FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C.
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1997
FDIC CERTIFICATE NUMBER 27553-1
BANK OF MECKLENBURG
A NORTH CAROLINA CORPORATION
IRS EMPLOYER IDENTIFICATION NUMBER 56-1588228
2000 RANDOLPH ROAD
CHARLOTTE NC 28207
TELEPHONE 704-375-2265
Indicate by checkmark whether the Bank (1) has filed all reports required to be
filed by Section 13 of the Securities Act of 1934 during the preceding twelve
months (or for such shorter period that the Bank was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES X NO
--- ---
Indicate by checkmark if the Bank, as a "small business issuer" as defined under
17 CFR 240-12b-2, is providing alternative disclosure as permitted for small
business issuers in this form F-4. YES X NO
--- ---
Indicate the number of shares outstanding of each of the Bank's classes of
common stock as of the latest practicable date.
COMMON STOCK, $2.00 PAR VALUE
2,118,945 SHARES OUTSTANDING ON MARCH 31, 1997
BANK OF MECKLENBURG AND SUBSIDIARY
FORM F-4
INDEX
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
o Consolidated Balance Sheets 3
o Consolidated Statements of Income 4
o Consolidated Statements of Changes in Shareholders' Equity 5
o Consolidated Statements of Cash Flows 6
o Notes to Consolidated Financial Statements 7-10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-17
SIGNATURES 18
2
BANK OF MECKLENBURG AND SUBSIDIARY
Unaudited Audited
Assets March 31, December 31,
1997 1996
--------- ------------
Cash due from banks $ 5,595 $ 6,109
Federal Funds sold -- 1,000
Available-for-sale securities, cost-1997
$80,172, 1996 $140,565 80,325 140,424
Held-to-maturity securities-market value-
1997-$1,000; 1996-$1,000 1,000 1,000
Trading assets 54,447 --
Loans 124,268 113,856
Less allowance for loan losses (1,249) (1,175)
--------- ---------
Net loans 123,019 112,681
--------- ---------
Premises and equipment 6,415 6,245
Other assets 2,711 2,830
--------- ---------
Total assets 273,512 270,289
========= =========
Liabilities and Shareholders' Equity
Deposits:
Demand:
Noninterst bearing 11,030 14,110
Interest bearing 66,015 56,537
Savings 1,403 1,303
Time, $100,00 or more 45,573 43,286
Other time 72,139 62,752
--------- ---------
Total deposits 196,160 177,988
--------- ---------
FHLB advances 46,500 48,000
Other borrowed funds 8,183 23,018
Other liabilities 3,097 2,443
--------- ---------
Total liabilities 253,940 251,449
--------- ---------
Shareholders' equity
Common stock, $2 par value; authorized
10,000,000 shares; issued and outstanding
2,118,945 in 1997, 2,118,445 in 1996 4,238 4,237
Additional paid-in capital 10,892 10,889
Retained earnings 4,341 3,807
Unrealized gain(loss) on available-
for-sale securities 101 (93)
--------- ---------
Total shareholders' equity 19,572 18,840
--------- ---------
Total liabilities and shareholders' equity $ 273,512 $ 270,289
========= =========
See accompanying notes to financial statements
3
BANK OF MECKLENBURG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands)
For the periods ended Unaudited Unaudited
March 31, March 31,
1997 1996
--------- ----------
Interest income:
Loans, including fees $ 2,573 $ 1,962
Securities 1,789 1,687
Federal funds sold and interest bearing balances 44 31
---------- ----------
Total interest income 4,406 3,680
---------- ----------
Interest expense:
Time deposits, $100,000 and over 610 463
Other deposits 1,677 1,251
FHLB advances and other borrowed funds 706 721
---------- ----------
Total interest expense 2,993 2,435
---------- ----------
Net interest income 1,413 1,245
Provision for loan losses (44) (95)
---------- ----------
Net interest income after provision
for loan losses 1,369 1,150
---------- ----------
Other income
Service charges on deposit accounts 32 35
Other service charges and fees 7 13
Other noninterest income 3 -
Securities gains 78 366
Gain on trading securities 310 -
---------- ----------
Total other income 430 414
---------- ----------
Other expenses:
Salaries and benefits 429 383
Premises and equipment 118 104
Other expenses 341 380
---------- ----------
Total other expenses 888 867
---------- ----------
Income before income taxes 911 697
Income tax expense 377 230
---------- ----------
Net income $ 534 $ 467
