UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
__X__ ANNUAL REPORT UNDER Section 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
_____ TRANSITION REPORT Pursuant to Section 13 or 15(d) of THE SECURITIES
EXCHANGE ACT of 1934
Commission File Number 0-21346
TRIANGLE BANCORP, INC.
(Exact Name of Registrant as specified in its Charter)
NORTH CAROLINA 56-1764546
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
4300 Glenwood Avenue
Raleigh, North Carolina 27612
(Address of principal executive offices) (Zip Code)
(919) 881-0455
(Registrant's Telephone Number Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock - No Par Value
(Title of Class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES __X__ NO _____
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-K contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 28, 1998, based upon the closing sales price of
the Common Stock ($31.88) on March 11, 1998, was approximately $357,158,335.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 6, 1998, 13,080,761 shares of no par value common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive Proxy Statement for the 1998 Annual Shareholders Meeting
(the "Proxy Statement") is incorporated by reference into Part III hereof.
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PART I
ITEM 1. Description of Business
General
Triangle Bancorp, Inc. (the "Corporation") was incorporated under the laws
of North Carolina on November 27, 1991 for the purpose of becoming a one-bank
holding company. The Corporation acquired Triangle Bank ("Triangle Bank") in
August 1992 as part of the reorganization of Triangle Bank into a one-bank
holding company structure. Pursuant to the reorganization, the former
shareholders of Triangle Bank became shareholders of the Corporation. On October
2, 1997, the Corporation acquired Bank of Mecklenburg, Charlotte, North Carolina
("Mecklenburg"), as a wholly-owned subsidiary, and became a multi-bank holding
company. Triangle Bank and Mecklenburg are referred to herein collectively as
the "Banks". On October 31, 1997, the Corporation acquired Coastal Leasing LLC,
Greenville, North Carolina ("Coastal Leasing"). To date, the Corporation has not
engaged in any material activities other than its ownership and management of
the Banks and Coastal Leasing and the issuance of trust preferred securities in
June 1997.
As a bank holding company, the Corporation's primary business is that of
owning the capital stock of the Banks and Coastal Leasing and promoting the
general development of its business. At December 31, 1997, the Corporation had
consolidated assets of approximately $1.6 billion and was the eighth largest
banking organization headquartered in North Carolina.
Recent and Pending Acquisitions
In June 1997, the Corporation sold two offices, both located in Sanford,
North Carolina, including $21 million in deposits and $11 million in loans and
fixed assets.
On August 15, 1997, Triangle Bank acquired two branch offices from Branch
Banking and Trust Company and eight branch offices from United Carolina Bank,
all of which were divested in connection with the merger of those two companies.
The ten branches are located in eastern and south-central North Carolina. In the
branch acquisition, Triangle Bank assumed approximately $195 million in deposits
and approximately $61 million in aggregate principal amount in loans associated
with the ten branches. The branch acquisition was accounted for as a purchase
and therefore the operations of these branches are reflected in the
Corporation's financial statements from the date of purchase.
On October 2, 1997, Triangle acquired Mecklenburg, with $270 million in
assets, as a wholly-owned subsidiary. Mecklenburg operates three branches in
Charlotte, North Carolina. The Mecklenburg acquisition was accounted for under
the pooling-of-interests method of accounting.
On October 31, 1997, Triangle acquired Coastal Leasing, with $13 million in
assets, as a wholly-owned subsidiary. Coastal Leasing is a business equipment
leasing company headquartered in Greenville, North Carolina. The Coastal Leasing
acquisition was accounted for under the pooling-of-interests method of
accounting.
As both the Mecklenburg and Coastal Leasing acquisitions were accounted for
using the pooling-of-interests method of accounting, all historical information
has been restated to reflect Mecklenburg; however, based on materiality, Coastal
has been pooled for 1997 only. As a result, the Corporation's total assets and
net
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income as of and for the year ended December 31, 1996, have been restated from
$971 million to $1.2 billion and from $11.3 million to $13.2 million,
respectively.
On October 16, 1997, the Corporation entered into an agreement to acquire
Guaranty State Bancorp ("Guaranty State") and its commercial bank subsidiary,
Guaranty State Bank, both located in Durham, North Carolina. As of December 31,
1997, Guaranty had approximately $107 million in total assets, $72 million in
loans, $92 million in deposits, and $11 million in shareholders' equity.
Guaranty State Bank has five branches in Durham, North Carolina, four of which
are expected to become branches of Triangle Bank. The transaction will be
accounted for under the pooling-of-interests method of accounting. All
regulatory approvals have been received, and the Guaranty State shareholders are
to meet on March 30, 1998 to vote on the proposed acquisition. The transaction
is expected to be consummated in April 1998.
On March 4, 1998, Triangle entered into an agreement to acquire United
Federal Savings Bank, Rocky Mount, North Carolina ("United Federal"), a
federally-chartered savings bank whose deposits are insured by the Savings
Association Insurance Fund of the FDIC. At December 31, 1997, United Federal had
total assets of $304 million, total deposits of $266 million, and shareholders'
equity of $22 million. United Federal operates 13 branches in the North Carolina
communities of Rocky Mount, Cary, Greenville, Morehead City, New Bern, Pinetops,
Raleigh, Spring Hope, Tarboro, Warrenton and Wilson and two mortgage origination
offices located in Charlotte and Wilmington. United Federal will be merged into
Triangle Bank. The United Federal acquisition will be accounted for under the
pooling-of-interests method of accounting, and is subject to the approval of
United Federal's shareholders and all applicable regulatory agencies. The United
Federal acquisition is expected to be consummated in the third quarter of 1998.
In addition, it is anticipated that the Corporation will continue to
investigate and hold discussions and negotiations in connection with possible
acquisitions of, or combinations with, other banks and financial service
entities. As of the date hereof, the Corporation has not entered into any
agreements or understandings with respect to any such transactions other than
the proposed acquisitions of Guaranty State and United Federal.
Trust Securities Issuance
In May 1997, the Corporation caused a Delaware statutory business trust
subsidiary to be created which issued trust preferred securities in the amount
of $19.33 million to eight qualified institutional buyers, and $619,000 in trust
common securities to the Corporation (collectively, the "Trust Securities"),
both sales occurring on June 3, 1997. The Trust Securities have a maturity of 30
years, pay dividends at the rate of 9.375% and may be treated as tier 1 capital
by the Corporation. To fund the trust, the Corporation sold to the trust $19.95
million of junior subordinated notes with a yield and maturity identical to the
Trust Securities. Holders of the Trust Securities are entitled to receive
preferential cumulative cash distributions accumulating from the date of
original issuance and payable semi-annually in arrears on the first day of June
and December of each year, commencing December 1, 1997, at an annual rate equal
to 9.375%. The distribution rate and distribution payment dates of the Trust
Securities correspond to the interest rate and interest payment dates of the
junior subordinated debentures, which are the sole assets of the trust. The
Corporation, through various agreements, has irrevocably and unconditionally
guaranteed all of the trust's obligations under the Trust Securities regarding
the payment of distributions and payment on liquidation or redemption of the
Trust Securities, but only to the extent of funds held by the trust. The Trust
Securities are subject to mandatory redemption in whole, but not in part, upon
repayment of the junior subordinated debentures at their stated maturity or upon
their early redemption. The junior subordinated debentures may be redeemed prior
to their stated maturity upon the occurrence of certain events or at the option
of the Corporation on or after June 1, 2007. The Corporation caused the Trust
Securities to be issued because they are a relatively inexpensive form of
regulatory capital for the Corporation. The sale of the Trust Securities was
effected in a transaction exempt from the registration
3
requirements of the Securities Act of 1933. In November 1997, the trust
preferred securities sold to institutional buyers were registered under the
Securities Act of 1933 and an exchange offer conducted whereby all but $1.0
million of such trust preferred securities were exchanged for registered
securities.
Business of the Corporation
Banking. The Corporation's largest subsidiary is Triangle Bank. Triangle
Bank, headquartered in Raleigh, North Carolina, and Mecklenburg, headquartered
in Charlotte, North Carolina, are both chartered as state banks under the laws
of the State of North Carolina and are members of the Federal Reserve System
(the "Federal Reserve"). Deposit insurance is provided by the Bank Insurance
Fund ("BIF") of the FDIC. The sole business of the Banks is to provide banking
services to businesses and individuals in the communities they serve through 56
branches of Triangle Bank in eastern and south-central North Carolina and three
branches of Mecklenburg in Charlotte, North Carolina. The Banks primarily serve
small and medium-sized businesses as well as consumers within their markets.
Triangle Bank began business on January 4, 1988. On June 30, 1991,
Enterprise Bancorp, Inc., a North Carolina bank holding company, and its
wholly-owned subsidiary, Enterprise Bank, National Association, merged into
Triangle Bank, adding approximately $34 million in assets to Triangle Bank. On
December 28, 1993, New East Bancorp, a North Carolina holding company, and its
wholly-owned subsidiaries, New East Bank of the Albemarle, New East Bank of the
Cape Fear, New East Bank of Goldsboro, New East Bank of Greenville and New East
Bank of New Bern, merged into Triangle Bank, adding approximately $131 million
in assets to the Bank. Triangle Bank merged with Columbus National Bank,
Standard Bank and Trust, Unity Bank and Trust Co. and The Village Bank as well
as acquiring three branch offices from NationsBank during 1995, adding
approximately $409 million in assets. Triangle Bank's wholly owned subsidiary,
Unity Financial Services (acquired through Unity Bank and Trust Co. merger),
changed its name to Triangle Investment Services in October 1995. This
subsidiary provides brokerage services. Triangle Bank merged with Granville
United Bank in October 1996, acquired four branches from First Union in January
1996 and completed a branch swap transaction in May 1996. In 1997, Triangle Bank
sold two branches in Sanford, North Carolina and acquired 10 branches as a
result of the UCB/BB&T merger adding a net of $174 million in deposits and $50
million in loans.
Mecklenburg began business on July 12, 1989 with one office in Charlotte.
Mecklenburg opened a second office in Charlotte in 1991, and purchased a third
office, with $28 million in deposits, in March 1996 from Essex Savings Bank.
Banking Services. The Banks offer a wide range of banking services,
including acceptance of deposits, checking services, debit cards, 24-hour phone
access to account information, commercial and consumer loans, mortgages, real
estate development and construction loans, safe deposit boxes, and credit cards.
The Banks offer their customers fully-automated, 24-hour teller machines
("ATMs"). This service is provided by ATM machines at selected branch locations
and by giving the Banks' customers access to the ATM network of the Cirrus
system and the HONOR system, which operate ATMs in many states.
Deposits. The Banks offer a variety of deposit accounts, including savings,
checking and time deposits of various types ranging from daily "money market"
accounts to longer-term certificates of deposit. Retirement accounts, such as
Individual Retirement Accounts, are also offered. The Banks seek to maintain
stability in their deposits by establishing direct relationships with their
depositors. Therefore, the Banks do not accepted brokered deposits. At December
31, 1997, Triangle Bank and Mecklenburg had deposits of approximately $1 billion
and $195 million, respectively.
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Lending Activities. The Banks offer a wide range of consumer, commercial,
real estate development, construction, and mortgage loans to small to
medium-sized businesses and to individuals. Loans are generally secured by real
property, equipment, inventory, accounts receivable, or other assets. In
addition, the Banks often obtain personal guarantees from the owners of the
businesses to which loans are extended. The Banks' lending policies are
established and periodically reviewed by their Boards of Directors. Loan
policies are also subject to the regulations of federal and state bank
regulators.
Real estate loans constituted the largest portion of the Banks' loans. Real
estate loans include both loans to businesses to finance or refinance real
estate used for the business and loans to individuals for residential real
estate. Commercial loans include credit lines for working capital, short-term
seasonal, or inventory financing as well as longer term loans. The Banks also
offer residential real estate, construction, and land development loans to
developers and builders. Finally, the Banks offer consumer loans to individuals.
Consumer loans constitute the least significant portion of the Banks' loan
portfolios.
Real estate development and construction loans accounted for approximately
8% of the Banks' loans at December 31, 1997. In addition, when loans that are
substantially secured by real estate are taken into account, loans secured in
full or in part by real estate constituted approximately 68% of the outstanding
loans at December 31, 1997. The Banks closely monitor their loan portfolios and
believe their current loan loss reserves adequately reflect problem loans that
have been identified to date.
Leasing. The Corporation conducts leasing activities through its
wholly-owned subsidiary, Coastal Leasing. Coastal Leasing is headquartered in
Greenville, North Carolina and operates four offices in addition to its
Greenville office. At December 31, 1997, Coastal Leasing had approximately $14
million in total assets, $13 million in leases, and $3 million in shareholders'
equity. Coastal Leasing began business in 1971 in Greenville, North Carolina,
opening its other offices in eastern North Carolina and tidewater Virginia over
the years as its business grew. Coastal engages in business equipment leasing.
Coastal's leasing activities complement the financing activities of the Banks
and provide alternatives to small business customers of the Banks.
Investments. The Corporation and its subsidiaries seek to maintain
liquidity by maintaining investments in liquid securities. Currently,
investments include primarily collateralized mortgage obligations, United States
Treasury obligations and federal agency and municipal securities. At December
31, 1997, the average maturity of the Corporation's available for sale and held
to maturity investment portfolios were approximately 122 and 75 months,
respectively.
Competition. Commercial banking in North Carolina is extremely competitive,
due in large part to statewide branching. Currently, many of the Corporation's
banking competitors are significantly larger and have greater resources than the
Corporation. The Corporation continues to encounter significant competition from
a number of sources, including bank holding companies, commercial banks, thrift
and savings and loan institutions, credit unions, and other financial
institutions and financial intermediaries. Among commercial banks, Triangle Bank
and Mecklenburg compete in their market areas with some of the largest banking
organizations in the state, several of which have as many as 200 to 300 branches
in North Carolina and many billions in assets. The Banks also compete for
interest-bearing funds with a number of investment alternatives, including
brokerage firms, "money-market" mutual funds, insurance companies, government
and corporate bonds, and other securities. Competition with the Banks are not
limited to financial institutions based in North Carolina. The enactment of
federal legislation authorizing nationwide interstate banking has greatly
increased the size and financial resources of some of the Banks' competitors.
Consequently, many of the Banks' competitors have substantially higher lending
limits due to their greater total capitalization, and many perform functions for
their customers, such as trust services that the Banks do not offer. As a result
of the interstate
5
banking legislation, the Banks' markets are open to future penetration by banks
located in other states thereby increasing competition.
The management of the Corporation believes banks compete in the following
areas: convenience of location, interest rates for deposits and loans, types of
accounts and services offered, and quality of the personnel providing services.
The Banks endeavor to provide quality service by operating centrally-located
branches, staffed with experienced bank personnel. The Banks offer a variety of
accounts and loans comparable to those offered by other banks. The Banks also
rely on the personal contacts of its officers and directors to attract
depositors and borrowers in its target market of small to medium-sized
businesses.
Employees. At December 31, 1997, the Corporation's subsidiaries employed
436 full-time employees and 162 part-time employees. None of its employees are
covered by a collective bargaining agreement. The Corporation believes its
subsidiaries' relationships with their employees to be good.
Triangle Bank and Mecklenburg each has a 401(k) plan for substantially all
of their respective employees. The Corporation has a qualified incentive stock
option plan for key officers and employees of the Corporation and its
subsidiaries, and a non-qualified stock option plan for directors and certain
officers of the Corporation and its subsidiaries. The Corporation also has an
employee stock purchase plan which allows employees to purchase the
Corporation's stock at a 15% discount from the stock's fair market value through
payroll deductions. The Corporation also has change of control agreements and
employment agreements that contain "change of control" provisions with certain
officers that would benefit such officers in the event of a change of control of
the Corporation and its subsidiaries.
