
Bank of Mecklenburg was incorporated on September 8, 1988, and began
operations on July 12, 1989. Bank of Mecklenburg is engaged in general
commercial banking in Mecklenburg County, North Carolina and operates
under the banking laws of North Carolina and the Rules and Regulations of
the Federal Deposit Insurance Corporation.
Mecklenburg Financial Services, Inc., a wholly-owned subsidiary of Bank
of Mecklenburg, was incorporated on March 7, 1994 to provide investment
and trust services through agreements with outside parties.
(2) Summary of Significant Accounting Policies
The following is a description of the significant accounting and
reporting policies that Bank of Mecklenburg and subsidiary (the Bank)
follow in preparing and presenting their consolidated financial
statements.
(a) Principles of Consolidation and Reporting
The accompanying consolidated financial statements include the
accounts of Bank of Mecklenburg and its wholly owned subsidiary,
Mecklenburg Financial Services, Inc. All significant intercompany
balances have been eliminated.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements, as well as
the amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications of certain amounts in the 1995 and 1994
consolidated financial statements have been made to conform with
the financial statement presentation for 1996. The
reclassifications have no effect on net income or shareholders'
equity as previously reported.
(b) Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and
federal funds sold. Generally, cash and cash equivalents are
considered to have maturities of three months or less.
(c) Securities
In May 1993, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 addresses the accounting and reporting
for investments in equity securities that have readily
determinable fair values and all investments in debt securities.
These investments are classified into three categories as follows:
(1) debt securities that the entity has the positive intent and
the ability to hold to
7 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
(c) Securities (cont'd)
maturity are classified as held to maturity and reported at
amortized cost; (2) debt and equity securities that are bought and
held principally for the purpose of selling them in the near term
are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings; and (3)
debt and equity securities not classified as either
held-to-maturity securities or trading securities are classified
as available-for-sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity (net of tax effect).
The Bank adopted the provisions of SFAS No. 115 on January 1,
1994, with a substantial portion of the securities portfolio
classified as available-for-sale.
Gains and losses on securities are recognized at the time of sale
based on the specific identification method, and premiums and
discounts are amortized into interest income using the level yield
method.
(d) Loans and Allowance for Loan Losses
Loans are carried at their principal amount outstanding, net of
any unamortized purchase premium or discount on those loans which
were purchased. Interest income is recorded as earned on an
accrual basis.
The accrual of interest is generally discontinued on all loans
that become 90 days past due as to principal or interest unless
collection of both principal and interest is assured by way of
collateralization, guarantees, or other security, and the loan is
considered to be in the process of collection.
The Bank uses the allowance method in providing for possible loan
losses. The provision for loan losses is based upon management's
estimate of the amount needed to maintain the allowance for loan
losses at an adequate level to cover known and inherent risk of
loss in the loan portfolio. In determining the provision amount,
management gives consideration to economic conditions, the growth
and composition of the loan portfolio, and the relationship of the
allowance for loan losses to outstanding loans. While management
uses the best information available to make evaluations, future
adjustments may be necessary if economic and other conditions
differ substantially from the assumptions used.
8 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments
about information available to them at the time of their
examination.
In May 1993, the FASB issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 prescribes the
recognition criterion for loan impairment and the measurement
methods for certain impaired loans and loans whose terms are
modified in troubled debt restructurings. When a loan is impaired,
a creditor must measure impairment based on (1) the present value
of the impaired loan's expected future cash flows discounted at
the loan's original effective interest rate, (2) the observable
market price of the impaired loan, or (3) the fair value of the
collateral for a collateral-dependent loan. Any measurement losses
are to be recognized through additions to the allowance for loan
losses. SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan - Income Recognition and Disclosures," amends SFAS No. 114 to
allow a creditor to use existing methods for recognizing interest
income on an impaired loan and requires additional disclosure
about how a creditor recognizes interest income related to
impaired loans.
Effective January 1, 1995, the Bank adopted SFAS No. 114 and 118.
The Bank previously measured loan impairment in a manner generally
comparable to the methods prescribed in SFAS No. 114. Accordingly,
the adoption of the Standards required no increase to the
allowance for loan losses and has had no impact on net income.