=========== ==========
Average shares outstanding 2,118,945 2,118,445
Net income per share $0.25 $0.22
See accompanying notes to financial statements
4
BANK OF MECKLENBURG AND SUBSIDIARY
Consolidated statement of changes in stockholders equity:
For the three months ended March 31, 1997, 1996 (unaudited)
(Dollars in thousands) Unrealized
Additional gain(loss) Total
Number of Common paid in Retained AFS Shareholders'
Shares Stock Capital Earnings securities Equity
Balance
January 1, 1996 2,118,445 $ 4,237 $ 10,889 $ 2,142 $ 195 $ 17,463
Net income for period -- -- -- 467 -- 467
Change in unrealized gain (loss)
on available-for-sale
securities -- -- -- -- (426) (426)
Proceeds from stock
options exercised -- -- -- -- -- --
Balance _________ _________ _________ _________ _________ _________
March 31, 1996 2,118,445 $ 4,237 $ 10,889 $ 2,609 $ (231) $ 17,504
========= ========= ========= ========= ========= =========
Unrealized
Additional gain(loss) Total
Number of Common paid in Retained AFS Shareholders'
Shares Stock Capital Earnings securities Equity
Balance
January 1, 1997 2,118,445 $ 4,237 $ 10,889 $ 3,807 $ (93) $ 18,840
Net income for period -- -- -- 534 -- 534
Change in unrealized gain (loss)
on available-for-sale
securities -- -- -- -- 194 194
Proceeds from stock
options exercised 500 1 3 -- -- 4
Balance _________ _________ _________ _________ _________ _________
March 31, 1997 2,118,945 $ 4,238 $ 10,892 $ 4,341 $ 101 $ 19,572
========= ========= ========= ========= ========= =========
See accompanying notes to financial statements
5
BANK OF MECKLENBURG AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended:
Unaudited Unaudited
--------- ---------
March 31, March 31,
1997 1996
--------- ---------
Cash flows from operating activities
Net income $ 534 $ 467
Adjustments to reconcile net income to
net cash provided by oerations:
Provision for loan losses 44 95
Premium amortization and discount accretion, net 162 104
Gain on sale of securities, net (78) (112)
Gain on sale of trading assets (310) --
Depreciation and amortization 106 62
Increase in accrued interest receivable (75) (220)
(Increase) decrease in other assets 108 (970)
Increase in accrued interest payable 251 170
Increase (decrease) in other liabilities 42 (47)
--------- ---------
Net cash provided (used) by operating activities 784 (451)
--------- ---------
Cash flows from investing activities:
Purchases of available-for-sale securities (16,896) (75,412)
Purchases of investment securities -- (1,548)
Purchases of trading securities (282,562) --
Maturities and issuer calls of:
Available-for-sale securities 2,279 5,080
Trading securities 570 --
Sales of available-for-sale securities 32,741 35,664
Sales of trading securities 270,454 --
Purchases of FHLB Stock (1,367) --
Sales of FHLB stock 1,262
Increase in loans, net (10,382) (9,272)
Purchase of branch and assumption of deposits,
net of acquired cash equivalents -- 26,325
Capital expenditures premises and equipment, net (238) (4)
--------- ---------
Net cash used in investing activities (4,139) (19,167)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 18,172 6,842
Proceeds from FHLB advances, net (1,500) --
Net increase in other borrowed funds (14,835) 8,326
Proceeds from stock options exercised 4 --
--------- ---------
Net cash provided by financing activities 1,841 15,168
--------- ---------
Net (decrease) increase in cash and cash equivalents (1,514) (4,450)
Cash and cash equivalents at beginning of year 7,109 10,552
--------- ---------
Cash and cash equivalents at end of year $5,595 $6,102
========= =========
Supplemental disclosures of cash flow information
- -----------------------------------------------
Cash paid during the period for:
Interest $ 2,709 $ 2,265
Income tax 118 216
Supplemental disclosures of non-cash transactions
- -------------------------------------------------
Unrealized gain (loss) in value of available-for-sale
securities net of tax effect on $100 and ($214),
respectively 194 (426)
Available-for-sale securities transferred to
Trading securities $42,291 $ --
For the purpose of reporting cash flows, (1) cash and cash equivalents include
cash, due from banks and federal funds sold and (2) have maturities of three
months or less.