Properties
The Corporation's executive offices are located at 4300 Glenwood Avenue,
Raleigh, North Carolina. The Corporation owns the four-story, 27,000 square foot
building which was purchased and renovated by the Corporation in 1996. The
executive office building also serves as the headquarters of Triangle Bank and
houses a branch of Triangle Bank. Triangle Bank operates 56 branch locations of
which 23 are either leased buildings or property on which Triangle Bank has
branch offices. Mecklenburg's headquarters office is located at 2000 Randolph
Road, Charlotte, North Carolina, which building is a two-story, 10,000 square
foot building owned by Mecklenburg. Mecklenburg operates two other branches in
Charlotte, both of which are owned by Mecklenburg. Coastal is headquartered at
2820 East Tenth Street, Greenville, North Carolina, in a one-story, 5,000 square
foot building. Coastal leases all of its offices. In addition, the Corporation
owns two buildings, with an aggregate of approximately 28,000 square feet, which
house its operations center in Selma, North Carolina. The Corporation believes
its facilities and those of its subsidiaries are adequate for their business
needs.
Governmental Regulation
General. Holding companies, banks and many of their nonbank affiliates are
extensively regulated under both federal and state law. The following is a brief
summary of certain statutes, rules and regulations affecting the Corporation and
the Banks. This summary is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to the Corporation's business. Supervision, regulation and
examination of the Corporation and the Banks by the bank regulatory agencies are
intended primarily for the protection of the Banks' depositors rather than
holders of the common stock of the Corporation.
In 1994, Congress adopted legislation which permits adequately capitalized
and managed bank holding companies to acquire control of a bank in any state
(the "Interstate Banking Law"). Existing state laws
6
setting minimum age restrictions on target banks can be retained, so long as the
age requirement does not exceed five years. Acquisitions will be subject to
anti-trust provisions that cap at 10% the portion of the United States' bank
deposits a single bank holding company may control, and cap at 30% the portion
of a state's deposits a single bank holding company may control. States have the
authority to waive the 30% cap.
Under the Interstate Banking Law, beginning on June 1, 1997, banks have
been permitted to merge with one another across state lines, subject to
concentration, capital and Community Reinvestment Act requirements and
regulatory approval. Only Texas and Montanta have opted out of interstate
branching through legislation. A state can also choose to permit out-of-state
banks to open new branches within its borders. In addition, if a state chooses
to allow interstate acquisition of branches, then an out-of-state bank also may
acquire branches by merger.
Interstate branches that primarily siphon off deposits without servicing a
community's credit needs will be prohibited. If loans are less than 50% of the
average of all institutions in the state, the branch will be reviewed to see if
it is meeting community credit needs. If it is not, the branch may be closed and
the bank may be restricted from opening a new branch in the state.
Holding Company Regulation
General. The Corporation is a holding company registered with the Federal
Reserve under the Bank Holding Company Act (the "BHC Act"). As such, the
Corporation and its subsidiaries are subject to the supervision, examination and
reporting requirements contained in the BHC Act and the regulation of the
Federal Reserve. The BHC Act requires that a bank holding company obtain the
prior approval of the Federal Reserve before (i) acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, (ii)
taking any action that causes a bank to become a subsidiary of the bank holding
company, (iii) acquiring all or substantially all of the assets of any bank, or
(iv) merging or consolidating with any other bank holding company.
The BHC Act generally prohibits a bank holding company, with certain
exceptions, from engaging in activities other than banking, or managing or
controlling banks or other permissible subsidiaries, and from acquiring or
retaining direct or indirect control of any company engaged in any activities
other than those activities determined by the Federal Reserve to be closely
related to banking, or managing or controlling banks, as to be a proper incident
thereto. In determining whether a particular activity is permissible, the
Federal Reserve must consider whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. For
example, factoring accounts receivable, acquiring or servicing loans, leasing
personal property, conducting discount securities brokerage activities,
performing certain data processing services, acting as agent or broker in
selling credit life insurance and certain other types of insurance underwriting
activities have all been determined by regulations of the Federal Reserve to be
permissible activities of bank holding companies. Pursuant to delegated
authority, the Federal Reserve Bank of Richmond has authority to approve certain
activities of holding companies within its district, including the Corporation,
provided the nature of the activity has been approved by the Federal Reserve.
Despite prior approval, the Federal Reserve has the power to order a holding
company or its subsidiaries to terminate any activity or to terminate its
ownership or control of any subsidiary when it has reasonable cause to believe
that continuation of such activity or such ownership or control constitutes a
serious risk to the financial safety, soundness or stability of any bank
subsidiary of that bank holding company.
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Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Reserve on any extensions of credit to the
bank holding company or any of its subsidiaries, investments in the stock or
securities thereof and the acceptance of such stock or securities as collateral
for loans to any borrower. A bank holding company and its subsidiaries are also
prevented from engaging in certain tie-in arrangements in connection with any
extension of credit, lease or sale of property or furnishing of services.
The Federal Reserve may issue cease and desist orders against bank holding
companies and non-bank subsidiaries to stop actions believed to present a
serious threat to a subsidiary bank. The Federal Reserve also regulates certain
debt obligations, changes in control of bank holding companies and capital
requirements.
Under the provisions of the North Carolina law, the Holding Company is
registered with and subject to supervision by the North Carolina Commissioner of
Banks (the "Commissioner").
Capital Requirements. The Federal Reserve has established risk-based
capital guidelines for bank holding companies and state member banks based on
the capital framework for international banking organizations developed by the
Basle Committee on Banking Regulations and Supervisory Practices. The minimum
standard for the ratio of capital to risk-weighted assets (including certain off
balance sheet obligations, such as standby letters of credit) is 8%. At least
half of this capital must consist of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items ("Tier
I capital"). The remainder ("Tier 2 capital") may consist of a limited amount of
other preferred stock, subordinated debt and a limited amount of loan loss
reserves.
The Federal Reserve also has adopted a minimum (leverage) ratio of Tier 1
capital to total assets of 4%. The 4% Tier 1 capital to total assets ratio
constitutes the leverage standard for bank holding companies and state member
banks, and will be used in conjunction with the risk-based ratio in determining
the overall capital adequacy of banking organizations. In proposing such
standards, the Federal Reserve emphasized that in all cases the suggested
standards are supervisory minimums and that an institution would be permitted to
maintain such minimum levels of capital only if it were a strong banking
organization, rated composite one under the CAMEL rating system for banks or the
BOPEC rating system for bank holding companies. The Federal Reserve noted that
most expansion-oriented banking organizations have maintained leverage capital
ratios of between 4% and 5% of total assets, and it is likely that these ratios
will be applied to the Corporation. At December 31, 1997, the Corporation had
not been advised by the Federal Reserve of a minimum leverage capital ratio
requirement specifically applicable to it.
As of December 31, 1997 the Corporation had Tier I risk-adjusted, total
regulatory capital and leverage capital of approximately 10.98%, 12.24% and
7.55%, respectively, all in excess of the minimum requirements.
Bank Regulation
The Banks are subject to numerous state and federal statutes and
regulations that affect their business, activities, and operations, and are
supervised and examined by the Commissioner and the Federal Reserve. The Federal
Reserve and the Commissioner regularly examine the operations of banks over
which they exercise jurisdiction. They have the authority to approve or
disapprove the establishment of branches, mergers, consolidations, and other
similar corporate actions, and to prevent the continuance or development of
unsafe or unsound banking practices and other violations of law. The Federal
Reserve and the Commissioner regulate and monitor all areas of the operations of
banks and their subsidiaries, including loans, mortgages, issuances of
securities, capital adequacy, loss reserves, and compliance with the CRA and
other laws and regulations.
8
Interest and certain other charges collected and contracted for by the banks are
also subject to state usury laws and certain federal laws concerning interest
rates.
The vast majority of the deposit accounts of the Banks are insured by the
BIF of the FDIC up to a maximum of $100,000 per insured depositor. Currently,
approximately $32 million of Mecklenburg's deposits are insured by the Savings
Association Insurance Fund ("SAIF") of the FDIC as those deposits were acquired
by Mecklenburg from a SAIF-insured savings bank. The FDIC issues regulations and
conducts periodic examinations, requires the filing of reports, and generally
supervises the operations of its insured banks. This supervision and regulation
is intended primarily for the protection of depositors. Any insured bank that is
not operated in accordance with or does not conform to FDIC regulations,
policies, and directives may be sanctioned for noncompliance. Civil and criminal
proceedings may be instituted against any insured bank or any director, officer,
or employee of such bank for the violation of applicable laws and regulations,
breaches of fiduciary duties, or engaging in any unsafe or unsound practice. The
FDIC has the authority to terminate insurance of accounts pursuant to procedures
established for that purpose.
Although the Corporation is not subject to any direct legal or regulatory
restrictions on dividends (other than the requirements under the North Carolina
corporation laws that a distribution may not be made if after giving it effect
the corporation would not be able to pay its debts as they become due in the
usual course of business or the corporation's total assets would be less than
its liabilities), the Corporation's ability to pay cash dividends is dependent
upon the amount of dividends paid by its subsidiaries. The ability of the Banks
to pay dividends to the Corporation is subject to statutory and regulatory
restrictions on the payment of cash dividends, including the requirement under
the North Carolina banking laws that cash dividends be paid only out of
undivided profits and only if the bank has surplus of a specified level. Federal
bank regulatory agencies also have the general authority to limit the dividends
paid by insured banks and bank holding companies if such payment is deemed to
constitute an unsafe and unsound practice.
Like the Corporation, the Banks are required by federal regulations to
maintain certain minimum capital levels. The levels required of the Banks are
the same as required for the Corporation. At December 31, 1997, Triangle Bank
had Tier I risk-adjusted, total regulatory capital and leverage capital of
approximately 9.51%,10.76% and 6.70%, respectively, all in excess of the minimum
requirements. Similarly, Mecklenburg had Tier I risk-adjusted, total regulatory
capital and leverage capital of approximately 13.93%, 15.05% and 7.32%,
respectively, all in excess of the minimum requirements.
The Banks are subject to insurance assessments imposed by the FDIC.
Effective January 1, 1997, the FDIC adopted a risk-based assessment schedule
providing for annual assessment rates ranging from 0% to .27% of an
institution's average assessment base, applicable to institutions insured by
both the BIF and the SAIF. The actual assessment to be paid by each insured
institution is based on the institution's assessment risk classification, which
is based on whether the institution is considered "well capitalized",
"adequately capitalized" or "under capitalized", as such terms are defined in
the applicable federal regulations, and whether the institution is considered by
its supervisory agency to be financially sound or to have supervisory concerns.
The FDIC also is authorized to impose one or more special assessments in any
amount deemed necessary to enable repayment of amounts borrowed by the FDIC from
the United States Treasury Department and, beginning in 1997, all banks pay
additional annual assessments at the rate of .013% of their average assessment
base. Effective January 1, 1999, there is proposed to be a merger of the SAIF
and the BIF insurance funds of the FDIC. One of the principal issues is the
amount of additional funds needed to recapitalize the SAIF prior to the merger.
In September 1996, a one-time special assessment was levied on SAIF-insured
deposits (including such deposits held by commercial banks) at the rate of .657%
on all SAIF-insured deposits held as of March 31, 1995; however, Mecklenburg was
not assessed the special assessment on its SAIF-insured deposits due to a
regulatory exemption obtained by Essex Savings Bank, FSB from whom Mecklenburg
obtained the deposits.
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The deposits of United Federal, proposed to be acquired by Triangle Bank, also
are insured by the SAIF and, after the acquisition, Triangle Bank will have both
BIF and SAIF-insured deposits. It cannot be predicted as to whether any further
assessments will be made on BIF-insured banks. In November 1997, the FDIC's
Board of Directors voted to maintain premium rates at their current level
through the first half of 1998.
Banks are subject to the Community Reinvestment Act of 1977 ("CRA"). Under
the CRA, the appropriate federal bank regulatory agency is required, in
connection with its examination of a bank, to assess such bank's record in
meeting the credit needs of the community served by that bank, including low and
moderate-income neighborhoods. The regulatory agency's assessment of the bank's
record is made available to the public. Further, such assessment is required of
any bank which has applied to (i) charter a national bank, (ii) obtain deposit
insurance coverage for a newly chartered institution, (iii) establish a new
branch office that will accept deposits, (iv) relocate an office, or (v) merge
or consolidate with, or acquire the assets or assume the liabilities of, a
federally regulated financial institution. In the case of a bank holding company
applying for approval to acquire a bank or other bank holding company, the
Federal Reserve will assess the record of each subsidiary bank of the applicant
bank holding company, and such records may be the basis for denying the
application.
Monetary Policy and Economic Controls
The Corporation and the Banks are directly affected by government policy
and by regulatory measures affecting the banking industry in general. Of primary
importance is the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board"), whose actions directly affect the money supply and, in general,
affect banks' lending abilities by increasing or decreasing the cost and
availability of funds to banks. The Federal Reserve Board regulates the
availability of bank credit in order to combat recession and curb inflationary
pressures in the economy by open market operations in United States government
securities, changes in the discount rate on member bank borrowings, changes in
reserve requirements against bank deposits, and limitations on interest rates
that banks may pay on time and savings deposits.
Deregulation of interest rates paid by banks on deposits and the types of
deposits that may be offered by banks have eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates have generally increased banks' cost of funds and made them more
sensitive to fluctuations in money market rates. In view of the changing
conditions in the national economy and money markets, as well as the effect of
actions by monetary and fiscal authorities, no prediction can be made as to
possible future changes in interest rates, deposit levels, loan demand, or the
business and earnings of the Banks or the Corporation. As a result, banks,
including the Banks, are facing a significant challenge to maintain acceptable
net interest margins.
Guide 3 Disclosures
The following schedule is provided as an index to the disclosure
requirements under Guide 3 of the Guides for the Preparation and Filing of
Reports and Registration Statements under the Securities Exchange Act of 1934.
10
Index to Reference to
Guide 3 Form 10-K Page
Disclosures Table Number
I. Distribution of Assets, Liabilities and Shareholders' Equity interest rates
and interest differential
(A) Average Balance Sheets 1 12
(B) Net Income Analysis 1 12
(C) Net Interest Income and Volume/Rate Variance 2 13
II. Securities Portfolio
(A) Book Value of Securities 4 21
(B) Securities by Maturities 4 19
(C) This item is not applicable since no items exist that related to this
disclosure
III. Loan Portfolio
(A) Types of Loans 3 14
(B) Maturities and Sensitivity of Loans to Changes in Interest Rates 3 15
Risk Elements 3 17
(C) Management's policy is to discontinue the accrual of interest and reverse
unpaid interest when management deems that collection of additional
interest is doubtful.
(D) This item is not applicable since no items existed from inception through
December 31, 1997 that related to the disclosure of this item.