Management considers loans to be impaired when based on current
information and events, it is probable that a creditor will be
unable to collect all amounts due according to contractual terms
of the loan agreement. Factors that influence management's
judgments include, but are not limited to, loan payment pattern,
source of repayment, and value of collateral. A loan would not be
considered impaired if an insignificant delay in loan payment
occurs and management expects to collect all amounts due. The
major sources for identification of loans to be evaluated for
impairment include past due and nonaccrual reports, internally
generated lists of loans of certain risk grades, and regulatory
reports of examination. Impaired loans are measured using either
the discounted expected cash flow method or the value of
collateral method. When the ultimate collectibility of an impaired
loan principal is in doubt, wholly or partially, all cash receipts
are applied to principal.
(e) Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Expenditures for major renewals and betterments
which extend the useful lives of premises and equipment are
capitalized. Maintenance, repairs and minor improvements are
expensed as incurred. Depreciation of buildings is computed on the
straight-line method over 30 years. Depreciation of furniture and
equipment is computed on the straight-line method over periods
that approximate the estimated useful lives of the assets.
Accelerated depreciation methods are used for tax purposes.
9 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
(f) Income Taxes
The Bank computes its income taxes in accordance with the
provisions of SFAS 109. Under SFAS 109, deferred tax liabilities
are recognized on all taxable temporary differences (reversing
differences where tax deductions initially exceed financial
statement expense, or income is reported for financial statement
purposes prior to being reported for tax purposes). In addition,
deferred tax assets are recognized on all deductible temporary
differences (reversing differences where financial statement
expense initially exceeds tax deductions, or income is reported
for tax purposes prior to being reported for financial statement
purposes) and operating losses and tax credit carryforwards.
Valuation allowances are established to reduce deferred tax assets
if it is determined to be "more likely than not" that all or some
portion of the potential deferred tax assets will not be realized.
Under SFAS 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period
that includes the enactment date.
(g) Reduction in Stock Par Value, Stock Split and Income per Share
During 1995, the Bank reduced the stated par value of the Bank's
common stock from $5 per share to $2 per share, declared and
distributed a five-for-four stock split and increased the Bank's
authorized shares from 3,000,000 shares to 10,000,000 shares. All
previously reported common stock and per share data have been
restated to reflect the reduction in par value and stock split.
Net income per share is computed by dividing consolidated net
income by the weighted average number of shares of common stock
outstanding during the year. The effect of common stock equivalent
shares applicable to stock option plans has not been included in
the calculation of net income per share because such effect is not
materially dilutive.
(h) Interest Rate Swaps, Floors and Caps
The Bank uses interest rate swaps, floors and caps for interest
rate risk management. These instruments are designated as hedges
of specific assets and liabilities when purchased. The net
interest payable or receivable on swaps, caps, and floors is
accrued and recognized as an adjustment to interest income or
interest expense of the related asset or liability. Premiums paid
for purchased caps and floors are amortized over the term of the
floors and caps as a yield adjustment of the related asset or
liability. Upon the early termination of swaps, floors and caps,
the net proceeds received or paid, including premiums, are
deferred and included in other assets or liabilities and amortized
over the shorter of the remaining contract life or the maturity of
the related asset or liability. Upon disposition or settlement of
the asset or liability being hedged, deferral accounting is
discontinued and any related premium or change in fair value of
the hedge instrument is recognized in earnings. If the hedge
instrument is retained subsequent to the disposition or settlement
of the underlying asset or liability, it will be redesignated to
specific assets or liabilities and any change in fair value of the
instrument recognized in earnings in connection with the previous
disposition of the underlying asset or liability will be recorded
as a purchase premium and amortized into interest income over the
contract term as a yield adjustment of the related asset or
liability.
10 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
(i) Other Accounting Changes
Effective January 1, 1996, the Bank adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights," which requires that a
mortgage banking enterprise recognize as separate assets the
rights to service mortgage loans for others, however those
servicing rights are acquired. A mortgage banking enterprise that
acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes those loans
with servicing rights retained should allocate the total cost of
the mortgage loans to the mortgage servicing rights and the loans,
(without the mortgage servicing rights) based on their relative
fair values if it is practicable to estimate those fair values. If
it is not practicable to estimate the fair values of the mortgage
servicing rights and the mortgage loans (without the mortgage
servicing rights), the entire cost of purchasing or originating
the loans should be allocated only to the mortgage loans without
the mortgage servicing rights. Additionally, this Standard
requires that a mortgage banking enterprise periodically assess
its capitalized mortgage servicing rights for impairment based on
the fair value of those rights. The impact of adoption of SFAS No.