6
BANK OF MECKLENBURG AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
In the opinion of Management the accompanying unaudited financial statement of
Bank of Mecklenburg reflect all adjustments which are necessary for a fair
presentation of the results of the periods presented.
(1) ORGANIZATION AND OPERATIONS
Bank of Mecklenburg (the Bank) was incorporated on September 8, 1988. Before
opening for operations on July 12, 1989, the Bank issued 2,063,510 shares of
common stock at a subscription price of $7.04 (adjusted for 5 for 4 splits
during 1993 and 1995). The Bank is engaged in general commercial operations 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.
The Bank opened its first branch office in September, 1991 at 6816 Morrison
Boulevard, Charlotte and purchased its East Boulevard branch office and related
deposits from Essex Savings Bank in March, 1996. The Bank conducts all of its
business from these three offices.
During the second quarter of 1994, the Bank formed Mecklenburg Financial
Services, a wholly owned subsidiary, to provide brokerage services through a
third party. Bankers Financial Partners, Inc. and Legg Mason Financial Services
offer securities and insurance products to Bank customers and the general
public through this subsidiary.
The Consolidated Financial Statements include the accounts of the Bank and its
wholly-owned subsidiary. All significant intercompany items were eliminated in
consolidation.
(2) SECURITIES
SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities"
addresses the accounting and reporting for investments in equity securities
that have a readily determinable fair value and all investments in debt
securities. All investments are classified into one of three classes as
follows: (1) debt securities that the Bank has the positive intent and ability
to hold to maturity are classified as held to maturity and reported at
amortized cost; (2) 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
income; and (3) debt and equity securities not classified as either held to
maturity or trading are classified as available-for-sale and reported at fair
value, with unrealized gains and losses excluded from income and reported as a
separate component of shareholders' equity. At March 31, 1997, the Bank had
available-for-sale securities with an unrealized gain of $153,000. The Bank
intends to hold these securities for an indefinite period of time but may sell
them prior to maturity.
Gains and losses on securities are recognized at the time of sale based on the
specific identification method. Premiums and discounts are amortized into
interest income using the level yield method.
7
BANK OF MECKLENBURG AND SUBSIDIARY
(3) FINANCIAL INSTRUMENTS USED FOR INTEREST RATE RISK MANAGEMENT
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 or caps as
a yield adjustment of the related asset or liability. Upon the early
termination of swaps, caps and floors, the net proceeds received or paid,
including premiums, are deferred, 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 hedged instrument is recognized in earnings. If the hedged instrument is
retained subsequent to the disposition or settlement of the underlying asset or
liability, it will be redesignated to specific assets for 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.
The net market value of purchased interest rate floors, caps and swaps used to
manage interest rate risk associated with the Bank's available-for-sale
investment portfolio is reflected in the market value adjustment of both the
Bank's available-for-sale portfolio and in equity, in accordance with Financial
Accounting Standards No. 115. At March 31, 1997, the market value of these
instruments exceeded their book value by approximately $501,000, while the book
value of securities held in the Bank's available-for-sale portfolio exceeded
their market value by approximately $348,000. The net aggregate market
appreciation, totaling approximately $153,000, is reflected by means of an
increase in the Bank's available-for-sale investment portfolio at March 31,
1997. This market adjustment (net of tax effects) resulted in an increase in
shareholders' equity of approximately $101,000 at the same time.
Instruments used to manage interest rate risk in balance sheet components
(other than the available-for-sale portfolio are also reflected in Note 3,
along with the asset or liability associated with the instruments. At March 31,
1997, the net market value of these instruments exceeded their book value by
approximately $47,000. The net market appreciation of these instruments is not
reflected in the financial statements of the Bank.
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 the counterparty's ability to meet the
terms of the contract and 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 exists. The primary risk with interest rate caps and floors
is counterparty risk. The Bank controls the credit risk (counterparty risk)
with credit approval requirements, requests for collateral, counterparty limits
and monitoring procedures.
For interest rate swaps, caps and floors the notional principal amounts are
often used to express the volume of transactions, however, the amounts
potentially subject to credit risk are much smaller.