IV. Summary of Loan Loss Experience
(A) Analysis of Allowance for Loan Losses 3 16
(B) Allocation of the Allowance for Loan Losses 3 17
V. Deposits
(A) Average Deposits and Rates paid 1 12
(B) Items B, C and E are not applicable
(C) Outstanding balances and maturities of certificates of deposits in amounts of
$100,00 or more as of December 31, 1997 5 22
VI. Return on Equity and Assets 7 24
VII. Short-Term Borrowings 6 23
VIII. Interest Sensitivity Table 8 25
11
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP INC. Table 1
INTEREST INCOME AND AVERAGE BALANCES
(In thousands)
1997 1996
----------------------------------- -----------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Yield/Rate Balance Expense Yield/Rate
----------------------------------- -----------------------------------
Interest Earning Assets:
Taxable investment securities and
interest bearing due from banks $ 216,599 $ 13,152 6.07% $ 237,381 $ 14,341 6.04%
Non-taxable investment securities
and interest bearing due from banks* 192,327 13,070 6.80% 134,766 9,038 6.71%
Federal funds sold and securities purchased
with agreements to resell 602 33 5.48% 2,494 127 5.09%
Gross Loans** 873,055 82,153 9.41% 718,206 67,633 9.42%
Allowance for loan losses (12,427) -- 0.00% (10,343) -- 0.00%
---------------------------------- ----------------------------------
Total Interest Earning Assets 1,270,156 108,408 8.54% 1,082,504 91,139 8.42%
---------------------------------- ----------------------------------
Noninterest Earning Assets
Cash and Due From Banks 38,666 37,020
Premises and Equipment, Net 28,221 24,041
Interest Receivable and Other 39,811 31,069
Unrealized gain (loss) on
securities available for sale 34 (364)
---------- ----------
Total Noninterest Earning Assets 106,732 91,766
---------- ----------
Total Average Assets $1,376,888 $1,174,270
========== ==========
Interest Bearing Liabilities:
Demand deposits $ 167,018 $ 3,836 2.30% $ 135,592 $ 3,209 2.37%
Money market and savings deposits 195,704 7,605 3.89% 168,376 5,770 3.43%
Time deposits 591,128 33,373 5.65% 524,220 30,003 5.72%
Borrowed Funds 138,273 8,148 5.89% 98,467 5,345 5.43%
---------------------------------- ----------------------------------
Total Interest Bearing Liabilities 1,092,123 52,962 4.85% 926,655 44,327 4.78%
---------------------------------- ----------------------------------
Noninterest Bearing Liabilities:
Demand deposits 153,169 134,571
Interest payable and other 17,287 12,616
---------- ----------
Total Noninterest Bearing Liabilities 170,456 147,187
---------- ----------
Total Liabilities 1,262,579 1,073,842
Shareholders' Equity 114,309 100,428
---------- ----------
Total Liabilities and
Shareholders' Equity $1,376,888 $1,174,270
========== ==========
Interest Rate Spread 3.69% 3.64%
==== ====
Taxable Equivalent Net Interest Income and
Net Yield on Interest Earning Assets $55,446 4.37% $ 46,812 4.32%
=================== ====================
1995
-----------------------------------
Interest
Average Income/ Average
Balance Expense Yield/Rate
-----------------------------------
Interest Earning Assets:
Taxable investment securities and
interest bearing due from banks $ 247,679 $ 15,470 6.25%
Non-taxable investment securities
and interest bearing due from banks* 24,872 2,083 8.37%
Federal funds sold and securities purchased
with agreements to resell 9,165 525 5.73%
Gross Loans 588,645 56,497 9.60%
Allowance for loan losses (9,509) - 0.00%
-----------------------------------
Total Interest Earning Assets 860,852 74,575 8.66%
-----------------------------------
Noninterest Earning Assets
Cash and Due From Banks 34,314
Premises and Equipment, Net 17,995
Interest Receivable and Other 28,966
Unrealized gain (loss) on
securities available for sale (1,721)
---------
Total Noninterest Earning Assets 79,554
---------
Total Average Assets $ 940,406
=========
Interest Bearing Liabilities:
Demand deposits $ 117,732 $ 3,190 2.71%
Money market and savings deposits 135,055 4,556 3.37%
Time deposits 416,142 23,542 5.66%
Borrowed Funds 50,811 2,981 5.87%
----------------------------------
Total Interest Bearing Liabilities 719,740 34,269 4.76%
----------------------------------
Noninterest Bearing Liabilities:
Demand deposits 119,170
Interest payable and other 11,466
---------
Total Noninterest Bearing Liabilities 130,636
---------
Total Liabilities 850,376
Shareholders' Equity 90,030
---------
Total Liabilities and
Shareholders' Equity $ 940,406
=========
Interest Rate Spread 3.90%
====
Taxable Equivalent Net Interest Income and
Net Yield on Interest Earning Assets $ 40,306 4.68%
=====================
* Tax equivalent adjustment of $1,860, $1,180, and $851 made in 1997, 1996
and 1995, respectively.
The effective tax rates used were 36% for federally tax exempt amounts and 7.75%
for state tax exempt amounts.
** Includes nonaccrual loans and loans held for sale.
- --------------------------------------------------------------------------------
12
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP INC. Table 2
RATE/VOLUME VARIANCE ANALYSIS
(In thousands)
1997 compared to 1996 1996 compared to 1995
Interest Interest
Income Income
Expense Volume Rate Expense Volume Rate
Variance Variance Variance Variance Variance Variance
------------------------------------- -------------------------------------
Interest Earning Assets:
Taxable investment securities and
interest bearing due from banks $ (1,189) $ (1,104) $ (85) $ (1,129) $ (794) $ (335)
Non-taxable investment securities
and interest bearing due from banks* 4,032 3,910 122 6,955 7,449 (494)
Federal funds sold and securities purchased
with agreements to resell (94) (103) 9 (398) (345) (53)
Gross Loans 14,520 14,571 (51) 11,136 12,219 (1,083)
------------------------------------- -------------------------------------
$ 17,269 $ 17,274 $ (5) $ 16,564 $ 18,529 $ (1,965)
===================================== =====================================
Interest Bearing Liabilities:
Demand deposits $ 627 $ 724 $ (97) $ 19 $ 451 $ (432)
Money market and savings deposits 1,835 1,005 830 1,214 1,141 73
Time deposits 3,370 3,782 (412) 6,461 6,183 278
Borrowed Funds 2,803 2,313 490 2,364 2,602 (238)
------------------------------------- -------------------------------------
Total Interest Bearing Liabilities $ 8,635 $ 7,824 $ 811 $ 10,058 $ 10,377 $ (319)
===================================== =====================================
- ------------------------------------------------------------------------------------------------------------------------------------
13
- -----------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 3
LOANS
(In thousands)
1997 1996 1995 1994 1993
Analysis of Loans:
Commercial, Financial and Agricultural $ 206,146 $ 194,726 $ 181,024 $ 167,423 $ 152,709
Real estate, Construction and Land Development 79,676 56,077 81,892 84,391 59,442
Real estate, Mortgage 492,262 383,447 258,243 178,388 158,441
Real estate, Equity Lines of Credit 58,846 40,288 36,594 30,666 27,499
Consumer Loans and Leases 115,008 82,505 81,712 65,321 60,659
Other 4,457 6,246 9,750 10,046 2,688
----------------------------------------------------------------------
TOTAL $ 956,395 $ 763,289 $ 649,215 $ 536,235 $ 461,438
======================================================================
- -----------------------------------------------------------------------------------------------------------------------------
14
- --------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 3
ANALYSIS OF CERTAIN LOAN MATURITIES AT DECEMBER 31, 1997
(In thousands)
Real Estate
Commercial Construction
Financial and Land
& Agricultural Development Total
Due within one year $ 81,492 $ 64,476 $145,968
Due after one year - five years
Fixed Rate 54,527 4,626 59,153
Variable Rate 45,611 7,751 53,362
--------- -------- --------
Total 100,138 12,377 112,515
--------- -------- --------
Due after five - ten years
Fixed Rate 7,705 2,174 9,879
Variable Rate 16,811 649 17,460
--------- -------- --------
Total 24,516 2,823 27,339
--------- -------- --------
Total $ 206,146 $ 79,676 $285,822
========= ======== ========
- --------------------------------------------------------------------------------
15
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 3
RESERVE FOR LOAN LOSSES AND NONPERFORMING ASSETS
(In Thousands)
For the year ended December 31,
1997 1996 1995 1994 1993
Beginning balance $ 10,890 $ 9,658 $ 10,161 $ 11,769 $ 5,472
Deduct charge offs:
Commercial, financial and agricultural 1,506 850 1,295 1,631 686
Real estate, construction and land development -- -- -- 1,151 77
Real estate, mortgage 19 249 358 156 150
Installment to individuals 715 676 407 506 245
Other 802 -- 2 7 --
-----------------------------------------------------------------
TOTAL 3,042 1,775 2,062 3,451 1,158
Add recoveries:
Commercial, financial and agricultural 994 592 763 197 184
Real estate, construction and land development -- -- 7 12 --
Real estate, mortgage 53 43 136 195 38
Installment to individuals 175 140 130 42 62
Other 67 -- -- -- --
-----------------------------------------------------------------
TOTAL 1,289 775 1,036 446 284
-----------------------------------------------------------------
Net charge offs 1,753 1,000 1,026 3,005 874
Additions charged to operations 3,458 2,330 523 1,299 2,272
Provision for acquired loans 1,205 (98) -- 98 110
Allowance acquired in mergers -- -- -- -- 4,789
-----------------------------------------------------------------
Ending balance $ 13,800 $ 10,890 $ 9,658 $ 10,161 $ 11,769
=================================================================
Ratio of net charge offs during the period
to average loans outstanding during the period
0.20% 0.14% 0.18% 0.60% 0.24%
- ------------------------------------------------------------------------------------------------------------------------------------
16
Table 3
TRIANGLE BANCORP, INC.
ALLOCATION OF THE RESERVE FOR LOAN LOSSES
At December 31,
(Dollars in thousands)
--------------------------------------------------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------
% of loans in % of loans in % of loans in
each category each category each category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
--------------------------------------------------------------------------------
Commercial, Financial and
Agricultural $ 4,204 21.55% $ 4,115 27.88% $ 3,665 31.22%
Real Estate, Construction
and Land Development 416 9.75% 169 12.61% 272 15.74%
Real Estate, Mortgage 2,826 50.05% 1,995 39.78% 1,912 33.27%
Real Estate, Equity Lines
of Credit 650 6.15% 402 5.64% 340 5.72%
Consumer Loans 1,698 8.55% 1,289 12.59% 1,220 12.18%
Other 380 3.95% 57 1.50% 76 1.87%
Unallocated 3,626 0.00% 2,863 0.00% 2,173 0.00%
--------------------------------------------------------------------------------
TOTAL $13,800 100.00% $10,890 100.00% $ 9,658 100.00%
================================================================================
------------------------------------------------------
1994 1993
------------------------------------------------------
% of loans in % of loans in
each category each category
Amount to Total Loans Amount to Total Loans
------------------------------------------------------
Commercial, Financial and
Agricultural $ 3,632 25.51% $ 4,724 33.09%
Real Estate, Construction
and Land Development 708 14.09% 653 12.88%
Real Estate, Mortgage 2,812 43.49% 3,254 34.34%
Real Estate, Equity Lines
of Credit 274 5.28% 260 5.96%
Consumer Loans 1,006 10.81% 823 13.15%
Other 23 0.82% 19 0.58%
Unallocated 1,706 0.00% 2,036 0.00%
------------------------------------------------------
TOTAL $10,161 100.00% $11,769 100.00%
======================================================
17
- -----------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 3
ANALYSIS OF NONPERFORMING ASSETS
(In Thousands)
1997 1996 1995 1994 1993
--------------------------------------------------------
Nonaccrual loans $ 2,141 $ 1,666 $ 1,532 $ 1,738 $ 3,849
Loans contractually past due 90 or 3,997 2,107 1,033 1,028 220
or more days as to principal or interest
Foreclosed assets 246 507 499 799 1,859
--------------------------------------------------------
Total $ 6,384 $ 4,280 $ 3,064 $ 3,565 $ 5,928
========================================================
- -----------------------------------------------------------------------------------------------------------------------------
18
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 4
SECURITIES
(In thousands)
December 31,
----------------------------------------------------------------------
1997 1996
Available for Sale Book Value Market Value Book Value Market Value
---------- ------------ ---------- ------------
U.S. Treasury $ 98,269 $ 99,020 $ 117,732 $ 117,902
U.S. Agencies 10,233 10,246 12,179 12,157
State and Political Subdivisions 31,501 32,322 14,369 14,341
Mortgage Backed Securities 467 467 127,818 128,030
Collateralized Mortgaged Obligations 251,332 250,056 2,145 2,108
End-User Derivatives 4,293 3,850
FHLB Stock 17,535 17,535 5,534 5,534
Federal Reserve Stock 2,210 2,210 2,524 2,524
Other Investments 64 64 64 64
----------------------------------------------------------------------
Total $ 411,611 $ 411,920 $ 286,658 $ 286,510
======================================================================
Held to Maturity
U.S. Agencies $ 72,128 $ 72,881 $ 72,134 $ 72,583
State and Political Subdivisions 12,998 13,405 13,663 13,918
Mortgage Backed Securities 6,376 6,343 8,711 8,564
Collateralized Mortgaged Obligations 3,038 3,044 3,050 3,025
Other Investments 253 273 554 577
----------------------------------------------------------------------
Total $ 94,793 $ 95,946 $ 98,112 $ 98,667
======================================================================
- ------------------------------------------------------------------------------------------------------------------------------------
19
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 4
SECURITIES
(In thousands)
WEIGHTED AVERAGE YIELDS AT DECEMBER 31, 1997
Due in One After
Available for Sale Year or less 1 - 5 years 5 - 10 years 10 years Total
U.S. Treasury 6.43% 6.13% 6.16%
U.S. Agencies 5.91% 5.91%
State and Political Subdivisions 4.75% 5.11% 5.07%
Mortgage Backed Securities 6.87% 6.87%
Collateralized Mortgaged Obligations* 8.49% 7.58% 7.56%
Other Investments 7.32% 7.32%
-----------------------------------------------------------------------------
Total 6.43% 6.11% 6.91% 6.84% 6.58%
-----------------------------------------------------------------------------
Held to Maturity
U.S. Agencies 5.90% 6.41% 7.58% 6.28%
State and Political Subdivisions 4.57% 5.17% 5.33% 5.59% 5.32%
Mortgage Backed Securities 5.72% 6.10% 5.65% 6.82% 6.19%
Collateralized Mortgaged Obligations* 6.36% 6.03% 6.25%
Other Investments 9.00% 9.00%
-----------------------------------------------------------------------------
Total 5.87% 6.31% 6.23% 6.07% 6.15%
-----------------------------------------------------------------------------
* Analysis performed using contractual maturities of collateralized mortgage obligations.
- ------------------------------------------------------------------------------------------------------------------------------------
20
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 4
SECURITIES
(In thousands)
Book Value as of December 31, 1997
------------------------------------------------------------------
Average
Due in One After Market Maturity
Available for Sale Year or less 1 - 5 years 5 - 10 years 10 years Total Value in Years
--------------------------------------------------------------------------------------------
U.S. Treasury $ 11,487 $ 86,782 $ -- $ -- $ 98,269 $ 99,020 1.20
U.S. Agencies 10,233 10,233 10,246 2.02
State and Political Subdivisions 3,683 27,817 31,500 32,322 10.19
Mortgage Backed Securities 467 467 467 20.35
Collateralized Mortgaged Obligations* 5,053 246,280 251,333 250,056 17.29
FHLB Stock 17,535 17,535 17,535
Federal Reserve Stock 2,210 2,210 2,210
Other Investments 64 64 64
--------------------------------------------------------------------------------------------
Total $ 11,487 $ 97,015 $ 8,736 $ 294,373 $411,611 $ 411,920 10.21
============================================================================================
Held to Maturity
U.S. Agencies $ 28,849 $ 39,378 $ 3,902 $ -- $ 72,128 $ 72,881 2.62
State and Political Subdivisions 531 3,513 5,644 3,310 12,998 13,405 5.66
Mortgage Backed Securities 1,608 1,943 687 2,138 6,376 6,343 5.12
Collateralized Mortgaged Obligations* 2,028 1,009 3,038 3,044 14.67
Other Investments 253 253 273 3.25
--------------------------------------------------------------------------------------------
Total $ 30,988 $ 45,087 $ 12,261 $ 6,457 $ 94,793 $ 95,946 6.26
============================================================================================
* Analysis performed using contractual maturities of collateralized mortgage obligations.