122 on the financial statements was not material.
(j) Stock Options
Effective January 1, 1996, the Bank adopted SFAS No. 123,
"Accounting for Stock-Based Compensation," which requires that the
fair value of employee stock-based compensation plans be recorded
as a component of compensation expense in the statement of income
or the impact of such fair value on net income and earnings per
share be disclosed on a pro forma basis in a footnote to financial
statements in accordance with APB 25. The Bank will continue such
accounting under the provisions of APB 25.
(3) Branch Acquisition
On December 8, 1995, the Bank signed a definitive agreement to purchase
certain assets and assume deposit liabilities of a branch office from
Essex Savings Bank. The agreement became effective March 15, 1996 at
which time the Bank assumed approximately $28,100,000 in deposits
including accrued interest thereon, acquired approximately $800,000 in
assets consisting of cash on hand, installment loans and premises and
equipment, and received approximately $26,200,000 in cash. Deposit base
premium was approximately $1,100,000 and is being amortized straight-line
over seven years.
(4) Available-for-Sale Securities
Available-for-sale securities held at December 31, 1996 and 1995 are
summarized as follows:
Gross Gross Total
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1996:
U.S. Government $ 1,028,547 - 19,177 1,009,370
U.S. Government agency 7,463,589 47,402 2,216 7,508,775
Mortgage-backed securities 123,781,733 490,590 215,212 124,057,111
Equity securities 63,648 - - 63,648
End-user derivatives 4,292,857 473,348 915,605 3,850,600
---------------- ------------- ------------- ---------------
$ 136,630,374 1,011,340 1,152,210 136,489,504
================ ============= ============= ===============
11 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
Gross Gross Total
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
December 31, 1995:
U.S. Government $ 3,038,082 - 33,077 3,005,005
U.S. Government agency 1,844,421 - 2,721 1,841,700
Mortgage-backed securities 79,416,771 438,973 107,562 79,748,182
--------------- ------------- ------------- ---------------
$ 84,299,274 438,973 143,360 84,594,887
=============== ============= ============= ===============
The following is a summary of the contractual maturities of available for
sale securities at December 31, 1996:
Amortized Cost Fair Value
Due in one year or less $ 422,205 420,024
Due after one year through five years 3,097,759 3,206,524
Due after five years through ten years 2,711,460 2,147,100
Due after ten years 130,335,302 130,652,208
Equity securities 63,648 63,648
----------- ------------
$136,630,374 136,489,504
=========== ============
Proceeds from sales of available-for-sale securities during 1996 and 1995
were $267,813,893 and $64,158,610, respectively. Gross gains of
$3,452,885 and $539,204 and gross losses of $2,224,067 and $342,633 were
realized on sales of available-for-sale securities during 1996 and 1995,
respectively. In addition in 1996, gross gains of $1,188,801 and gross
losses of $682,049 were realized on terminations or marks to market of
end-user derivatives in available-for-sale securities.
Available-for-sale securities with an aggregate par value of $94,521,200
at December 31, 1996, were pledged to secure public deposits, FHLB
advances and other borrowed funds.
At December 31, 1996, shareholders' equity includes an after-tax amount
of ($92,974) based on depreciation in available-for-sale securities of
$140,870. At December 31, 1995, shareholders' equity includes an
after-tax amount of $195,105 based on appreciation in available-for-sale
securities of $295,613.
(5) Investment Securities
At December 31, 1996 the Bank held as investment securities a North
Carolina Education Authority bond maturing in December, 2005, and which
had an amortized cost and estimated fair value of $1,000,000.
At December 31, 1995, investment securities were comprised of municipal
bonds with an amortized cost of $13,167,341 and an estimated fair value
of $13,215,749. Gross unrealized gains and losses related to these
securities were $164,548 and $116,140, respectively.