8
BANK OF MECKLENBURG AND SUBSIDIARY
Financial Instruments used for interest rate risk management, the designated
asset or liability and terms:
(dollars in thousands)
Carrying Estimated Contract or
Amount Fair value notional amount
Available-for-sale securities
Interest rate swap agreement:
(Receive 3 month LIBOR, pay fixed
5.53%, February 1996-February 2001 $ - $ 439 10,000
------ ----- ------
Purchased interest rate caps:
(Strike price 7%, 3 month LIBOR index,
December 1995-December 2002) 384 504 15,000
(Strike price 4%, 3 month LIBOR index,
October 1995-October 2000) 271 432 5,000
(Strike price 6%, 3 month LIBOR index,
March 1996-March 2001) 595 706 20,000
(Strike price 7%, 3 month LIBOR index,
March 1996-March 2001) 288 367 20,000
-------- ----- ------
Purchased interest rate floor:
(Strike price 5%, 3 month LIBOR index,
March 1996-March 2000) 449 39 40,000
------- ----- ------
$ 1,987 $ 2,487 110,000
======= ======= =======
Variable rate loans
Purchased interest rate floor:
(Strike price 6.38%, 1 month LIBOR index
January 1997-January 1998) $ 20 $ 104 25,000
------- ------- ------
$ 20 $ 104 25,000
======= ======= ======
Time deposits less than $100,000
Interest rate swap agreements:
(Pay 3 month LIBOR, receive 5.97% fixed and
Pay 3 month LIBOR, receive 6.00% fixed $ - $ (19) 8,000
March 1997-March 1998) - (18) 8,000
------- ------- ------
$ - $ (37) 16,000
======= ======== ======
Financial instruments designated as trading portfolio assets
Interest rate swap agreements:
(Receive 3 month LIBOR, pay fixed
6.54%, March 1996-March 2003) $ 448 $ 448 20,000
(Receive 3 month LIBOR, pay fixed
5.93%, January 1996-January 2006) 476 476 6,000
------ ------- ------
Purchased interest rate cap:
(Strike price 7%, 3 month LIBOR index,
April 1996-April 2003) 907 907 25,000
------- ------- ------
Purchased interest rate floor:
(Strike price 5%, 3 month LIBOR index,
April 1996-April 2006) 330 330 35,000
------- ------- ------
$2,161 $ 2,161 86,000
======= ======= ======
9
BANK OF MECKLENBURG AND SUBSIDIARY
(4) MERGER AGREEMENT
On March 27, 1997, Triangle Bancorp, Raleigh, North Carolina, executied a
letter of intent to acquire the capital stock of the Bank. Under the terms of
the agreement, Bank of Mecklenburg will operate as a subsidiary of Triangle
Bancorp. The proposed transaction will be a tax-free stock for stock exchange
of one share of Triangle Bancorp common stock for one share of Bank of
Mecklenburg common stock. A definitive agreement was executed on May 5, 1996.
Subject to shareholder approval, it is anticipated that the transaction will
take place during the fourth quarter of 1997.
10
BANK OF MECKLENBURG AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes included in this report.
GENERAL
The Bank had net income of $534,000 or $.25 per share for the first quarter of
1997, compared to $467,000 or $.22 per share for the same period in 1996. This
earnings improvement resulted primarily from an increase in net interest income
of $168,000 and an increase of $16,000 in non-interest income. The increase in
net interest income was primarily attributable to increased average earning
assets.
This earnings improvement was partially offset by increased non-interest
expenses of $21,000 although the most significant increase in expenses was the
increase of $147,000 in income tax expense. This increase is mainly
attributable to changes in the mix of earning assets (primarily the change
from more favorably tax advantaged investments, including municipal securities,
to other types of securities).
NET INTEREST INCOME
Net interest income is the amount of interest earned on earning assets (loans,
investments and other invested funds-federal funds sold and interest bearing
balances), less the interest expense of interest bearing liabilities (interest
bearing deposit accounts, FHLB advances and other borrowed funds), and is the
principal source of the Bank's earnings. Changes that affect net interest
income are changes in the average rate earned on interest earning assets,
changes in the average rate paid on interest bearing liabilities, and changes
in the volume and mix of interest earning assets and interest bearing
liabilities.
Net interest income for the first quarter of 1997 totaled $1,413,000, compared
to $1,245,000 for the first quarter of 1996.
Average interest bearing liabilities for the first quarter of 1997 totaled
$225,039,000, while average interest earning assets totaled $240,687,000
(compared to $183,599,000 and $199,208,000, respectively for the same period in
1996).