- ------------------------------------------------------------------------------------------------------------------------------------
21
- --------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 5
LARGE TIME DEPOSIT MATURITIES
(In thousands)
Analysis of Time Deposits of $100,000 or more at December 31, 1997:
Remaining maturity of three months or less $ 51,458
Remaining maturity of over three months through 12 months 48,864
Remaining maturity of over twelve months 10,971
---------
Total time deposits of $100,000 or more $ 111,293
=========
- --------------------------------------------------------------------------------
22
- ------------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 6
SHORT-TERM DEBT
(Dollars in thousands)
1997 1996
----------------------------------------------------- -------------------------------------------
Securities Securities
Federal Sold Under TT & L Federal Sold Under TT & L
Funds Agree to Master Note Funds Agree to Note
Purchased Repurchase Note Option Combined Purchased Repurchase Option Combined
End of year:
Amount outstanding $24,800 $20,601 $15,705 $ 400 $61,506 $ 3,900 $34,738 $ 342 $38,980
Weighted average interest rate 5.85% 4.56% 4.80% 5.27% 5.15% 7.00% 4.90% 5.15% 5.11%
Maximum amount outstanding $30,800 $25,360 $15,704 $ 400 $72,264 $35,745 $39,466 $ 400 $75,611
at any month end
Averages:
Average outstanding during year $ 3,503 $19,971 $ 6,884 $ 288 $30,646 $10,876 $31,502 $ 395 $42,773
Weighted average interest rate 5.76% 4.61% 4.70% 4.24% 4.76% 5.74% 5.17% 3.15% 5.30%
during the year
1995
-----------------------------------
Securities
Federal Sold Under
Funds Agree to
Purchased Repurchase Combined
End of year:
Amount outstanding $16,155 $23,667 $39,822
Weighted average interest rate 5.98% 4.49% 5.09%
Maximum amount outstanding $21,125 $25,394 $46,519
at any month end
Averages:
Average outstanding during year $ 4,061 $60,073 $64,134
Weighted average interest rate 5.76% 5.43% 5.45%
during the year
- ------------------------------------------------------------------------------------------------------------------------------------
23
- --------------------------------------------------------------------------------
TRIANGLE BANCORP, INC. Table 7
SELECTED KEY FINANCIAL RATIOS
For the year ended December 31,
1997 1996 1995
-------------------------------------
Return on Average Assets 1.20% 1.13% 0.97%
Return on Average Equity 14.51% 13.16% 10.12%
Dividends Paid ratio 31.39% 26.71% 22.11%
Average Equity to Average Assets 8.30% 8.55% 9.57%
- --------------------------------------------------------------------------------
24
- -----------------------------------------------------------------------------------------------------------------------------------
TRIANGLE BANCORP Table 8
INTEREST SENSITIVITY
DECEMBER 31, 1997
(Dollars in thousands)
0 - 3 4 to 12 1 to 5 Over 5
Balance Months Months Years Years
--------------------------------------------------------------------------------
Federal funds sold $ 1,549 $ 1,549 $ -- $ -- $ --
Interest bearing deposits in banks 23,027 23,027 -- -- --
Securities 506,713 -- 42,512 142,829 321,372
Loans and leases, net 942,595 -- -- -- --
--------------------------------------------------------------------------------
Earning assets 1,473,884 24,576 42,512 142,829 321,372
--------------------------------------------------------------------------------
Total assets $ 1,605,012
===========
Interest bearing demand deposits $ 167,651 67,060 -- 67,060 33,530
Savings deposits 66,931 -- -- 53,545 13,386
Money market account deposits 175,196 -- 87,598 87,598 --
Time deposits 600,466 -- -- -- --
Short-term debt 61,506 61,506 -- -- --
FHLB advances 193,500 45,000 80,000 68,500 --
Corporation obligated
manditorily redeemable securities 19,951 19,951
--------------------------------------------------------------------------------
Costing liabilities $ 1,265,250 173,566 167,598 276,703 46,916
--------------------------------------------------------------------------------
GAP $ (148,990) $ (125,086) $ (133,874) $ 274,456
---------------------------------------------------------------
% of total assets -9.28% -7.79% -8.34% 17.10%
---------------------------------------------------------------
Cumulative GAP $ (148,990) $ (274,076) $ (407,951) $ (133,495)
---------------------------------------------------------------
% of total assets -9.28% -17.08% -25.42% -8.32%
---------------------------------------------------------------
Assumptions regarding non-maturing deposits follow the FDICIA section 305 maximums.
- ------------------------------------------------------------------------------------------------------------------------------------
25
MARKET RISK
As discussed in the Management Discussion and Analysis Asset and Liability
Management section, the Company's market risk relates to the interest rate risk
inherent in its lending and deposit taking activities. The Banks use a model to
simulate interest movements and the effect such movements would have on the
market value of portfolio equity. The market value of portfolio equity is the
present value of expected cash flows from assets, liabilities and off balance
sheet contracts using current market discount rates .
In executing the model, assumptions, which may or may not actually occur in
rapid interest rate changes, are used. The assumptions related to non-maturing
deposits are based on the FDICIA 305 maximum maturities. Assumptions regarding
expected cash flows are based on the individual maturities of the Companies
securities, loans, deposits and other borrowings.
The table below illustrates the effect of interest rate movements, both up and
down, of 100 and 200 basis points for each of the Banks.
- --------------------------------------------------------------------------------
December 31, 1997
Market Value
of Portfolio Estimated
Equity Change from
(In Thousands) Base
$ $ %
--------------------------------------------------
TRIANGLE BANK
Up 200 102,060 (4,039) -3.81%
Up 100 103,887 (2,212) -2.08%
Base 106,099 - 0.00%
Down 100 108,751 2,652 2.50%
Down 200 111,903 5,804 5.47%
BANK OF MECKLENBURG
Up 200 18,438 (937) -0.88%
Up 100 18,882 (493) -0.46%
Base 19,375 - 0.00%
Down 100 19,927 552 0.52%
Down 200 20,543 1,168 1.10%
- --------------------------------------------------------------------------------
26
ITEM 2. Properties
See Item 1. Description of Business-Properties.
ITEM 3. Legal Proceedings
There are no material legal proceedings pending to which the Corporation or
its direct or indirect subsidiaries is a party or of which any of their
property is subject.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the Corporation's shareholders in the fourth
quarter of 1997
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The stock price and shareholder data appear on page FS-1 of this Annual
Report on Form 10-K. Restrictions on paying dividends are described in Item
1 on Form 10-K under the heading "Bank Regulation".
ITEM 6. Selected Financial Data
The selected consolidated financial data appears on page FS-2 of this
Annual Report on Form 10-K.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's discussion and analysis of financial condition and results of
operations for the years ended December 31, 1997 and December 31, 1996
appears on pages FS-3 through FS-9 of this Annual Report on Form 10-K. See
page 26 for a discussion of market risk.
ITEM 8. Financial Statements and Supplementary Data
The consolidated financial statements, together with the report thereon of
Coopers & Lybrand L.L.P. dated January 19, 1998, appears on pages FS-10
through FS-38 of this Annual Report on Form 10-K.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
No changes in accountants or disagreements on accounting or financial
disclosure occurred in the period from January 1, 1996 through the date
hereof.
27
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information contained under the captions "Proposal 1. Election of
Directors", "Incumbent Directors, Director Relationships", and "Executive
Officers" in the Proxy Statement is incorporated herein by reference.
ITEM 11. Executive Compensation
The information contained under the captions "Director Compensation",
"Compensation Committee Report", "Compensation Committee Interlocks and
Insider Participation", "Executive Compensation" and "Performance Graph" in
the Proxy Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information contained under the caption "Beneficial Ownership of Voting
Securities" in the Proxy Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
The information contained under the captions "Indebtedness of Management"
and "Transactions with Management" in the Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
Financial Statements:
Report of Independent Accounts........................................FS-10
Consolidated Balance Sheets as of
December 31, 1997 and 1996............................................FS-11
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995..................FS-12
Consolidated Statements of Changes in
Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995......................................FS-13
Consolidated Statements of Cash
Flows for the years ended December 31,
1997, 1996 and 1995..........................................FS-14 to FS-15
Notes to Consolidated Financial Statements...................FS-16 to FS-38
28
The following exhibits listed in accordance with the number assigned to
each in the Exhibit Table of Item 601 of Regulation S-K under the Securities Act
of 1933, as amended, are included in this Form 10-K.
Exhibit
Number
2(a) Amended and Restated Agreement and Plan of Reorganization and Merger
By and Among Guaranty State Bancorp, Guaranty State Bank, Triangle
Bancorp, Inc. and Triangle Bank dated as of November 18, 1997
(incorporated by reference to Exhibit 2(a) to the Registrant's Form
S-4 (Registration No. 333-44027) as declared effective by the
Commission on February 6,1998)
2(b) Agreement and Plan of Reorganization and Merger By and Among United
Federal Savings Bank, Triangle Bancorp, Inc. and Triangle Bank dated
as of March 4, 1998 (incorporated by reference to Exhibit 10(a) to the
Registrant's Form 8-K filed with the Commission on March 25, 1998)
3(a) Articles of Incorporation of Triangle Bancorp, Inc. as amended at the
meeting of shareholders on May 23, 1995 (incorporated by reference to
Exhibit 3(a) to the Registrant's Form 10-K filed with the Commission
on March 25, 1997)
3(b) Bylaws of Triangle Bancorp, Inc. as amended at the special meeting of
shareholders on April 28, 1997 and by the Board of Directors on
January 27, 1998
4 Specimen of Common Stock Certificate of Triangle Bancorp, Inc.
10(a) Triangle Bancorp, Inc. 1988 Incentive Stock Option Plan, as amended on
August 19, 1997 and on November 18, 1997
10(b) Triangle Bancorp, Inc. 1988 Non-Qualified Stock Option Plan, as
amended on August 19, 1997 and on November 18, 1997
10(c) Triangle Bancorp, Inc. 1998 Omnibus Stock Plan
10(d) Triangle Bancorp, Inc. Deferred Compensation Plan for Outside
Directors (incorporated by reference to Exhibit 10(c) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1993 as
filed with the Commission on March 31, 1994)
10(e) Triangle Bancorp, Inc. 1997 Deferred Compensation Plan for Outside
Directors
29
10(f) Employment Agreement between Triangle Bancorp, Inc. and Michael S.
Patterson (incorporated by reference to Exhibit 10(a) to the
Registrant's Form 10-K for the fiscal year ended December 31, 1993 as
filed with the Commission on March 31, 1994)
10(g) Deferred Compensation Agreement between Triangle Bancorp, Inc. and
Michael S. Patterson (incorporated by reference to Exhibit 10(g) to
the Registrant's Form S-4 (Registration No.33-86226) as declared
effective by the Commission on January 20, 1995)
10(h) Deferred Compensation Agreement between Triangle Bancorp, Inc. and
Debra L. Lee (incorporated by reference to Exhibit 10(h) to the
Registrant's Form S-4 (Registration No. 33-86226) as declared
effective by the Commission on January 20, 1995)
10(i) Employment Agreement between Triangle Bancorp, Inc. and George W. Holt
(incorporated by reference to Exhibit 10(j) to the Registrant's Form
10-K filed on March 31, 1995)
10(j) Employment Agreement between Triangle Bancorp, Inc. and H. Leigh
Ballance, Jr. (incorporated by reference to Exhibit 10(k) to the
Registrant's Form 10-K filed on March 31, 1995)
10(k) Split Dollar Insurance Agreement and Deferred Compensation Agreement
between Triangle Bancorp, Inc. and Michael S. Patterson (incorporated
by reference to Exhibit 10(n) to the Registrant's Form 10-K filed on
March 31, 1996)
10(l) Change of Control Agreement among Triangle Bancorp, Inc., Triangle
Bank and Steven R. Ogburn
10(m) Change of Control Agreement among Triangle Bancorp, Inc., Triangle
Bank and Debra L. Lee
10(n) Employment Agreement between Triangle Bancorp, Inc. and Billy N.
Quick, Sr.
10(o) Change of Control Agreement among Triangle Bancorp, Inc., Triangle
Bank and Edward O. Wessell
10(p) Supplemental Employee Retirement Plan dated January 1, 1998 between
Triangle Bank and Michael S. Patterson.
10(q) Form of Supplemental Employee Retirement Plan dated January 1, 1998
between Triangle Bank and each of Debra L. Lee, Steven R. Ogburn and
Edward O. Wessell
30
21 Subsidiaries of Registrant
23 Consent of Coopers & Lybrand L. L. P.
27 Financial Data Schedule for the year and quarter ended
December 31, 1997
27.1 Financial Data Schedule - Restated 1997 quarters
27.2 Financial Data Schedule - Restated 1996 quarters
27.3 Financial Data Schedule Restated December 31, 1995
(b) Reports on Form -8K
On October 17, 1997, a Form 8-K was filed to report the completion of the
acquisition of Mecklenburg.
On October 31, 1997, a Form 8-K was filed to restate historical financial
information due to the acquisition of Mecklenburg.
On December 19, 1997, a Form 8-K was filed reporting completion of one
month of combined operations of the Company and Mecklenburg. A consolidated
balance sheet and statement of income were included in the filing.
On December 22, 1997, a Form 8-K was filed which included the restated
historical financial information filed on October 31, 1997, without reference to
Mecklenburg's prior independent accountants in the audit opinion.
31
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TRIANGLE BANCORP, INC.
By /s/ Michael S. Patterson
-----------------------------
Michael S. Patterson
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael S. Patterson Chairman, President and Chief March 17, 1998
- --------------------------- Executive Officer
Michael S. Patterson
/s/ Debra L. Lee Chief Financial Officer March 17, 1998
- --------------------------- (Principal Financial and
Debra L. Lee Accounting Officer)
/s/ Lisa F. Campbell Controller (Principal
- --------------------------- Accounting Officer) March 17, 1998
Lisa F. Campbell
/s/ Carole S. Anders Director March 17, 1998
- ---------------------------
Carole S. Anders
/s/ Charles H. Ashford, Jr. Director March 17, 1998
- ---------------------------
Charles H. Ashford, Jr.
- --------------------------- Director March 17, 1998
Cy N. Bahakel
- --------------------------- Director March 17, 1998
E. B. Borden
32
/s/ Robert E. Bryan, Jr. Director March 17, 1998
- ---------------------------
Robert E. Bryan, Jr.
/s/ David T. Clancy Director March 17, 1998
- ---------------------------
David T. Clancy
- --------------------------- Director March 17, 1998
N. Leo Daughtry
/s/ Syd W. Dunn Director March 17, 1998
- ---------------------------
Syd W. Dunn, Jr.
/s/ Willie S. Edwards Director March 17, 1998
- ---------------------------
Willie S. Edwards
/s/ James P. Godwin, Sr. Director March 17, 1998
- ---------------------------
James P. Godwin, Sr.
/s/ Robert L. Guthrie Director March 17, 1998
- ---------------------------
Robert L. Guthrie
/s/ John B. Harris, Jr. Director March 17, 1998
- ---------------------------
John B. Harris, Jr.
/s/ George W. Holt Director March 17, 1998
- ---------------------------
George W. Holt
/s/ Earl Johnson, Jr. Director March 17, 1998
- ---------------------------
Earl Johnson, Jr.
- --------------------------- Director March 17, 1998
J.L. Maxwell, Jr.
/s/ Michael A. Maxwell Director March 17, 1998
- ---------------------------
Michael A. Maxwell
33
- --------------------------- Director March 17, 1998
Wendell H. Murphy
/s/ Patrick L. Pope Director March 17, 1998
- ---------------------------
Patrick L. Pope
/s/ William R. Pope Director March 17, 1998
- ---------------------------
William R. Pope
/s/ Edythe M. Poyner Director March 17, 1998
- ---------------------------
Edythe M. Poyner
/s/ Billy N. Quick, Sr. Director March 17, 1998
- ---------------------------
Billy N. Quick, Sr.
/s/ J. Dal Snipes Director March 17, 1998
- ---------------------------
J. Dal Snipes
/s/ N. Johnson Tilghman Director March 17, 1998
- ---------------------------
N. Johnson Tilghman
/s/ Sydnor M. White, Jr. Director March 17, 1998
- ---------------------------
Sydnor M. White, Jr.
/s/ J. Blount Williams Director March 17, 1998
- ---------------------------
J. Blount Williams
34
================================================================================
Shareholder Information
- --------------------------------------------------------------------------------
Annual Meeting
The Annual Meeting of the shareholders of Triangle Bancorp, Inc. will be held on
Tuesday, April 28, 1998, at the Radisson Governors Inn, Research Triangle Park,
NC at 10:00 a.m.
Common Stock
At December 31, 1997, the Company had 12,980,925 shares of common stock
outstanding which was held by approximately 7,600 shareholders of record.
Beginning December 30, 1997, the Company's stock was listed on the New York
Stock Exchange ("NYSE") under the ticker symbol TGL. Prior to December 30, 1997,
the Company's stock was traded Over-the-Counter on the NASDAQ National Market
under the ticker symbol TRBC.
Stock Transfer Agent and Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
800-368-5948
Independent Accountants
Coopers & Lybrand L.L.P.
Certified Public Accountants
150 Fayetteville Street Mall
Suite 2300
Raleigh, North Carolina 27601
Quarterly Common Stock Prices and Dividends
The talbe below sets forth the range of high and low per share sales prices as
reported by the NYSE from December 30, 1997 forward and by NASDAQ for prior
periods. The table also sets forth per share dividend information for the period
indicated.