12 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
Investment securities with a carrying value of $14,714,976 were sold
during March and April 1996, resulting in proceeds of $14,644,960. Gross
gains of $155,888 and gross losses of $225,904 were realized on these
sales of investment securities. In addition, gross gains of $700,250 were
realized on terminations or marks to market of end-user derivatives
designated to these assets. Management determined that the prevailing
market conditions did not justify maintaining a held-to-maturity
securities portfolio and, as a result, liquidated this entire portfolio.
There were no sales of investment securities during 1995 or 1994.
No investment securities were pledged to secure public deposits and other
borrowed funds at December 31, 1996.
(6) Loans and Allowance for Loan Losses
Loans at December 31, 1996 and 1995 are summarized as follows:
1996 1995
---- ----
Commercial $ 39,167,187 26,544,972
Real estate 62,576,460 39,144,219
Consumer 11,567,890 14,541,221
Other 543,980 592,570
---------------- ---------------
$ 113,855,517 80,822,982
================ ===============
Included in real estate loans were 1-4 family residential loans of
approximately $9,370,000 at December 31, 1996.
There were no nonaccrual loans or any loans considered impaired under
SFAS No. 114 at December 31, 1996 and 1995.
The following is a summary of the changes in the allowance for loan
losses for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994
---- ---- ----
Beginning balance $ 973,000 900,000 857,000
Provision for loan losses 229,700 95,432 49,450
Charge-offs (28,852) (36,884) (7,197)
Recoveries 1,093 14,452 747
----------- ---------- -----------
Net charge-offs (27,759) (22,432) (6,450)
----------- ---------- -----------
Ending balance $ 1,174,941 973,000 900,000
=========== ========== ===========
The following is a reconciliation of loans outstanding to executive
officers, directors, and their affiliates for the year ended December 31,
1996:
Balance at December 31, 1995 $ 6,715,914
New loans 1,872,741
Principal repayments (2,421,060)
-------------
Balance at December 31, 1996 $ 6,167,595
=============
13 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 1996, the Bank had preapproved but unused lines of credit
totaling $2,694,502 to executive officers, directors, and their
affiliates.
Such loans and lines of credit are made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time
for comparable transactions with other borrowers. Such loans do not
involve more than the normal risks of collectibility.
(7) Premises and Equipment
Premises and equipment are summarized as follows:
Accumulated Net
Cost Depreciation Book Value
December 31, 1996:
Land $ 2,618,196 - 2,618,196
Building 3,720,782 666,285 3,054,497
Furniture and equipment 1,325,651 752,802 572,849
-------------- ----------- --------------
$ 7,664,629 1,419,087 6,245,542
============== =========== ==============
December 31, 1995:
Land $ 2,390,196 - 2,390,196
Building 3,204,565 552,813 2,651,752
Furniture and equipment 1,220,835 662,795 558,040
-------------- ----------- --------------
$ 6,815,596 1,215,608 5,599,988
============== =========== ==============
(8) Liabilities
Time deposits maturing in each of the five years subsequent to December
31, 1996 are as follows: 1997, $82,196,391; 1998, $20,257,568; 1999,
$1,525,075; 2000, $1,962,671; and 2001, $95,965.
FHLB adjustable rate advances and interest rates at December 31, 1996
consist of the following:
Maturity Date Interest Rate December 31, 1996
Demand 6.95% (based on daily Fed Funds rate) $ 8,000,000
February 13, 1998 5.42% (based on 3 month LIBOR) 30,000,000
March 23, 1998 5.53% (based on 3 month LIBOR) 10,000,000
----------
$ 48,000,000
==========
The Bank is required to purchase and hold certain amounts of FHLB stock
in order to obtain FHLB advances. No ready market exists for the FHLB
stock and it has no quoted market value. This stock has a carrying value
based on cost and is redeemable at $100 per share subject to certain
limitations set by the FHLB.
14 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
At December 31, 1996, all stock in the FHLB and certain
available-for-sale securities were pledged as collateral to secure these
advances.