Average interest rate spread for the first quarter of 1997 was 2.03%, compared
to 2.01% for the first quarter of 1996.
The Bank will continue its efforts to maximize net interest income by
management of both interest earning asset and interest bearing liability rates,
to include as previously discussed, the use of derivative financial products.
It is management's ongoing objective to maximize net interest income while
maintaining asset quality. The change in interest rate spreads from 1996 is
primarily due to changes in the mix of earning assts.
11
BANK OF MECKLENBURG AND SUBSIDIARY
PROVISION FOR LOAN LOSSES
Earnings are also affected by the amount provided to the allowance for loan
losses. A $44,000 provision for loan losses was recognized during the first
quarter of 1997, compared to $95,000 during the first quarter of 1996.
At March 31, 1997 the allowance for loan losses stood at 1.01% of total loans,
compared to 1.17% at March 31, 1996. This change in the allowance as a
percentage of total loans is attributable to changes in the mix of loans. At
March 31, 1997 total loans included $16,965,000 of SBA loans which were 100%
guaranteed and $1,429,000 of SBA loans with partial guarantees (these
guarantees average 80%). Also included in total loans at March 31, 1997 were
$7,718,000 of purchased variable rate mortgage loans. In comparison, at
March 31, 1996 the Bank had $4,738,000 of SBA loans with 100% guarantees and
$2,379,000 with partial guarantees. Total loans, less the guaranteed SBA loans
were $105,874,000 at March 31, 1997 and the allowance for loan losses totaled
1.18% of that amount. In comparison, total loans, less guaranteed SBA loans,
equaled $85,293,000 and the allowance for loan losses totaled 1.25% of that
amount at March 31, 1996.
The provision for loan losses represents the charge to earnings needed to
maintain the allowance for loan losses at a level deemed adequate. The
provision for loan losses is determined by factors such as growth in the loan
portfolio, management's evaluation of current economic conditions and their
effect on the loan portfolio, and a continuing evaluation of the loan portfolio
itself.
On an ongoing basis, management evaluates the relative quality of each loan and
assigns a loan grade. This loan grading system assists management in
determining the overall risk in the loan portfolio and factors into the
estimation of the appropriate level of the allowance for loan losses.
Management's analysis of the adequacy of the Bank's allowance for loan losses
(as well as the Bank's loan portfolio) are regularly reviewed by the Bank's
Loan Committee and Board of Directors. The Bank also uses the services of an
independent, outside reviewer to review the loan portfolio on a regular basis.
Management feels that its portfolio is of sound quality and that the allowance
for loan losses is sufficient to absorb any inherent losses that relate to
loans outstanding at March 31, 1997. Management will continue to monitor
economic conditions and will continue to maintain conservative underwriting
standards and a diversified portfolio. Management realizes that economic
conditions affect loan losses and no assurances can be made that further
evaluation of the loan portfolio based on conditions then prevailing may not
require additions to the allowance. In the event that conditions change,
management will assess the impact on the allowance and provision for loan
losses and will make appropriate adjustments if necessary.
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.
ASSET QUALITY
The Bank had no charge offs and recovered $30,000 during the first three months
of 1997. During the first quarter of 1996 there were no charge offs or
recoveries. At March 31, 1997 and 1996 the Bank had no nonperforming assets.
12
BANK OF MECKLENBURG AND SUBSIDIARY
OTHER OPERATING INCOME
Non-interest income from service charges, fees and other miscellaneous income
totaled $42,000 for the first quarter of 1997 compared to $48,000 for the first
quarter of 1996.
The Bank also realized net losses on the sale of AFS securities of $47,000 and
net gains of $125,000 from the sale or mark-to-market of derivatives hedging
AFS securities during the first three months of 1997. The Bank also recognized
gains of $588,000 from sales of trading securities; gains of $51,000 from the
sale of derivatives carried as trading assets; losses of $356,000 from the
mark-to-market of securities carried as trading assets and gains of $27,000
from the mark-to-market of related derivatives. In comparison, the Bank
recognized net gains of $112,000 on the sale of AFS securities and net gains of
$254,000 from the sale or mark-to-market of hedges upon the disposition of the
related asset or liability during the first three months of 1996. The Bank
segregated a group of assets into a trading portfolio as of January 1, 1997.