1997 1996
High Low Dividend High Low Dividend
- --------------------------------------------------------------------------------
Fourth Quarter 35.88 24.50 0.12 16.38 14.50 0.09
- --------------------------------------------------------------------------------
Third Quarter 30.00 21.75 0.10 15.25 13.50 0.07
- --------------------------------------------------------------------------------
Second Quarter 22.50 18.50 0.09 15.00 13.50 0.07
- --------------------------------------------------------------------------------
First Quarter 20.50 16.00 0.09 16.00 13.88 0.06
- --------------------------------------------------------------------------------
Dividend Reinvestment and Stock Purchase Plan
Triangle Bancorp, Inc. has a Dividend Reinvestment and Stock Purchase Plan which
allows shareholders to reinvest dividends and buy additional stock in any amount
up to $2,000 per quarter after they have made their initial purchase of stock.
For further information and an application, contact our Stock Transfer Agent.
About This Report
The 1997 Annual Report is presented using a summary format intended to provide
information regarding Triangle Bancorp, Inc.'s financial position and results of
operations in a concise manner that will be meaningful and useful to our
shareholders. The audited financial statements and detailed analytical schedules
are contained in the Triangle Bancorp, Inc. Annual Report on Form 10-K for the
year ended December 31, 1997.
Form 10-K
A copy of Triangle Bancorp, Inc.'s Form 10-K Annual Report to the Securities and
Exchange Commission for 1997 will be furnished, without charge, upon written
request to:
Investor Relations
Triangle Bancorp, Inc.
P.O. Box 31828
Raleigh, North Carolina 27622
Equal Opportunity Employer
As an equal opportunity employer, Triangle Bancorp, Inc. pledges to recruit,
hire, train and promote persons in all job classifications, without regard to
race, color, religion, sex, national origin, age, disability or veteran status.
Triangle Bancorp, Inc.
Corporate Headquarters
4300 Glenwood Avenue
Raleigh, NC 27612
(919) 881-0455
================================================================================
FS-1
Selected Consolidated Financial Information
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993
At Period End (in thousands)
Loans, net $ 942,595 $ 752,399 $ 639,557 $ 526,104 $ 449,738
Securities Available for Sale 411,920 286,510 216,523 156,745 --
Securities Held to Maturity 94,793 98,112 89,452 86,427 213,371
Total Assets 1,605,012 1,241,394 1,054,159 877,983 791,900
Total Deposits 1,191,926 1,025,752 844,878 737,388 674,302
Advances from the FHLB 193,500 58,000 59,500 20,500 5,500
Subordinated Debt 1,066 -- -- 2,000 6,700
Corporation-Obligated Mandatorily
Redeemable Capital Securities 19,951 -- -- -- --
Shareholders' Equity $ 119,093 $ 105,736 $ 96,870 $ 82,887 $ 80,360
Summary of Operation (in thousands)
Net Interest Income $ 53,586 $ 45,632 $ 39,455 $ 34,411 $ 24,407
Provision for Loan Losses 3,458 2,330 523 1,299 2,272
Noninterest Income 13,213 9,948 8,445 5,856 6,438
Noninterest Expense 37,577 32,761 33,601 31,123 22,753
Net Income $ 16,584 $ 13,220 $ 9,114 $ 5,184 $ 4,535
Per Share Data
Basic Earnings per Share $ 1.28 $ 1.05 $ 0.73 $ 0.43 $ 0.44
Diluted Earnings per Share $ 1.24 $ 1.02 $ 0.72 $ 0.42 $ 0.44
Book Value $ 9.17 $ 8.40 $ 7.73 $ 6.75 $ 6.74
Cash Dividends $ 0.40 $ 0.29 $ 0.16 $ 0.07 $ 0.02
Selected Ratios
Return on Average Assets 1.20% 1.13% 0.97% 0.63% 0.77%
Return on Average Equity 14.51% 13.16% 10.12% 6.31% 6.68%
Shareholders' Equity to Total Assets 7.42% 8.52% 9.19% 9.44% 10.15%
Annual Stock Price
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
$7.50 $10.00 $14.25 $16.38 $35.38
Annual Compounded
Growth Rate
47%
Total Assets
(in millions)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
$792 $878 $1,054 $1,241 $1,605
Annual Compounded
Growth Rate
19%
Net Income
(in millions)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
$5 $5 $9 $13 $17
Annual Compounded
Growth Rate
38%
Diluted Earnings
Per Share
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
$0.44 $0.42 $0.72 $1.02 $1.24
Annual Compounded
Growth Rate
31%
FS-2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
- --------------------------------------------------------------------------------
Return on Average
Equity (percent)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
6.68 6.31 10.12 13.16 14.51
OVERVIEW
The purpose of the following discussion is to provide the reader with a concise
understanding of the performance and financial condition of Triangle Bancorp,
Inc. (the "Company"). The Company is a multibank holding company incorporated
in November 1991 under the laws of the State of North Carolina, with four
wholly-owned subsidiaries: Triangle Bank ("Triangle"); Bank of Mecklenburg
("Mecklenburg"); collectively, (the "Banks"); Coastal Leasing LLC ("Coastal")
and Triangle Capital Trust.
HIGHLIGHTS
During 1997, the Company continued its strategy of growth both internally and
through acquisitions. In August, Triangle acquired eight branches of United
Carolina Bank and two branches of Branch Banking & Trust located in south
central and eastern North Carolina (the "Branch Acquisition") with $195 million
in deposits and $61 million in loans. The Branch Acquisition was accounted for
using purchase accounting and, therefore, is included from the date of
acquisition forward. In the Branch Acquisition, $15.8 million was recorded as
deposit premium and $920,000 was recorded as goodwill. The deposit premium is
being amortized over 10 years and the goodwill is being amortized over 3 years.
In October of 1997, the Company acquired, as wholly-owned subsidiaries,
Mecklenburg with assets of approximately $270 million and Coastal with $13
million in assets. Both of these acquisitions were accounted for using the
pooling-of-interests method of accounting. All prior periods have been restated
for Mecklenburg, however, based on materiality, Coastal has been pooled for 1997
only. As a result, the Company's total assets and net income for December 31,
1996 have been restated from $971 million to $1.2 billion, and from $11.3
million to $13.2 million, respectively.
In anticipation of the Branch Acquisition, which would increase the
Company's need for capital, in May 1997, the Company created a Delaware
statutory business trust subsidiary, Triangle Capital Trust, which issued
corporation-obligated mandatorily redeemable capital securities ("Trust
Securities") in the amount of $19.33 million and trust common securities in the
amount of $619,000 to the Company. The Trust Securities have a maturity of 30
years, pay dividends at the rate of 9.375% and may be treated as tier 1 capital
by the Company.
In the third quarter of 1997, Triangle formed a wholly-owned Delaware
investment subsidiary to house securities. In the fourth quarter of 1997,
Mecklenburg also formed a wholly-owned Delaware investment subsidiary.
During 1997, the Company's total assets grew to $1.6 billion from $1.2
billion at December 31, 1996. The growth in assets of 30% reflects internal
growth as well as the Branch Acquisition. In addition, a leveraged investment
program was employed by the Company to more effectively utilize capital. This
strategy is described further under the balace sheet analysis section below.
In early 1996, Triangle completed the purchase of four branch offices and
approximately $55 million in deposits from First Union of North Carolina and
Mecklenburg acquired one branch office and $26 million in deposits from Essex
Savings Bank ("1996 Branch Acquisition"). These transactions were accounted for
as purchases, therefore, the operations of these branches are reflected only
from the date of purchase. In the 1996 Branch Acquisition, $4.6 million was
recorded as deposit premium and it is being amortized over 10 years.
In addition, during 1996, the Company acquired Granville United Bank with
assets of approximately $60 million. This acquisition was accounted for using
the pooling-of-interests method of accounting, therefore, all historical
information was restated for 1996 reporting to reflect the operations of the
combined institutions.
During 1996, the Company's total assets grew to $1.2 billion from $1.1
billion at December 31, 1995. The growth in assets of 18% reflects internal
FS-3
deposit growth as well as the 1996 Branch Acquisition. The funds acquired in the
1996 Branch Acquisition were principally invested in loans as demand was strong
for most of the year. The remaining funds were invested in securities as the
liquidity of the balance sheet increased through the year. In addition, a
leveraged investment portfolio strategy was employed by Mecklenburg to more
effectively utilize capital. (This strategy was implemented during late 1995 by
Mecklenburg, and discontinued in late 1997 after the acquisition of Mecklenburg
by the Company.)
Earnings increased to $16.6 million for the year ended December 31, 1997
compared to $13.2 million for the year ended December 31, 1996, a 26% increase.
The 1996 results reflected a $4.1 million increase, or 45%, in net income over
the $9.1 million earned for the year ended December 31, 1995. A summary of the
significant items impacting earnings are listed below.
1997 compared to 1996
o Net interest income increase $8 million for the year ended December 31,
1997 compared to 1996.
o The provision for loan losses increased $1 million in 1997 over the 1996
amount
o A gain of $2 million was recognized ($1.27 million after-tax) on the sale
of $25 million in deposits in 1997 versus a gain of $558,000 ($354,000
after-tax) in 1996 for a net after-tax increase of $916,000.
o Merger expenses of approximately $2.5 million ($1.6 million after-tax) were
incurred in 1997 versus approximately $494,000 ($313,000 after-tax) in 1996
for a net after-tax increase of $1.3 million.
1996 compared to 1995
o Net interest income increased $6 million for the year ended December 31,
1996 versus 1995.
o The provision for loan losses increased $1.8 million over the 1995 amount
due to loan growth in 1996.
o A gain of $558,000 ($354,000 after-tax) on the sale of deposits was
recognized in 1996 while a comparable gain of $529,000 ($349,000 after-tax)
was recognized in 1995 on the sale of the mortgage servicing portfolio.
o Merger expenses of approximately $494,000 ($313,000 after-tax) were
incurred in 1996 versus approximately $2.6 million ($1.7 million after-tax)
in 1995 for a net after-tax decrease of $1.4 million.
The return on average assets was 1.20% and 1.13% for the years ended
December 31, 1997 and 1996, respectively. The return on average equity was
14.51% and 13.16%, for the years ended December 31, 1997 and 1996, respectively,
an increase of 22%.
EARNINGS ANALYSIS
Net Interest Income
Net interest income, the principal source of the Company's earnings, is the
amount of income generated by earning assets (primarily loans and investment
securities) less the total interest cost of the funds obtained to carry them
(primarily deposits and other borrowings). The volume, rate and mix of both
earning assets and related funding sources determine net interest income.
Net interest income for 1997 increased to $53.6 million for $45.6 million
for 1996. This 18% increase primarily reflects as increase in the volume of
average earning assets of $190 million while average interest-bearing
liabilities increased $165 million. The taxable equivalent net interest margin
increased 5 basis points for the year ended December 31, 1997 over the same
period in 1996.
For 1996, the Company's net interest income was $45.6 million, an increase
of 15% or $6.1 million over 1995. Net interest income was favorably impacted by
growth in the volume of average earning assets, which exceeded the volume growth
in average interest-bearing liabilities by $14 million. This volume growth was
offset by the fact that the taxable equivalent yield on interest-earning assets
declined by 24 basis points, and the cost of interest-bearing liabilities
increased by 2 basis points.
Provision for Loan Losses
The provision for loan losses for 1997 was $3.5 million versus $2.3 million in
1996. This increase reflects the growth in the loan portfolio during
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
Return on Average
Assets (percent)
93 94 95 96 97
0.77 0.63 0.97 1.13 1.20
Triangle Bancorp, Inc. and Subsidiaries
FS-4
Efficiency Ratio
(percent)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
73.8 77.3 70.2 58.9 56.3
1997. The Company continues to maintain adequate levels of coverage for
nonperforming assets as well as general reserves for the portfolio as described
further in the loans and leases section.
The 1996 provision for loan losses of $2.3 million was significantly higher
than the 1995 provision of $523,000 due to loan growth in 1996. The Company's
loan loss reserve calculation continued to show adequate reserve levels in 1996
as the loan portfolio demonstrated improving quality and realized reductions for
nonperforming assets.
Noninterest Income
Noninterest income for 1997 was $13.2 million versus $9.9 million for 1996, a
33% increase. This increase resulted primarily from a 1997 gain of $2 million on
the sale of approximately $25 million in deposits, which was higher than the
$558,000 gain recognized in 1996 on the sale of approximately $8 million in
deposits. Service charges on deposit accounts also increased significantly in
1997.
Net gains on sales of securities were lower in 1997 compared to 1996
primarily due to a decrease in Mecklenburg's net gains. In 1996, gains on sales
of investment securities were the result of gains on off-balance sheet
derivative products in connection with the leveraged investment portfolio
strategy implemented during late 1995. In 1997, as the acquisition approached,
this leverage strategy was unwound, thereby reducing the gains.
In January 1997, Mecklenburg segregated a group of assets into a trading
portfolio. During the year, $681,000 in net gains were recognized on the trading
account which was an increase over 1996 as the Company held no trading assets in
1996. By the time of the Company's acquisition of Mecklenburg, the trading
assets had been disposed and the Company held no trading assets as of December
31, 1997.
Other operating income increased in 1997 due to increased income from the
sale of loans, rental income from leased facilities, income from the investment
service subsidiaries and a smaller loss on the sale of certain fixed assets in
1997 compared to 1996.
Noninterest income increased to $9.9 million in 1996 form $8.4 million in
1995. This was due in large part to increased service charge income on deposit
accounts in 1996. Other service charges, primarily mortgage servicing income,
decreased from 1995 as the mortgage servicing portfolio was sold during late
1995. The gain on the sale of that portfolio of $529,000 in 1995 was marched by
a gain of $558,000 on the sale of deposits of approximately $8 million during
the second quarter of 1996. Also during 1996, noninterest income was impacted by
an increase in gains on sales of investment securities due primarily to gains on
off-balance sheet derivative products in connection with Mecklenburg's leveraged
investment portfolio strategy. These increases were mitigated by a reduction in
other operating income as a result of the loss on the sale of certain fixed
assets of acquired organizations.
Noninterest Expense
Noninterest expenses were $37.6 million for 1997, an increase of 15% from $32.8
for 1996, primarily due to increases in nonrecurring merger expenses of $2
million, amortization of intangibles of $650,000, legal and professional fees of
$666,000 and stationery, printing and office supplies of $331,000. Merger
expenses increased due to the Branch Acquisition and the acquisitions of
Mecklenburg and Coastal. The increase in amortization expense is due to the
deposit premium amortization associated with the Branch Acquisition. Legal and
professional fees are up due to general corporate litigation as well as an
increase in outside services such as consulting. Increases in other expenses are
due to the growth of the Company, including the Branch Acquisition in August, a
new branch location in January and three in-store facilities opened during the
year.
Noninterest expenses of $32.8 million for 1996 decreased form $33.6 million
for 1995. This decrease is due to the reduction of merger expenses and other
professional services. Absent the merger expenses, noninterest expenses
increased by 4%. This small increase is primarily a result of increased
intangible amortization expenses from the 1996 Branch Acquisition, increased
intangible amortization expenses from the 1996 Branch Acquisition, increased
facilities expenses as a new main office was purchased and upfitted and 4
additional branch office sites acquired or constructed during 1996. These
increases were offset by gaining the efficiencies of combining the operations of
merged companies.
FS-5
Income Taxes
The Company's income tax expense for 1997 and 1996 was approximately 35.5% of
income. This level is less than the expected combined state and federal
statutory rates due to tax-exempt securities held, as well as the adjustment of
the deferred tax asset to reflect current tax rates.
During 1995, the Company's income tax expense approximated the federal
statutory rate. No state tax expense was recorded due to the use of net
operating loss carryforwards, which were fully utilized in 1995.
BALANCE SHEET ANALYSIS
The Company's total assets increased to $1.6 billion at December 31, 1997 from
$1.2 billion at December 31, 1996, a 30% increase. This growth, reflected
primarily in the investment and loan portfolios, was funded by additional
deposits purchased in the Branch Acquisition and borrowings from the Federal
Home Loan Bank ("FHLB"). In the fourth quarter of 1997, Triangle implemented a
$130 million leveraged investment program which employs a mix of fixed and
variable FHLB borrowings to purchase collateralized mortgage backed securities.