Other borrowed funds at December 31, 1996 and 1995 are summarized as
follows:
Weighted Average Maximum
Balance as of Interest Rate as Average Average Outstanding at
December 31 of December 31 Balance Interest Rate Any Month-End
- -----------------------------------------------------------------------------------------------------------------------------
1996:
Repurchase
agreements $ 22,676,297 5.05% $ 19,748,158 5.54% $ 28,230,808
Federal funds
purchased - - 2,028,921 5.54% 9,745,000
1995:
Repurchase
agreements $ 8,745,472 4.69% $ 7,584,029 5.01% $ 9,951,561
Federal funds
purchased 1,155,000 5.75 1,073,096 5.97% $ 6,125,000
Other borrowed funds also included treasury tax and loan note option
accounts of $341,761 and $391,258 at December 31, 1996 and 1995,
respectively.
(9) Income Taxes
Income tax expense consists of the following:
1996 1995 1994
---- ---- ----
Current
Federal $ 985,500 499,000 325,000
State 182,000 22,000 76,800
Deferred (79,000) (21,000) 51,000
-------------- ----------- -----------
Total $ 1,088,500 500,000 452,800
============== =========== ===========
Total income tax expense differed from the amounts computed by applying
the applicable U.S. federal income tax rate as a result of the following:
1996 1995 1994
------------------------ ----------------------- ----------------------
Amount Percentage Amount Percentage Amount Percentage
Tax at federal income tax rate $ 1,022,684 34.0% 597,202 34.0% 494,539 34.0%
State taxes, net of federal
benefit 120,120 4.0 14,520 0.8 50,688 3.5
Tax-exempt interest income (68,716) (2.3) (185,689) (10.6) (129,168) (8.9)
Non-deductible interest
expense 13,085 0.4 34,478 2.0 17,150 1.2
Other, net 1,327 0.1 39,489 2.3 19,591 1.3
-------------- --- ----------- ---- ----------- ----
$ 1,088,500 36.2% 500,000 28.5% 452,800 31.1%
============== ==== =========== ==== =========== ====
15 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
The source and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets (liabilities) at December
31, 1996 and 1995 are presented below:
1996 1995
---- ----
Deferred tax assets:
Loan loss reserves $ 416,678 328,596
Unrealized loss on available-for-sale
securities 47,895 -
Other 25,327 2,438
------------ ----------
Total gross deferred tax assets 489,900 331,034
Less valuation allowance - -
------------ -----------
Net deferred tax assets 489,900 331,034
------------ -----------
Deferred tax liabilities:
Depreciable basis of fixed assets (368,460) (337,731)
Unrealized gain on available-for-sale
securities - (100,508)
Other (5,545) (4,303)
------------ -----------
Total gross deferred tax liabilities (374,005) (442,542)
------------ -----------
Net deferred tax asset (liability) $ 115,895 (111,508)
============ ===========
A portion of the change in the net deferred tax asset/liability relates
to unrealized gains and losses on available-for-sale securities. The
related current period deferred tax benefit of $148,403 has been recorded
directly to shareholders' equity. The balance of the change in the net
deferred tax asset/liability results from the current period deferred tax
benefit of $79,000.
The valuation allowance as of January 1, 1995 was $122,309. The net
change in the valuation allowance during 1995 was a decrease of $122,309
and was recorded directly to shareholders' equity as an adjustment to
unrealized gains and losses on available-for-sale securities. There was
no valuation allowance at January 1, 1996 and no net change in the
valuation allowance during 1996. It is management's opinion that
realization of the deferred tax asset is more likely than not, based upon
the Bank's history of taxable income and estimates of future taxable
income
The Bank's income tax return for 1993 and subsequent years are subject to
review by the taxing authorities.
(10) Common Stock
On September 13, 1988, the Bank adopted a Non-Qualified Stock Option Plan
(the "Plan") under which only directors are eligible to receive grants of
options. During 1994, all outstanding options were exercised or forfeited
with no options available for future grants.
16 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
In April 1996, the Bank's shareholders approved the 1996 Director Stock
Option Plan (the "1996 Plan") under which only directors are eligible to
receive grants of options. In June 1996, each of twelve directors was
granted options to purchase 15,000 shares of the Bank's common stock
resulting in a total of 180,000 options granted. These options have an
exercise price of $11.50 per share and are subject to a vesting schedule
under which the options will become exercisable over a five-year period,
with 20% of such options to become exercisable on each anniversary of the
date of grant, beginning in June 1997. The options will expire if not
exercised within ten years of the date of grant.