Assets within the trading account are accounted for at market value and changes
in market value are included in the Bank's income statements. The Bank had no
assets designated as trading assets in 1996.
OTHER OPERATING EXPENSE
Non-interest expenses for the quarter ended March 31, 1997 totaled $888,000
compared to $867,000 for the quarter ended March 31, 1996. The increase in
non-interest expense is primarily attributable to increases in personnel
expense and premises and equipment expense (the result of the acquisition of
the Bank's third office on March 15, 1996). Reductions in other miscellaneous
non-interest expenses helped to offset the additional expenses in these
categories. The Bank also experienced an increase of $147,000 for the first
quarter of 1997 compared to the first quarter of 1996 in its income tax expense.
This increase is primarily due to changes in the mix of earning assets.
Beginning in the second quarter of 1996 the Bank's investment portfolio mix was
changed to include fewer tax advantaged securities (mainly municipal bonds).
These investments typically had lower rates but, at the same time, required a
lower tax provision.
LOANS
Average loans for the first quarter of 1997 totaled $117,161,000, while average
loans for the first quarter of 1996 were $83,036,000. The loan portfolio is
weighted toward real estate loans and various commercial loans.
INVESTMENTS
Investments at March 31, 1997 totaled $135,772,000 while interest bearing
deposits totaled $49,000 compared to $136,444,000 and $1,481,000, respectively
at March 31, 1996. The Bank had no federal funds sold at March 31, 1997, March
31,1996 or December 31, 1996.
Average investments for the first quarter of 1997 totaled $141,685,000,
compared to average investments of $109,715,000 for the same period in 1996.
Average AFS investments for the first quarter of 1997 were $76,601,000, average
HTM investments were $1,000,000 and securities held for trading purposes
averaged $42,102,000. As previously mentioned, the Bank segregated a group of
assets into a trading portfolio as of January 1, 1997. Assets within the
trading account and their corresponding hedges are accounted for at market
value and changes in market value are included in the Bank's income statement.
13
BANK OF MECKLENBURG AND SUBSIDIARY
At March 31, 1997, excluding the effect of off balance sheet derivatives
(hedges), the market value of AFS securities was $348,000 below amortized cost.
As a result, a $230,000 after tax unrealized loss was recorded as a decrease to
stockholders' equity. At the same time, derivatives hedging AFS securities had
a market value of $501,000 above amortized cost. As a result, a $331,000 after
tax unrealized gain was recorded as an increase to shareholders equity.
Included in investments at March 31, 1997 was $4,039,000 FHLB capital stock.
Membership in the FHLB provides an additional liquidity source to the Bank. The
Bank also had $64,000 in equity stock of The Bankers Bank, Atlanta, Georgia. At
March 31, 1997. Both of these equity stocks pay cash dividends quarterly.
DEPOSITS
At March 31, 1997 total deposits equaled $196,160,000 compared to $165,147,000
at March 31, 1996.
Average deposits for the first quarter of 1997 totaled $183,449,000, compared
to $138,700,000 for the first quarter of 1996 and were comprised of the
following:
(dollars in thousands)
1997 1996
---- ----
Non interest bearing deposits $ 11,497 $ 7,947
Time deposits of $100,000 or more 43,783 32,140
Time deposits less than $100,000 65,811 52,750
Savings deposits 1,366 1,532
Money market (MMDA) deposits 4,983 5,089
56,009 39,242
------ ------
Total deposits $183,449 $138,700
-------- --------
OTHER BORROWED FUNDS
Other borrowed funds are comprised primarily of securities sold under agreement
to repurchase and Federal Home Loan Bank advances and are used as a supplement
or as an alternative to other funding sources. Average other borrowed funds for
the first quarter of 1997 totaled $53,086,000 compared to $50,292,000 for the
first quarter of 1996.
At March 31, 1997, the Bank had $46,500,000 in FHLB advances. These advances
are secured by FHLB stock and investment securities as required by the Federal
Home Loan Bank. Two advances (totaling $40,000,000) are variable and mature
during the first quarter of 1998. The $6,500,000 advance is also variable and
repayable daily. This advance was used as an alternative to federal funds
purchased and repaid on April 24, 1997.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The primary objective of the Bank's asset/liability management process is to
maintain adequate liquidity while minimizing interest rate risk. Liquidity is
the ability to meet current and future obligations through liquidation or
maturity of existing assets or the acquisition of additional liabilities.