The yields on the investments exceed the cost of the borrowings resulting in
increased income for the Company. The Company continued to have a strong ratio
of average earning assets to total average assets of 92.25% for the year ended
December 31, 1997 compared to 91.99% for the year ended December 31, 1996.
Loans and Leases
The loan portfolio constitutes the Company's largest earning asset. During 1997,
average net loans and leases increased by $153 million to $861 million over the
1996 level of $708 million. This increase was due to strong loan demand
throughout the year in many of the Company's service areas, the acquisition of
Coastal with $13 million in leases, and the $61 million of loans acquired in the
Branch Acquisition.
The components of nonperforming assets are nonaccrual loans, loans 90 days
or more past due and other real estate owned ("OREO"). Nonperforming assets at
December 31, 1997 were $6.4 million, or .67% of gross loans and OREO, and
increase from .56% of gross loans and OREO at December 31, 1996. Net charge-offs
for 1997 were .20% of average loans versus .14% for 1996. While nonperforming
assets have increased slightly, these levels are considered to be relatively low
compared to industry averages.
The classification "nonaccrual" identifies those loans which management
recognized as collection problems, but which have not been identified as
losses. Loans are placed on nonaccrual status when payments of interest and/or
principal have remained delinquent for a period of 90 days or more or when
management's evaluation indicates probable default prior to the 90 day
delinquency period, unless the loan is both well secured and in the process of
collection. The Company's credit policy does not allow new funds to be committed
to borrowers who have credits in nonaccrual status.
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based on the present
value of expected future cash flows discounted at the historical effective
interest rate, except that collateral-dependent loans are measured for
impairment based on the fair value of the collateral. During 1997 and 1996, the
Company did not have a significant investment in loans determined to be
impaired.
There are no loans, other than those included in nonperforming assets, that
(i) represent or result from trends or uncertainties which management reasonably
expects will materially impact future operating results, liquidity, or capital
resources, or (ii) represent material credits about which management is aware of
any information which causes management to have serious doubts as to the ability
of such borrowers to comply with the loan repayment terms.
The adequacy of the allowance for loan losses is monitored by management
through an internal loan review process. Among the factors determining the level
of the allowance are loan growth, projected net charge-offs, the amount of
nonperforming and past due loans, and current and anticipated economic
conditions.
The allowance for loan losses at December 31,
Net Charge-Offs as
% of Average Loans
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
0.24 0.60 0.18 0.14 0.20
Loans, net
(in millions)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
$450 $526 $640 $752 $943
Triangle Bancorp, Inc. and Subsidiaries
FS-6
Deposits
(in millions)
[THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.]
93 94 95 96 97
$647 $737 $845 $1.026 $1.192
1997 was 1.44% of gross loans (1.43% in 1996) and 216% of nonperforming assets
(254% in 1996). While nonperforming assets have increased slightly during 1997
and the coverage ratios noted above have decreased during 1997, based on
information currently available to management as described in the previous
paragraph, the allowance for loan losses is believed to be adequate. However,
future additions to the allowance may be necessary based on changes in economic
conditions or the circumstances of individual borrowers which may impact
borrowers' ability to repay their loans. The most recent regulatory agency
examinations have not noted any material problem loans that had not been
previously identified by management; however, examinations in the future may
result in regulatory agencies requiring additions to the provision for loan
losses based on information available at the time of the examination.
Securities, Federal Funds Sold and Interest-Bearing Deposits
Securities, federal funds sold and interest bearing deposits at the end of 1997
totaled $531 million, compared to $388 million at December 31, 1996. The
increase is due to the overall growth of the Company as well as the leveraged
investment program implemented by Triangle in the fourth quarter of 1997.
Interest-bearing deposits in banks increased $22 million due to Mecklenburg
having $22 million in an interest bearing account at the FHLB as collateral for
their FHLB advance. These funds became available when their trading assets were
sold, and the funds will be used in early 1998 to repay the advance.
Securities available for sale increased $125 million and securities held to
maturity decreased $3 million. Approximately 50% of the total securities
portfolio represents collateralized mortgage-backed securities, while US
Treasury and Agency obligations represent approximately 36% of the portfolio.
The remaining portfolio is in municipal obligations, FHLB and Federal Reserve
Bank ("FRB") stock.
Deposits
Deposits increased $166 million to $1.2 billion at December 31, 1997, compared
to $1.0 billion at December 31, 1996. This growth was found in all categories of
deposits. The $195 million in deposits purchased in the Branch Acquisition in
August was offset slightly by the divestiture of $25 million in deposits from
two branch offices in June 1997 and by limited growth through deliberate pricing
strategies.
Other Borrowings
During the year, the Company increased its use of other borrowings as it
determined these funds to be a cost effective alternative to deposits. This is
reflected in the December 31, 1997 balance sheet. Short-term debt increased to
$62 million at December 31, 1997 from $39 million on December 31, 1996. The
majority of the increase, $21 million, was in Federal Funds purchased as the
Company was in a net borrowing position at December 31, 1997.
FHLB advances increased significantly in 1997 to $194 million from $58
million. This relates to Triangle's leveraging employed in the fourth quarter of
1997. The maturity of these advances ranges from $80 million maturing in 1998,
$5 million in 1999 and the remainder in 2002.
As previously discussed, the Company, through Triangle Capital Trust,
issued $20 million in Trust Securities. The majority of these funds, $12
million, were used to provide capital to Triangle and the remainder used for
general corporate purposes.
Capital
The Company's primary source of new capital is retained earnings. Management
feels the Company has other funding sources if needed, including the ability to
issue additional common stock or debt. The $20 million in Trust Securities
issued in 1997 may be counted as Tier 1 capital by the Company. The Company
considers the Trust Securities, which bear interest at the rate of 9.375% per
annum and have a maturity of 30 years, to be a relatively inexpensive source of
capital. The adequacy of capital is reviewed regularly, in light of current
plans and economic conditions, to ensure that sufficient capital is available
for current and future needs, to minimize the Company's cost of capital and to
assure compliance with regulatory requirements.
FS-7
Current federal regulations require that the Banks maintain a minimum ratio
of total captial to risk weighted assets of 8%, with at least 4% being in the
form of Tier 1 capital, as defined in the regulations. In addition, the Banks
must maintain a leverage ratio of 4%. As of December 31, 1997, the Bank's
capital exceeded the current capital reuirements. The Banks currently expects to
continue to exceed these minimums without altering current operations or
strategy.
The Company recognized the need to balance the retention of sifficient
capital to support future growth, meet regulatory requirements and provide
shareholders with a current cash return on their investment. As a result, for
the years ended December 31, 1997 and 1996, cash dividends paid were 31% and 27%
of earnings, respectively.
ASSET AND LIABILITY MANAGEMENT
The largest component of the Company's earnings is net interest income, which
can fluctuate widely when significant interest rate maovements occur. Management
is responsible for minimizing the Company's exposure to interest rate risk and
assuring an adequate level of liquidity.
To mitigate the impact of interest rate movements, the balance sheet must
be structured so that repricing opportunities exist for both assets and
liabilities, in generally equivalent amounts, at approximately the same time
intervals. Imbalances in these repricing opportunities at any point in time
constitute interest rate sensitivity. Interest rate sensitivity management
measures the potential exposure to fluctuating interest rates. The Company's
objective in managing interest rate sensitivity is to achieve reasonable
stability in the net interest margin throughout economic and interest rate
cycles by maintaining the proper balance of rate sensitive assets and
liabilities. The major factors used to manage interest rate risk include the mix
of fixed and floating interest rates, pricing, and maturity patterns of all
asset and liability accounts. Management regularly reviews the Company's
sensitivity position and evaluates alternative sources and uses of funds.
The Company's interest sensitivity is monitored using computer simulation
programs which analyze the effect of various rate environments on the Company's
net interest margin. In modeling the interest sensitivity of the Company's
balance sheet, assumptions must be made concerning the repricing of nonmaturing
liabilities such as deposit transaction accounts. Management has concluded that
the historical experience of the Company and the industry in general provide the
best basis for determining the repricing characterisics of these accounts.
Accordingly, management places a portion of transaction account balances as
repricing immediately and the remainder in the one to five year time period.
Using these assumptions, the Company's interest sensitivity within a one year
time frame reflects a positive impact on net interest income in a declining
interest rate environment. The Company has historically monitored its interest
sensitivity within an acceptable range in both rising and falling interest rate
environments and keeps its exposure to changing rates to a manageable level.
Prior to the Company's acquisition of Mecklenburg, Mecklendburg used
off-balance sheet derivative instruments to provide a cost-effective way to
manage interest rate sensitivity created primarily by the repricing mismatch of
the leveraged securities portfolio and its funding sources as well as overall
balance sheet interest rate risk. During 1997, the majority of these acitivities
were terminated, however two derivative products remain. At December 31, 1997,
Mecklenburg had a $15 million notional amount interest rate floor used to hedge
the balance sheet. It is marked to market each month, had a $17,000 value at
December 31, 1997 and expires in early 1998. Mecklenburg also had a $16 million
notional value off-balance sheet interest rate swap which is being used to hedge
deposits at December 31, 1997.
To ensure that sufficient funds are available for loan growth and deposit
withdrawals, as well as to provide for general needs, the Company must maintain
an adequate level of liquidity. Both assets and liabilities provide sources of
liquidity. Asset liquidity comes from the Company's ability to convert
short-term investments into cash and from the maturity and repayment of loans
and investment securities. Liability liquidity is provided by the Company's
ability to attract deposits and borrow against unencumbered assets. The primary
source of liability liquidity is the Compnay's customer base
Triangle Bancorp, Inc. and Subsidiaries
FS-8
which provides core deposit growth. The overall liquidity position of the
Company is closely monitored and evaluated regularly by management. Management
believes the Company's liquidity sources at December 31, 1997 are adequate to
meet its operating needs.
EFFECT OF CHANGING PRICES
The results of operations and financial condition presented in this report are
based on historical cost information and are unadjusted for the effects of
inflation. Since the assets and liabilities of banks are primarily monetary in
nature (payable in fixed, determinable amounts) the performance of the Company
is affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may be inconsistent. While the effect of inflation on banks is
normally not as significant as is its influence on those businesses which have
large investments in plant and inventories, it does have an effect during
periods of high inflation. There are normally corresponding increases in the
money supply, and banks will normally experience above average growth in assets,
loans, and deposits. Also, increases in the price of goods and services
generally will result in increased operating expenses. Inflation has not been a
significant factor in the Company's operations to date as the inflation rate has
been moderate since its inception.
IMPACT ON THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company has made a
preliminary assessment of its software and does not believe it has any
significant systems that require modifications. An outside firm is undergoing an
extensive study of all of the Company's internal and external systems and this
is scheduled to be completed in 1998. The costs of this study are not considered
material and, based on information now available, the Company anticipates its
systems will properly process dates in the year 2000 and beyond.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains forward-looking statements about the Company's
financial condition and results of operations, which are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those reflected in the forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's judgment only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
and circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from these
forward-looking statements are the passage of unforeseen legislation or
regulation applicable to the Company's operations and the Company's ability to
accurately predict loan loss provision needs using its present loan review
process.
FS-9
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Triangle Bancorp, Inc.
Raleigh, North Carolina
We have audited the consolidated balance sheets of Triangle Bancorp, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Triangle Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Raleigh, North Carolina
January 19, 1998
FS-10
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
ASSETS 1997 1996
---------- ----------
(thousands,except share data)
Cash and due from banks $ 50,398 $ 40,178
Federal funds sold 1,549 2,558
Interest-bearing deposits in banks 23,027 879
Securities available for sale 411,920 286,510
Securities held to maturity, estimated
market value $95,946 in 1997 and $98,667 in 1996 94,793 98,112
Loans held for sale -- 2,413
Loans, net 942,595 752,399
Premises and equipment, net 32,503 26,426
Interest receivable 12,626 10,428
Deferred income taxes 6,567 6,816
Intangible assets, net 27,681 12,607
Other assets 1,353 2,068
---------- ----------
$1,605,012 $1,241,394
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 181,682 $ 154,015
Interest-bearing demand 167,651 135,841
Savings and money market accounts 242,127 187,619
Large denomination certificates of deposit 111,293 104,970
Other time 489,173 443,307
---------- ----------
Total deposits 1,191,926 1,025,752
Short-term debt 61,506 38,980
Federal Home Loan Bank of Atlanta advances 193,500 58,000
Corporation obligated manditorily
redeemable capital securities 19,951 --
Interest payable 8,546 8,584
Other liabilities 10,490 4,342
---------- ----------
Total liabilities 1,485,919 1,135,658
---------- ----------
Commitments and contingencies (Notes 14 and 16)
Shareholders' equity:
Common stock; no par value; 20,000,000 shares authorized;
12,980,925 shares and 12,586,481 shares issued and
outstanding in 1997 and 1996, respectively 75,562 76,670
Retained earnings 43,324 29,052
Net unrealized gains on securities available for sale 207 14
---------- ----------
Total shareholders' equity 119,093 105,736
---------- ----------
$1,605,012 $1,241,394
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
FS-11
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
(in thousands, except per share data)
-------- -------- --------
Interest income:
Loans and fees on loans $ 82,153 $ 67,633 $ 56,497
Federal funds sold and securities purchased under
resale agreements 2,030 430 525
Securities 22,200 21,856 16,590
Deposits with other financial institutions 165 40 112
-------- -------- --------
Total interest income 106,548 89,959 73,724
======== ======== ========
Interest expense:
Large denomination certificates of deposit 6,391 5,914 4,854
Other deposits 38,423 33,068 26,434
Borrowed funds 8,148 5,345 2,981
-------- -------- --------
Total interest expense 52,962 44,327 34,269
======== ======== ========
Net interest income 53,586 45,632 39,455
Provision for loan losses 3,458 2,330 523
-------- -------- --------
Net interest income after provision for loan losses 50,128 43,302 38,932
-------- -------- --------
Noninterest income:
Service charges on deposit accounts 6,301 5,800 4,805
Other service charges, commissions and fees 1,894 1,894 2,111
Net gain on sales of securities 778 1,144 284
Net gain on trading account securities 681 -- --
Gain on sale of deposits 2,000 558 --
Other operating income 1,559 552 1,245
-------- -------- --------
Total noninterest income 13,213 9,948 8,445
-------- -------- --------
Noninterest expense:
Salaries and employee benefits 15,181 14,908 14,382
Occupancy expense 3,311 2,997 2,313
Equipment expense 2,803 2,667 2,628
Amortization of intangible assets 2,170 1,518 1,054
Merger expenses 2,542 494 2,582
Legal and professional fees 2,233 1,567 1,969
Stationery, printing and supplies 1,384 1,053 1,065
Other operating expense 7,953 7,557 7,608
-------- -------- --------
Total noninterest expense 37,577 32,761 33,601
-------- -------- --------
Income before income taxes 25,764 20,489 13,776
Income tax expense 9,180 7,269 4,662
-------- -------- --------
Net income $ 16,584 $ 13,220 $ 9,114
======== ======== ========
Basic earnings per share $ 1.28 $ 1.05 $ .73
======== ======== ========
Diluted earnings per share $ 1.24 $ 1.02 $ .72
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
FS-12
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements
of Changes in Shareholders' Equity
For the years ended December 31, 1997, 1996 and 1995
Unrealized
Gain(Loss)
Common Stock on Securities Total
-------------------------- Undivided Available Shareholders'
Shares Amount Profits for Sale, Net Equity
----------- ----------- ----------- ------------- -----------
(in thousands, except share and per share data)
Balance, December 31, 1994 12,309,937 $ 74,876 $ 12,264 $ (4,253) $ 82,887
Shares issued under stock plans 65,604 446 -- -- 446
Common shares issued to the public 175,000 1,300 -- -- 1,300
Repurchased shares (15,000) (188) -- -- (188)
Cash payments for fractional shares (1,018) (11) -- -- (11)
Cash dividends paid ($.16 per share) -- -- (2,015) -- (2,015)
Change in unrealized loss, net -- -- -- 5,337 5,337
Net income -- -- 9,114 -- 9,114
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1995 12,534,523 76,423 19,363 1,084 96,870
Shares issued under stock plans 71,069 527 -- -- 527
Repurchased shares (18,900) (277) -- -- (277)
Cash payments for fractional shares (211) (3) -- -- (3)
Cash dividends paid ($.29 per share) -- -- (3,531) -- (3,531)
Change in unrealized gain, net -- -- -- (1,070) (1,070)
Net income -- -- 13,220 -- 13,220
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 12,586,481 76,670 29,052 14 105,736
Pooling adjustment 325,000 40 2,894 -- 2,934
Shares issued under stock plans 189,844 1,584 -- -- 1,584
Repurchased shares (120,400) (2,732) -- -- (2,732)
Cash dividends paid ($.40 per share) -- -- (5,206) -- (5,206)
Change in unrealized gain, net -- -- -- 193 193
Net income -- -- 16,584 -- 16,584
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 12,980,925 $ 75,562 $ 43,324 $ 207 $ 119,093
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
FS-13
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
--------- --------- ---------
(in thousands)
Cash flows from operating activities:
Net income $ 16,584 $ 13,220 $ 9,114
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 4,594 3,603 2,723
Writedown of fixed assets 5 -- 1,358
Accretion of discount on securities, net of
amortization of premiums 1,352 724 281
Provision for loan losses 3,458 2,330 523
Gain on sales of securities (1,459) (1,144) (284)
Gain on market valuation of loans held for sale -- (25) --
Loss (gain) on sale of premises and equipment (114) 239 (146)
Gain on sale of mortgage servicing portfolio -- -- (529)
Gain on sale of branches (2,000) (558) --
Net change in trading securities 42,548 -- --
Loans held for sale:
Originations (948) (21,798) (20,422)
Sales 3,361 25,934 17,876
Provision (benefit) for deferred taxes (36) (279) 672
Gain on sales of foreclosed assets (7) (14) (66)
Changes in assets and liabilities:
Interest receivable (1,630) (1,459) (1,739)
Other assets 1,128 233 461
Interest payable (400) 337 3,221
Other liabilities (735) (366) (855)
--------- --------- ---------
Net cash provided by operating activities 65,701 20,977 12,188
--------- --------- ---------
Cash flows from investing activities:
Proceeds from maturity and principal paydowns of
securities available for sale 36,840 39,664 41,719
Proceeds from maturity and principal paydowns of
securities held to maturity 40,893 24,918 9,454
Proceeds from sales of securities available for sale 297,203 308,646 100,264
Proceeds from sales of securities held to maturity -- 14,645 --
Purchase of securities available for sale (501,763) (422,857) (172,566)
Purchase of securities held to maturity (37,509) (43,796) (34,428)
Net increase in loans (133,326) (118,196) (95,401)
Net capital expenditures, premises and equipment (5,463) (7,058) (5,265)
Proceeds from sales of foreclosed assets 323 307 382
Proceeds from sale of premises and equipment 261 475 218
Proceeds from sale of mortgage servicing portfolio -- -- 1,467
Net cash acquired in acquisitions and divestitures 102,613 74,281 32,164
--------- --------- ---------
Net cash used in investing activities
(199,928) (128,971) (121,992)
--------- --------- ---------
(continued)
FS-14
(Continued)
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
--------- --------- ---------
(in thousands)
Cash flows from financing activities:
Net increase (decrease) in deposit accounts $ (5,410) $ 101,451 $ 52,867
Net increase (decrease) in short-term debt 22,526 (20,732) 34,561
Proceeds from common stock issuance -- -- 1,300
Proceeds from FHLB advances, net 135,500 18,000 17,500
Proceeds from issuance of corporation obligated
manditorily redeemable capital securities 19,951 -- --
Deferral of debt issuances costs (627) -- --
Repurchase of stock (2,732) (277) (188)
Cash payments for fractional shares -- (3) (11)
Shares issued under stock plans 1,584 527 446
Cash dividends paid (5,206) (3,531) (2,015)
--------- --------- ---------
Net cash provided by financing activities 165,586 95,435 104,460
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 31,359 (12,559) (5,344)
Cash and cash equivalents at beginning of year 43,615 56,174 61,518
--------- --------- ---------
Cash and cash equivalents at end of year $ 74,974 $ 43,615 $ 56,174
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 53,000 $ 43,657 $ 30,957
========= ========= =========
Income taxes $ 8,504 $ 7,432 $ 3,098
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
FS-15
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Triangle Bancorp, Inc. (the "Company") is a bank holding company
incorporated in November 1991 under the laws of the State of North
Carolina, with four wholly owned subsidiaries, Triangle Bank ("Triangle")
and Bank of Mecklenburg ("Mecklenburg"), (collectively, the "Banks"),
Coastal Leasing LLC ("Coastal"), and Triangle Capital Trust (the "Trust").