The Bank has an Incentive Stock Option Plan (the "ISO Plan") under which
options are periodically granted to executive officers and other
employees at a price not less than 100% of the fair market value of the
shares at the date of the grant. The ISO Plan provides that, unless
otherwise modified by the Compensation Committee of the Board of
Directors (the Committee), each option granted under the Plan shall
become fully exercisable by the optionee five years from the date the
option is granted. Pursuant to the terms of the ISO Plan, the Committee
increased the exercise period to six years for all options granted
subsequent to March 7, 1989. Shares subject to option vest at the rate of
20% for each year of continuous service for options granted prior to
March 7, 1989, and 20% for each year of continuous service after the
first full year of employment for options granted subsequent to March 7,
1989. If a recipient of options under the ISO Plan ceases to perform
services for the Bank during the five-year vesting period, then that
person may exercise the option only with respect to the vested portion of
the shares subject to the option. All options expire ten years from the
date of the grant.
The following table reflects the status of the ISO Plan at December 31,
1996:
Shares
Available Subject to
for Future Outstanding Option
Grants Options Price
Balance at December 31, 1993 $ 32,667 115,770 $ 7.04- 8.96
Options granted (10,625) 10,625 8.40
Options exercised - - -
Options forfeited 6,719 (6,719) 7.40- 8.96
--------- ---------- ---------------
Balance at December 31, 1994 28,761 119,676 $ 7.04- 8.96
Options granted (9,000) 9,000 10.75
Options exercised - (3,591) 7.04- 8.96
Options forfeited 9,530 (9,530) 7.40- 8.40
--------- ----------- -------------
Balance at December 31, 1995 29,291 115,555 $ 7.04-10.75
Options granted (12,500) 12,500 11.00-13.00
Options exercised - - -
Options forfeited 2,500 (12,030) 7.40-10.75
--------- ---------- --------------
Balance at December 31, 1996 $ 19,291 116,025 $ 7.04-13.00
========= ========== ==============
At December 31, 1996, 67,404 options under the ISO Plan were exercisable.
17 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank has elected to follow APB No. 25 and related interpretations in
accounting for its employee stock options as permitted under SFAS No.
123. In accordance with APB No. 25, no compensation expense is recognized
by the Bank when stock options are granted because the exercise price of
the Bank's stock option equals the market price of the underlying stock
on the date of grant. Had compensation cost for the Bank's stock option
plans been determined consistent with SFAS No. 123, the dilutive effect
on the Bank's net income would have been approximately $545,000 in 1996.
The effect on net income in 1995 would not have been material.
The average fair value of options granted in 1996 approximated $4.75. The
fair value of the 1996 option grants is estimated on the date of the
grants using the Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 0.92%, expected
volatility of 19.00%, risk-free interest rate of 6.20% and an expected
average life of six years.
(11) Employee Benefit Plan
The Bank sponsors a 401(k) profit sharing plan available to substantially
all employees. The provisions of the plan provide that participating
employees may contribute up to 9% of their compensation. The Bank will
match at 100% the employee's annual contribution up to 6% of their
salary. The Bank's expense for its matching contributions in 1996, 1995
and 1994 amounted to approximately $49,905, $41,700 and $29,400,
respectively.
(12) Regulation and Regulatory Restrictions
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory--and possible
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 others 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 (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1996, that the Bank meets all capital adequacy requirements
to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as 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 Teir I leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
18 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios are also presented in the
table.