14
BANK OF MECKLENBURG AND SUBSIDIARY
Bank of Mecklenburg manages both assets and liabilities to achieve appropriate
levels of liquidity. Cash and short term investments are the Bank's primary
sources of asset liquidity. These funds provide a cushion against short-term
fluctuations in cash flows from both deposits and loans. Commercial and
individual deposits are the Bank's primary sources of funds for credit purposes.
The Bank maintains federal funds purchase lines from other depository
institutions for additional liquidity sources, in addition to its Federal Home
Loan Bank membership and borrowing ability with that institution.
Management believes that the Bank's liquidity sources are adequate to meet its
liquidity needs.
Related to liquidity is interest rate sensitivity in that each is affected by
maturities of earning assets and funding sources. Interest rate sensitivity is
a function of the repricing characteristics of the Bank's portfolio of assets
and liabilities-the period of time in which, either at replacement upon
maturity or during the life of the instrument, interest bearing assets and
liabilities are subject to changes in interest rates.
The Bank's results of operations are affected by changes in the interest rate
environment. Since interest earning assets and interest bearing liabilities
have various repricings and maturities, changes in interest rates or yield
curves may result in an increase or decrease in net income.
The Bank strives to manage its asset/liability position to maximize net
interest income while managing interest rate risk and maintaining a stable
deposit base. Management's principal goal in the management of interest rate
sensitivity and interest rate risk is to limit the impact of changes in
interest rates upon the Bank's earnings.
Major portions of the Bank's loan portfolio and securities portfolios are
immediately rate sensitive. Variable rate loans totaled approximately
$67,471,000 or 54.29% of total loans at March 31, 1997 compared to $56,404,000
or .62.65% at March 31, 1996. Variable rate securities with repricing of three
months or less totaled $11,341,000 at March 31, 1997; securities with a
repricing of annually or more frequently (but less frequently than quarterly)
totaled $47,864,000 In comparison, variable rate securities totaled $14,109,000
and $46,304,000 at March 31, 1996.
The Bank's funding sources included liabilities with a repricing frequency or
remaining maturity of three months or less of approximately $113,231,000 at
March 31, 1997 and $104,474,000 at March 31, 1996.
The Bank has determined that the use of off-balance sheet derivative
instruments provides a cost effective way to manage interest rate sensitivity
by modifying the repricing or maturity characteristics of on-balance sheet
assets or liabilities. Interest rate risk is one of the most significant risks
to which financial institutions are exposed. To identify, quantify and manage
this risk, the Bank employs automated simulation (computer) modeling to measure
and manage the effect of fluctuations in interest rates on the value of assets
and liabilities. In addition to the traditional techniques to measure interest
rate risk of modifying the duration and mix of assets and liabilities, the Bank
utilizes interest rate risk protection products to reduce risk. Such products
include interest rate caps, floors and swaps.
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BANK OF MECKLENBURG AND SUBSIDIARY
These financial instruments allow the Bank to acquire longer duration assets
and liabilities bearing otherwise favorable characteristics and adjust their
duration so as to limit the interest rate risk associated with them. Generally,
these instruments consist of a contract between the Bank and a counterparty to
exchange payments of fixed or floating amounts based on the market level of
interest rates. The Bank has established specific parameters for levels of
interest rate risk that management considers acceptable as well as specific
policies for the use, management and monitoring of interest rate products.
Included in these policies are limits directed toward minimizing the Bank's
exposure to fluctuations in interest rates, criteria for the qualifications for
interest rate contract counterparties, limitations on exposures to
counterparties and specific policies for the performance measurement and
oversight of all interest rate instruments.
The Bank's rate risk parameters include limits for both changes in net interest
income and market price under various interest rate shock simulations. While
interest rate shocks of up to four hundred basis points are regularly
performed, efforts are focused on managing potential adverse effects of
interest rate movements up and down of one hundred basis points. The Bank's
policy specifies acceptable levels of risk to be limited to a reduction in net
interest income of five percent and a reduction in net asset value of the
Bank's available-for-sale portfolio of one percent. Counterparty risk
limitations restrict the Bank from entering into any interest rate protection
instrument with a counterparty whose credit rating is less than "A", as rated
by "Dun and Bradstreet" or "Moodys". Individual counterparty exposure is then
limited to a maximum of 40% of the Bank's tangible equity. It is the Bank's
policy to request collateral as deemed necessary to limit counterparty risk.
At March 31, 1997, the Banks off-balance sheet interest rate products included
$25 million notional amount in interest rate floors utilized to protect its
variable rate loan portfolio and $16 million in interest rate swaps on a group
of the Bank's certificates of deposit (time deposits). The Bank also had $40
million in interest rate floors, $60 million in interest rate caps and $10
million in interest rate swaps hedging its AFS portfolio. Included in trading
assets at March 31, 1997 were $26 million in interest rate swaps, $25 million
in interest rate caps and $35 million in interest rate floors.
All the interest rate protection products utilized by the Bank require the
exchange or payment of fixed and/or floating rate interest payments based on
notional amounts. It should be noted that these notional amounts are not at
risk, but are used as a basis on which to calculate the interest rate payments
due between the Bank and its counterparties to these contracts. The interest
rate caps and floors utilized are option contracts on which a premium is paid
at the inception of the contract. These premiums are amortized over the life of
the contract. Any cash flows received from these contracts are recognized in
the accounting period in which they are received as adjustments to the yield of
the asset or liability. As interest rate option contracts bear no performance
risk, the maximum direct cost to the Bank is limited to the option premium. All
cash flows from the interest rate swaps are accounted for in a like manner, as
adjustments to asset yields or liability costs.
The Bank expects to continue the prudent use of interest rate protection
products to actively manage its balance sheet and interest rate risk.
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BANK OF MECKLENBURG AND SUBSIDIARY
CAPITAL RESOURCES
Capital to support the Bank's asset base came exclusively from the sale of
newly issued shares of common stock in 1988 and interest earned on investments
from incorporation in 1988 until the Bank opened for commercial operations on
July 12, 1989. Growth in the Bank's capital base since opening has come from
the retention of earnings and the exercise of the outstanding options relative
to the Bank's non-qualified stock option plan during 1994 and exercises of
options under the Bank's qualified stock option plan beginning in 1995.
The Board of Directors declared a stock split in 1993 and again in 1995. A five
for four split was declared to shareholders of record on May 11, 1993 and
distributed on June 4, 1993. A second five for four split was declared to
shareholders of record on April 18, 1995 and distributed on May 16, 1995.
The Bank had 2,118,945 shares issued and outstanding as of March 31, 1997.
During 1994, the Bank declared its first cash dividend. Dividends have been
paid on a quarterly basis since that time.
In the banking industry, one measure of capital adequacy is total capital
divided by total assets. The Bank's equity to assets ratio at March 31, 1997
stood at 7.12% (excluding the effect of unrealized gains and losses on
available-for-sale securities).
Other important measures of capital adequacy are the capital adequacy
guidelines for regulatory purposes. The capital of the Bank continues to exceed
all current regulatory guidelines. The Bank's regulatory capital ratios at
quarter end were:
o Total Capital to risk weighted assets 16.85%
Minimum required for Regulatory capital purposes-8.00%
Minimum required by Regulators to be well capitalized-10.00%
o Tier one capital to risk weighted assets 15.79%
Minimum required for Regulatory capital purposes-4.00%
Minimum required by Regulators to be well capitalized-6.00%
o Tier one capital to average assets 7.21%
Minimum required for Regulatory capital purposes-4.00%
Minimum required by Regulators to be well capitalized-5.00%
Management is not aware of any recommendations by regulatory authorities which,
if they were to be implemented, would have a material impact on the Bank.
EFFECTS OF INFLATION
The major portion of the Bank's assets and liabilities are monetary in nature.
As a result of this distinctly different asset and liability structure, the
Bank's performance may be more significantly influenced by changes in interest
rates than by inflation. Although inflation has a lesser impact on a bank's
performance, operating expenses may be affected in that personnel costs, supply
costs and the expenses of outside service providers increase during periods of
inflation. Also, inflation will affect the level of interest rates prevailing at
any one time.
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BANK OF MECKLENBURG AND SUBSIDIARY
SIGNATURES
Under the requirements of the Securities and Exchange Act of 1934, the Bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized:
BANK OF MECKLENBURG
By:_____________________________________ Date:________________
John H. Ketner, Jr.
President & CEO
By:_____________________________________ Date:________________
Jean R. Galloway
Vice President & CFO
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