Minimum required Minimum required
for Regulatory Capital by Regulators to
Actual Adequacy Purposes be Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets) $ 19,155,000 15.0% 10,210,000 >8.0% 12,763,000 >10.0%
- -
Tier I Capital (to Risk
Weighted Assets) 17,980,000 14.1 5,105,000 >4.0 7,658,000 >6.0
- -
Tier I Capital (to Average
Assets) 17,980,000 7.2 9,963,000 >4.0 12,453,000 >5.0
- -
AS OF DECEMBER 31, 1995:
Total Capital (to Risk
Weighted Assets) 18,241,000 16.8% 8,712,000 >8.0% 10,890,000 >10.0%
- -
Tier I Capital (to Risk
Weighted Assets) 17,268,000 15.9 4,356,000 >4.0 6,534,000 >6.0
- -
Tier I Capital (to Average
Assets) 17,268,000 10.9 6,323,000 >4.0 7,903,000 >5.0
- -
(13) Fair Value of Financial Instruments
In December 1991, the FASB issued SFAS No. 107, "Disclosures about Fair
Value of Financial Instruments." SFAS No. 107 requires disclosures in
financial statements of the fair value of all financial instruments,
including assets and liabilities both on- and off-balance sheet, for
which it is practicable to estimate such fair value. Fair value
estimates, methods, and assumptions as of December 31, 1996 for the Bank
are set forth below and are subject to the following limitations.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank's entire
holdings of a particular financial instrument. Because no market exists
for a portion of the Bank's financial instruments, fair value estimates
are based on judgments regarding future expected loss and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-balance sheet financial
instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Significant assets and liabilities that
are not considered financial assets or liabilities include deferred tax
liabilities, and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on the fair value estimates and have
not been considered. For fair value estimates of off-balance sheet
financial instruments, see Note 13.
The Bank's fair value methods and assumptions are as follows:
o Cash and due from banks, federal funds sold, accrued interest
receivable and payable, and FHLB stock - the carrying value is a
reasonable estimate of fair value.
19 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
o Available-for-sale securities and investment securities - fair value
is based on available quoted market prices or quoted market prices
for similar securities if a quoted market price is not available.
o Loans - fair value for fixed and adjustable rate loans is estimated
based upon discounted future cash flows using discounted rates
comparable to rates currently offered for such loans.
o Deposits - fair value of time deposits is estimated using rates
currently offered for deposits of similar maturities. The fair value
of all other deposit account types is the amount payable on demand at
year-end.
o FHLB advances and other borrowed funds - the carrying value is a
reasonable estimate of fair value based on the borrowings being
adjustable rate or having short maturities.
Based on the limitations, methods, and assumptions noted above, the
estimated fair values of the Bank's financial instruments at December 31,
1996 are as follows:
Carrying Fair
Amount Value
FINANCIAL ASSETS:
Cash and due from banks $ 6,108,977 6,108,977
Federal funds sold 1,000,000 1,000,000
Available -for-sale securities 136,489,504 136,489,504
Investment securities 1,000,000 1,000,000
Loans 112,680,579 113,309,000
Accrued interest receivable 1,597,291 1,597,291
Federal Home Loan Bank Stock 3,934,500 3,934,500
FINANCIAL LIABILITIES:
Deposit accounts 177,987,873 176,545,000
FHLB advances 48,000,000 48,000,000
Other borrowed funds 23,018,060 23,018,060
Accrued interest payable 1,991,166 1,991,166
(14) Off-Balance Sheet Risk, Commitments and Contingent Liabilities
In the normal course of business, the Bank is a party to off-balance
sheet financial commitments originated in the course of its lending
activities. Such commitments include commitments to extend credit and
standby letters of credit. 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.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Generally,
commitments for extension of credit expire in one year or less. At
December 31, 1996, all of the Bank's $806,000 of standby letters of
credit had expiration dates of one year or less. All of the Bank's
$1,384,000 of outstanding loan commitments had expiration dates of one
year or less at December 31, 1996 while the Bank's $25,030,000 of
pre-approved but unused lines of credit had expiration dates over one
year. Since many of these commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank'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 contract amount of those instruments. The Bank uses
the same credit and collateral policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
20 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
The Bank uses off-balance sheet financial contracts to assist in managing
interest rate risk. Instruments used for this purpose include interest
rate swaps, interest rate caps and interest rate floors. Interest rate
swap transactions generally involve the exchange of fixed and floating
rate interest payment obligations without the exchange of the underlying
principal or notional amounts. Entering into interest rate swap
agreements involves both the risk of dealing with counterparties and
their ability to meet the terms of the contracts and also interest rate
risk. Interest rate caps and floors are option contracts for which an
initial premium is paid and for which no ongoing interest rate risk is
present. The ability of counterparties to meet their obligation under the
terms of these contracts is the primary risk involved with purchased
interest rate caps and floors. The Bank manages the counterparty credit
risk associated with these instruments through credit approvals, limits
and monitoring procedures.
For interest rate swaps, interest rate caps and interest rate floors,
notional principal amounts often are used to express the volume of
transactions, however, the amounts potentially subject to credit risk are
much smaller. As of December 31, 1996, the aggregate notional amount of
all outstanding financial instrument contracts used for interest rate
management totaled approximately $256 million. At December 31, 1996, the
carrying amount of financial instruments used for interest rate risk
management was approximately $4,320,000 while the market value for these
instruments was approximately $4,070,000.
All these instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amounts recognized in the
consolidated financial statements. At December 31, 1996, off-balance
sheet financial instruments and their related fair value methods and
assumptions, and fair values are as follows:
Commitments to extend credit and standby letters of credit - the large
majority of the Bank's credit commitments are at variable rates and,
therefore, are subject to minimal interest rate exposure.
Interest rate swaps, floors and caps - carrying values for off-balance
sheet investment products represent deferred amounts arising from these
financial instruments. Where possible, the fair values are based upon
quoted market prices. Where such prices do not exist, these values are
based on dealer quotes and generally represent an estimate of the amount
that the Bank would receive or pay to terminate the agreement at the
reporting date, taking into account current interest rates and the
current creditworthiness of the counterparties.
Contract or
Carrying Estimated Notional
(IN THOUSANDS) Amount Fair Value Amount
Financial Instruments Associated With
Lending Activities
Commitments to extend credit $ - $ - $ 1,384,000
Standby letters of credit - - 806,000
Unused lines of credit - - 25,030,000
21 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
Contract or
Carrying Estimated Notional
(IN THOUSANDS) Amount Fair Value Amount
Financial Instruments Used for Interest
Rate Risk Management, the Designated
Asset or Liability and Terms
Interest rate swap agreements:
Available-for-sale-securities
(Receive 3 month LIBOR,
pay fixed 6.25%, November 1995 -
November 2002) 212 108 10,000
(Receive 3 month LIBOR,
pay fixed 5.53%, February 1996 -
February 2001) - 282 10,000
(Receive 3 month LIBOR,
pay fixed 6.54%, March 1996 -
March 2003 449 (40) 20,000
(Receive 3 month LIBOR,
pay fixed 5.93%, January 1996 -
January 2006) 350 293 6,000
---------- ----------- -----------
$ 1,011 643 46,000
========== =========== ===========
Purchased interest rate caps:
Available-for-sale-securities
(Strike price 7%, 3 month LIBOR
index, December 1995 - December
2002) $ 400 434 15,000
(Strike price 4%, 3 month LIBOR
index, October 1995 - October 2000) 291 380 5,000
(Strike price 6%, 3 month LIBOR
index, March 1996 - March 2001) 632 581 20,000
(Strike price 7%, 3 month LIBOR
index, March 1996 - March 2001) 307 323 20,000
(Strike price 7%, 3 month LIBOR
index, April 1996 - April 2003) 769 782 25,000
---------- ----------- -----------
2,399 2,500 85,000
========== =========== ===========
22 (Continued)
BANK OF MECKLENBURG AND SUBSIDIARY
Notes to Consolidated Financial Statements
Contract or
Carrying Estimated Notional
(IN THOUSANDS) Amount Fair Value Amount
Purchased interest rate floors:
Variable rate loans
(Strike price 6.5%, 1 month LIBOR
index, January 1996 - January 1997) - - 25,000
(Strike price 6.38%, 1 month LIBOR
index, January 1997 - January 1998) 26 197 25,000
Available-for-sale-securities
(Strike price 5%, 3 month LIBOR
index, March 1996 - March 2000) 352 137 40,000
(Strike price 5%, 3 month LIBOR
index, April 1996 - April 2006) 531 570 35,000
---------- ----------- -----------
$ 909 904 125,000
========== =========== ===========
The Bank grants primarily commercial, real estate, and consumer loans to
customers in its primary market area, which is Mecklenburg County. The
real estate loan portfolio can be affected by the condition of the local
real estate market. The commercial and consumer loan portfolios can be
affected by local economic conditions.
The Bank is a defendant in various litigation arising in the normal
course of business. In the opinion of management, resolution of these
matters will not result in a material adverse effect on the Bank's
financial position.
Average daily Federal Reserve balance requirements for the year ended
December 31, 1996, amounted to $2,032,000.
23