The consolidated financial statements have been restated to include the
accounts and operations of companies acquired and accounted for as poolings
of interests as discussed in Note 2.
The accounting and reporting policies of the Company and its subsidiaries
follow generally accepted accounting principles and general practices
within the financial services industry. All amounts in tabular format are
in thousands of dollars unless otherwise noted. Following is a summary of
the more significant policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Securities
The Company classifies its securities into three types as follows:
(a) Securities Held to Maturity - Debt securities that the Company has the
positive intent and ability to hold to maturity which are reported at
amortized cost,
(b) Trading Securities - Debt and equity securities that are bought and
held principally for the purpose of selling in the near term which are
reported at fair value, with unrealized gains and losses included in
earnings, or
(c) Securities Available for Sale - Debt and equity securities not
classified as either Securities Held to Maturity or Trading Securities
which are reported at fair value, with unrealized gains and losses
reported as a separate component of shareholders' equity.
The classification of securities is generally determined at the date of
purchase. Gains and losses on sales of securities, computed based on
specific identification of adjusted cost of each security, are included in
other income at the time of the sales. Premiums and discounts on debt
securities are recognized in interest income on the interest method over
the period to maturity.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an allowance
for loan losses, unearned discounts and net deferred loan origination fees
and costs. Interest on loans is calculated by using the simple interest
method on daily balances of the principal amount outstanding. Deferred loan
fees and costs are amortized to interest income over the contractual life
of the loan using a method that approximates the level yield method.
FS-16
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Loans and Allowance for Loan Losses (Continued)
A loan is considered impaired, based on current information and events, if
it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due according to the contractual
terms of the loan agreement. Uncollateralized loans are measured for
impairment based on the present value of expected future cash flows
discounted at the original contractual interest rate, while all
collateral-dependent loans are measured for impairment based on the fair
value of the collateral. During 1997 and 1996 there were no loans material
to the consolidated financial statements that were impaired as defined.
The Company uses several factors in determining if a loan is impaired. The
internal asset classification procedures include a thorough review of
significant loans and lending relationships and include the accumulation of
related data. This data includes loan payment status, borrowers' financial
data and borrowers' operating factors such as cash flows, operating income
or loss, etc.
The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is
unlikely. The allowance is an amount that management believes will be
adequate to absorb possible losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans and
prior loan loss experience. The evaluations take into consideration such
factors as changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans, and current economic
conditions and trends that may affect the borrowers' ability to pay.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. Loans that are on a current payment status or past
due less than 90 days may also be classified as nonaccrual if repayment in
full of principal and/or interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained
period of repayment performance (generally a minimum of six months) by the
borrower, in accordance with the contractual terms of interest and
principal.
FS-17
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Income Recognition on Impaired and Nonaccrual Loans (Continued)
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and
principal are generally applied as a reduction to the principal
outstanding, except in the case of loans with scheduled amortizations where
the payment is generally applied to the oldest payment due. When the future
collectibility of the recorded loan balance is expected, interest income
may be recognized on a cash basis. In the case where a nonaccrual loan had
been partially charged-off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan
balance at the contractual interest rate. Receipts in excess of that amount
are recorded as recoveries to the allowance for loan losses until prior
charge-offs have been fully recovered.
Foreclosed Assets
Assets acquired as a result of foreclosure are valued at the lower of the
recorded investment in the loan or fair value less estimated costs to sell.
The recorded investment is the sum of the outstanding principal loan
balance and foreclosure costs associated with the loan. Any excess of the
recorded investment over the fair value of the property received is charged
to the allowance for loan losses. Any subsequent write-downs are charged
against other expenses.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed by the
straight-line method based on estimated service lives of assets, or, for
leasehold improvements over the terms of the related leases, if shorter.
Intangible Assets
Intangible assets are composed primarily of core deposit premiums and
goodwill. Amortization of core deposit premiums and goodwill is computed
using the straight-line method based on the estimated useful lives of
assets. Useful lives range from 7 to 10 years for the core deposit premiums
and from 3 to 15 years for goodwill.
The Company evaluates intangible assets for potential impairment by
analyzing the operating results, trends and prospects of the Company. The
Company also takes into consideration recent acquisition patterns within
the banking industry and any other events or circumstances which might
indicate potential impairment.
FS-18
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Interest Rate Swaps, Floors and Caps
Prior to being acquired by the Company, Mecklenburg used interest rate
swaps, floors and caps for interest rate risk management. These instruments
were 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 were amortized over the term of the related asset
or liability. Upon the early termination of swaps, floors and caps, the net
proceeds received or paid, including premiums, were 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 was discontinued and any related premium or change in
fair value of the hedge instrument was recognized in earnings. If the hedge
instrument was retained subsequent to the disposition or settlement of the
underlying asset or liability, it would be reassigned 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 would 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.
Income Taxes
The Company files a consolidated Federal income tax return. State income
tax returns are filed for each entity.
Deferred tax asset and liability balances are determined by application to
temporary differences of the tax rate expected to be in effect when taxes
will become payable or receivable. Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts
in the financial statements that will result in taxable or deductible
amounts in future years. The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
Cash Flow
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and Federal funds sold. Generally,
Federal funds are purchased and sold for one-day periods.
Reclassifications
Certain items included in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation. These reclassifications
have no effect on the net income or shareholders' equity previously
reported.
FS-19
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
New Accounting Pronouncements
The Company will adopt Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" on January 1, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements.
The Company will adopt SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information" on January 1, 1998. SFAS No. 131
specifies revised guidelines for determining an entity's operating segments
and the type and level of financial information to be disclosed. The impact
of adopting this statement is not expected to be material to the Company's
consolidated financial statements.
Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
The Company adopted SFAS No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" on January 1, 1997.
The adoption of this pronouncement had no material effect on the Company's
financial statements.
2. MERGERS AND ACQUISITIONS
On October 2, 1997 the Company completed the acquisition of Mecklenburg
through the issuance of one share of the Company's common stock for each
share of the outstanding common stock of Mecklenburg, or 2,185,068 shares.
On October 31, 1997 the Company acquired Coastal through the issuance of
325,000 shares of the Company's stock. On October 24, 1996 the Company
completed the merger of Granville United Bank ("Granville") with and into
Triangle through the issuance of 1.75 shares of the Company's common stock
for each share of the outstanding common stock of Granville, or 752,289
shares. These mergers were accounted for as poolings of interests, however,
due to materiality, Coastal was pooled for 1997 only.
Separate results of the pooled entities for the year ended December 31,
1996 are as follows:
Company(1) Mecklenburg Combined
---------- ----------- --------
Total income $ 81,360 $ 18,547 $ 99,907
Net interest income 40,256 5,376 45,632
Net income 11,301 1,919 13,220
(1) Prior to Mecklenburg merger
FS-20
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. MERGERS AND ACQUISITIONS (Continued)
Mecklenburg and Coastal, prior to their merger with the Company, reported
total income of $15.9 million and $1.9 million, respectively, net interest
income of $4.3 million and $1.3 million, respectively, and net income of
$1.8 million and $166,000, respectively, for the nine months ended
September 30, 1997.
In August 1997, Triangle acquired ten branches with approximately $195
million in deposits and $61 million in loans and paid a premium of
approximately $15.8 million and recorded $920,000 in goodwill. The deposit
premium is being amortized over ten years and the goodwill is being
amortized over three years. This acquisition was accounted for as a
purchase and therefore, the results of operations have been included in the
consolidated financial statements from the date of the acquisition.
The Trust Securities described in Note 9 were issued in anticipation of the
1997 branch acquisition.
See Note 21 to these consolidated financial statements for a summary of
branch acquisitions in 1997 and 1996.
3. SECURITIES
The amortized cost and estimated market value of securities at December 31,
1997 and 1996 are as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
1997:
Available for sale:
U.S. Treasury securities $ 98,269 $ 785 $ 34 $ 99,020
U.S. Agency obligations 10,233 18 5 10,246
Mortgage-backed securities 467 -- -- 467
Obligations of states and political subdivisions 31,501 825 3 32,323
Collateralized mortgage obligations 251,332 -- 1,277 250,055
Other investments 19,809 -- -- 19,809
-------- -------- -------- --------
$411,611 $ 1,628 $ 1,319 $411,920
======== ======== ======== ========
Held to maturity:
U.S. Agency obligations $ 72,128 $ 835 $ 82 $ 72,881
Mortgage-backed securities 6,376 8 41 6,343
Obligations of states and political subdivisions 12,998 409 2 13,405
Collateralized mortgage obligations 3,038 10 4 3,044
Other investments 253 20 -- 273
-------- -------- -------- --------
$ 94,793 $ 1,282 $ 129 $ 95,946
======== ======== ======== ========
FS-21
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES (Continued)
Gross Gross Estimate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------
1996:
Available for sale:
U.S. Treasury securities $117,732 $ 481 $ 311 $117,902
U.S. Agency obligations 12,179 47 69 12,157
Mortgage-backed securities 127,818 491 279 128,030
Obligations of states and political subdivisions 14,369 80 108 14,341
Collateralized mortgage obligations 2,145 -- 37 2,108
End-user derivatives 4,293 473 916 3,850
Other investments 8,122 -- -- 8,122
-------- -------- -------- --------
$286,658 $ 1,572 $ 1,720 $286,510
======== ======== ======== ========
Held to maturity:
U.S. Agency obligations $ 72,134 $ 680 $ 231 $ 72,583
Mortgage-backed securities 8,711 5 152 8,564
Obligations of states and political subdivisions 13,663 296 41 13,918
Collateralized mortgage obligations 3,050 -- 25 3,025
Other investments 554 23 -- 577
-------- -------- -------- --------
$ 98,112 $ 1,004 $ 449 $ 98,667
======== ======== ======== ========
The amortized cost and estimated market value of securities at December 31,
1997 by contractual maturities are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
-------- --------
Available for sale:
Due in one year or less $ 11,487 $ 11,524
Due after one year through five years 97,015 97,742
Due after five years through ten years 8,736 8,826
Due after ten years 274,564 274,019
Other investments 19,809 19,809
-------- --------
$411,611 $411,920
======== ========
Held to maturity:
Due in one year or less $ 30,988 $ 30,966
Due after one year through five years 45,087 45,671
Due after five years through ten years 12,261 12,692
Due after ten years 6,457 6,617
-------- --------
$ 94,793 $ 95,946
======== ========
FS-22
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES (Continued)
Gross realized gains and losses on sales of securities for the years ended
December 31, 1997, 1996 and 1995 are summarized below: 1997 1996 1995
1997 1996 1995
------- ------- ------
Gross realized gains $ 1,964 $ 3,728 $ 848
======= ======= ======
Gross realized losses $ 1,186 $ 2,584 $ 564
======= ======= ======
Included in the 1996 gross realized gains and losses are gross gains of
$1,889,051 and gross losses of $682,049 on terminations or marks to market
of end-user derivatives.
During 1996, the Company, upon evaluation of the acquired Granville
investment portfolio, transferred securities with an amortized cost of
$4,557,000 and an estimated market value of $4,400,000 from the available
for sale category to the held to maturity category.
Mecklenburg liquidated its Held to Maturity portfolio during 1996. The
carrying value of the liquidated securities was approximately $14,715,000
and a loss of approximately $70,000 was recognized on the related sales.
Securities with an amortized cost of approximately $130 million and $154
million as of December 31, 1997 and 1996, respectively, were pledged to
secure public deposits, FHLB advances and for other banking purposes.
4. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans as of December 31, 1997 and 1996, are
summarized as follows:
1997 1996
--------- ---------
Commercial $ 189,482 $ 183,889
Real estate:
Construction and land development 79,676 56,077
Residential, 1-4 families 307,842 279,290
Residential, 5 or more families 5,005 3,554
Farmland 13,595 7,326
Nonfarm, nonresidential 224,666 133,546
Agricultural production 16,664 10,674
Consumer 101,675 82,580
Other 16,755 6,751
Net deferred loan costs (fees) 1,035 (398)
--------- ---------
956,395 763,289
Less allowance for loan losses 13,800 10,890
--------- ---------
$ 942,595 $ 752,399
========= =========
FS-23
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
A summary of the allowance for loan losses for the years ended December 31,
1997, 1996 and 1995, is as follows:
1997 1996 1995
-------- -------- --------
Balance, beginning of year $ 10,890 $ 9,658 $ 10,161
Provision charged against income 3,458 2,330 523
Loans charged off, net of recoveries (1,753) (1,000) (1,026)
Allowance on purchased (sold) loans 1,205 (98) --
-------- -------- --------
Balance, end of year $ 13,800 $ 10,890 $ 9,658
======== ======== ========
Nonperforming assets at December 31, 1997 and 1996, consist of the
following:
1997 1996
--------- ---------
Loans past due ninety days or more $ 3,997 $ 2,107
Nonaccrual loans 2,141 1,666
Foreclosed assets (included in other assets) 246 507
--------- ---------
$ 6,384 $ 4,280
========= =========
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996, are as follows:
1997 1996
--------- ---------
Premises $ 18,644 $ 16,895
Equipment and fixtures 15,725 12,787
Leasehold improvements 712 550
--------- ---------
35,081 30,232
Less accumulated depreciation and amortization 11,426 9,734
--------- ---------
23,655 20,498
Construction in process 2,038 684
Land 6,810 5,244
--------- ---------
$ 32,503 $ 26,426
========= =========
FS-24
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INTANGIBLE ASSETS
Intangible assets at December 31, 1997 and 1996 are as follows:
1997 1996
--------- ---------
Core deposit premiums $ 30,470 $ 14,646
Goodwill 2,083 1,174
Other intangibles 976 350
--------- ---------
33,529 16,170
Less accumulated amortization 5,848 3,563
--------- ---------
$ 27,681 $ 12,607
========= =========
Amortization expense, principally related to the core deposit premiums,
amounted to approximately $2,170,000, $1,518,000, and $1,054,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
7. SHORT-TERM DEBT
Short term debt consisted of the following as of December 31, 1997 and
1996:
1997 1996
--------- --------
Securities sold under repurchase agreements $ 20,601 $ 34,738
Federal funds purchased 24,800 3,900
Masternotes 15,705 --
Other 400 342
--------- --------
$ 61,506 $ 38,980
========= ========
The weighted average rate on short term debt was 5.15% and 5.11% at
December 31, 1997 and 1996, respectively.
The Company has pledged certain securities to collateralize the repurchase
agreements. These agreements generally mature and are renewed daily.
8. FEDERAL HOME LOAN BANK OF ATLANTA ADVANCES
FHLB Advances with interest rates and maturity dates and weighted average
rates (WAR) as of December 31, 1997 and 1996 are as follows:
1997 1996
------------------- ------------------
Amount WAR Amount WAR
-------- ------- -------- -------
Due in one year $125,000 5.79% $ 8,000 6.95%
Due after one year within two years 5,000 6.14 50,000 5.56
Due after four years within five years 63,500 6.19 -- --
-------- ------- -------- -------
Balance, end of year $193,500 5.77% $ 58,000 5.75%
======== ======= ======== =======
The advances are collateralized by qualifying mortgage loans and investment
securities.
FS-25
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FEDERAL HOME LOAN BANK OF ATLANTA ADVANCES (Continued)
Each of the Banks 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.
9. CORPORATION OBLIGATED MANDITORILY REDEEMABLE CAPITAL SECURITIES
Corporation obligated manditorily redeemable capital securities ("Trust
Securities") aggregating $20,000,000 were issued in June 1997 through the
Trust, a statutory business trust registered in the State of Delaware.
These Trust Securities bear interest at the rate of 9.375% and have a
maturity of thirty years.
The proceeds from the Trust Securities were used by the Trust to purchase
junior subordinated debentures of the Company with a yield and maturity
identical to the Trust Securities. The distribution rate and payment dates
of the Trust Securities correspond to the distribution rate and interest
payment dates of the junior subordinated debentures, which are the sole
assets of the Trust. The Company has irrevocably and unconditionally
guaranteed all of the Trust's obligation under the Trust Securities, but
only to the extent of funds held by the Trust. The Trust Securities are
subject to mandatory redemption in whole, but not in part, upon repayment
of the junior subordinated debentures at their stated maturity or upon
their early redemption. The junior subordinated debentures may be redeemed
prior to their stated maturity upon the occurrence of certain events or at
the option of the Company on or after June 1, 2007.
10. INCOME TAXES
The components of income tax expense for the years ended December 31, 1997,
1996 and 1995 are as follows:
1997 1996 1995
------- ------- -------
Current expense $ 9,216 $ 7,548 $ 3,990
Deferred expense (benefit) (36) (279) 672
------- ------- -------
$ 9,180 $ 7,269 $ 4,662
======= ======= =======
The reconciliation of expected income tax at the statutory Federal rate
(35%) with income tax expense for the years ended December 31, 1997, 1996
and 1995, is as follows:
1997 1996 1995
------- ------- -------
Expected income tax expense at statutory rate $ 9,017 $ 7,171 $ 4,822
Increase (decrease) in income tax expense
resulting from:
State taxes, net of federal tax benefit 727 582 338
Benefit of net operating loss carryforward -- (229) (217)
Tax exempt interest (604) (389) (342)
Non-deductible interest 63 13 34
Other, net (23) 121 27
------- ------- -------
Income tax expense $ 9,180 $ 7,269 $ 4,662
======= ======= =======
FS-26
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES (Continued)
The components of net deferred tax assets at December 31, 1997 and 1996 are
as follows:
1997 1996
------- -------
Allowance for loan losses 3,445 $ 2,976
Accumulated depreciation 2,950 1,631
Deferred compensation 344 190
Net operating loss carryforwards 1,858 2,038
Depreciable basis of fixed assets (1,915) (368)
Other (4) 176
Unrealized securities (gains) losses (111) 173
------- -------
$ 6,567 $ 6,816
======= =======
The Company has federal net operating loss carryforwards of approximately
$6,000,000, which expire in years 2003 through 2008. Use of the net
operating loss carryforwards is limited to approximately $600,000 each
year.
11. EMPLOYEE BENEFIT PLAN
The Company maintains a 401(k) plan for its subsidiaries' employees 21
years of age or over with at least one year of service, which covers
substantially all employees. In 1997 neither Mecklenburg nor Coastal
employees were included in the Company's plan. Under the plan, employees
may contribute from 2% to 15% of compensation, subject to an annual maximum
as determined under the Internal Revenue Code. Employees may elect for up
to 25% of their contributions to be invested in the Company's common stock.
The Company matches, in contributions of the Company's common stock, 100%
of the employee's first 2% of contributions and 50% of the next 4% of
contributions. Mecklenburg also maintains a 401(k) Plan which covers
substantially all employees. Employees may contribute up to 6% of their
salary with the employer matching up to 6% of eligible contributions. The
Company contributed approximately $607,000, $505,000 and $412,000 to the
plans in 1997, 1996 and 1995, respectively.
The Company maintains an Employee Stock Purchase Plan (the "ESPP") that
allows employees to purchase stock of up to 10% of their compensation
through payroll deduction. In May 1997 this plan was amended to allow the
purchase of the stock at a 15% discount with the six month period beginning
July 1, 1997. The discount is taken on the lower of the market price on
July 1 or December 31 with shares being issued out of authorized but
unissued shares. A total of 250,000 shares have been authorized for the
plan with 7,568 issued on January 1, 1998.
12. EARNINGS PER SHARE
The Company adopted SFAS No. 128 "Earnings Per Share" on December 31, 1997.
As required, all prior period earnings per share have been restated to
conform with the provisions of the statement. Previously reported diluted
earnings per share for the years ended December 31, 1996 and 1995 were
$1.01 and $.71, respectively.
FS-27
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EARNINGS PER SHARE (Continued)
The following table provides a reconciliation on income available to common
shareholders and the average number of shares outstanding for the years
ended December 31, 1997, 1996, and 1995.
1997 1996 1995
----------- ----------- -----------
Net income $ 16,584 $ 13,220 $ 9,114
Average outstanding shares for basic EPS 12,932,379 12,558,378 12,493,246
Dilutive effect of stock options and warrants 484,584 400,332 221,348
----------- ----------- -----------
Total shares for diluted EPS 13,416,963 12,958,710 12,714,594
=========== =========== ===========
13. COMMON STOCK
The Company has a Long-Term Incentive Plan which allows the Board of
Directors to award any combination of stock options, restricted stock and
cash.
The Company has a qualified incentive stock option plan for the benefit of
certain of the Company's key officers and employees and a non-qualified
stock option plan for directors and certain officers (the "Stock Option
Plans"). The Stock Option Plans expire on January 4, 1998, and as such, no
new awards will be made after that date. Options under these plans are
exercisable at no less than fair market value at the date of grant and are
subject to a prorated five-year, and in some instances three-year, vesting
requirement. The options are exercisable as they vest and expire no later
than ten years after that date.
On January 27, 1998, the Board of Directors of the Company approved the
Triangle Bancorp, Inc. 1998 Omnibus Stock Plan. This plan, which is subject
to approval by the shareholders of the Company, reserves 1,000,000 shares
for future grants in the form of stock options, restricted stock awards and
stock appreciation rights, the terms and conditions of which are to be
determined at the date of grant. Incentive options under this plan will be
granted at fair market value and will have ten year lives.
On January 1, 1996 the Company adopted SFAS No. 123, "Accounting for Stock
Based Compensation". As permitted by SFAS No. 123, the Company has chosen
to continue to apply APB Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25) and related Interpretations. Accordingly, no
compensation cost has been recognized for options granted under the Stock
Option Plans or the ESPP.
The pro forma effect on net income and earnings per share of recording
compensation expense in accordance with SFAS No. 123 is presented in the
table below:
Year ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Net income:
As reported $ 16,584 $ 13,220 $ 9,114
Pro Forma $ 16,153 $ 12,970 $ 9,081
Basic earnings per share
As reported $ 1.28 $ 1.05 $ .73
Pro Forma $ 1.25 $ 1.03 $ .73
Diluted earnings per share
As reported $ 1.24 $ 1.02 $ .72
Pro Forma $ 1.20 $ 1.00 $ .71
FS-28
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. COMMON STOCK (Continued)
The fair value of options granted during 1997, 1996 and 1995 was estimated
using the Black-Scholes option pricing model with the following weighted
average assumptions.
Year ended December 31,
1997 1996 1995
-------- -------- --------
1997 Employee Stock Purchase Plan:
Weighted average grant date fair value $ 5.30 -- --
Dividend yield 2.10% -- --
Risk free interest rates 6.00% -- --
Expected lives (years) 0.50 -- --
Volatility 32.00% -- --
Stock Option Plans:
Weighted average grant date fair value $ 6.42 $ 3.48 $ 2.68
Dividend yield 3.30% 3.90% 3.70%
Risk free interest rates 6.00% 6.00% 6.30%
Expected lives (years) 6.96 7.00 7.00
Volatility 32.00% 21.00% 25.00%
A summary of the status of the Stock Option Plans as of December 31, 1997,
1996 and 1995, and changes during the years ending on those dates,
including weighted average exercise price (Price), is presented below:
1997 1996 1995
------------------------ ------------------------ ------------------------
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning
year 1,056,641 $ 9.21 869,250 $ 7.97 808,444 $ 7.53
Granted 111,295 20.50 286,480 12.69 124,387 9.73
Exercised (169,512) 7.84 (55,144) 6.18 (33,604) 4.77
Forfeited (46,083) 11.58 (43,945) 11.05 (29,977) 7.08
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at end of year 952,341 $ 10.63 1,056,641 $ 9.21 869,250 $ 7.97
========== ========== ========== ========== ========== ==========
The following table summarizes information about the Stock Option Plans at
December 31, 1997 including weighted average remaining contractual term in
years (Term) and weighted average exercise price (Price).
Options Outstanding Options Exercisable
--------------------------- ---------------------
Range of Exercise Prices Number Term Price Number Price
------------------------ ------- ------- ------- --------- --------
$ 4.00 - $6.00 124,304 3.64 $ 5.94 83,009 $ 5.90
6.25 - 6.80 139,954 2.20 6.56 139,954 6.56
6.86 - 8.00 136,851 4.83 7.29 115,571 7.26
8.04 - 10.00 156,207 6.10 9.21 83,298 9.00
10.75 - 11.50 164,720 8.40 11.46 163,500 11.49
12.38 - 15.00 88,010 8.27 14.70 16,103 14.86
16.19 - 18.38 108,560 7.17 18.28 30,870 18.15
18.88 - 23.50 12,500 9.52 22.58 0 0
26.75 - 35.00 21,235 9.83 27.27 0 0
------- ------ ------- --------- --------
952,341 5.89 $ 10.63 632,305 $ 8.98
======= ====== ======= ========= ========
During 1997, 7,800 of the Company's warrants were exercised leaving 4,200
remaining. All the warrants have an exercise price of $9.17 and expire on
December 31, 2000.
FS-29
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. REGULATORY RESTRICTIONS
The Banks, as North Carolina banking corporations, may pay dividends only
out of undivided profits as determined pursuant to North Carolina General
Statutes Section 53-87. However, regulatory authorities may limit payment
of dividends by any bank when it is determined that such a limitation is in
the public interest and is necessary to ensure the financial soundness of
the bank.
Under regulations of the Federal Reserve, banking affiliates are required
to maintain certain minimum average reserve balances which include both
cash on hand and deposits with the Federal Reserve. These deposits are
included in cash and cash equivalents in the accompanying balance sheets.
At December 31, 1997 and 1996, the Banks were required to maintain such
balances aggregating approximately $10,315,000 and $8,432,000,
respectively.
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly additional discretionary, actions by regulators
that, if undertaken, could have a direct material effect on the
consolidated financial statements. Management believes, as of December 31,
1997, that the Company and the Banks meet all capital adequacy requirements
to which they are subject.
As of December 31, 1997 and 1996, the most recent notification from the
FDIC categorized the Company and the Banks as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as
well capitalized the Banks must maintain minimum amounts and ratios, as set
forth in the table below. There are no conditions or events since that
notification that management believes have changed the Company's or the
Banks' category.
A summary of the Company's required and actual capital components follows:
To Be Well Capitalized
Under Prompt Corrective
For Capital Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
As of December 31, 1997:
---------------------------------------
Total Capital (to Risk Weighted Assets) $ 123,817 12.2% $ 80,959 8.0% $ 101,199 10.0%
Tier I Capital (to Risk Weighted Assets) 111,156 11.0 40,477 4.0 60,719 6.0%
Tier I Capital (to Average Assets) 111,156 7.6 58,855 4.0 73,569 5.0%
As of December 31, 1996:
---------------------------------------
Total Capital (to Risk Weighted Assets) $ 102,851 12.6% $ 65,196 8.0% $ 81,495 10.0%
Tier I Capital (to Risk Weighted Assets) 93,241 11.4 32,598 4.0 48,897 6.0
Tier I Capital (to Average Assets) 93,241 7.9 47,098 4.0 58,873 5.0
FS-30
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. REGULATORY RESTRICTIONS (Continued)
A summary of Triangle's required and actual capital components follows:
To Be Well Capitalized
Under Prompt Corrective
For Capital Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
As of December 31, 1997:
----------------------------------------
Total Capital (to Risk Weighted Assets) $ 92,343 10.8% $ 68,630 8.0% $ 85,788 10.0%
Tier I Capital (to Risk Weighted Assets) 81,605 9.5 34,315 4.0 51,473 6.0
Tier I Capital (to Average Assets) 81,605 6.7 48,747 4.0 60,933 5.0
As of December 31, 1996:
----------------------------------------
Total Capital (to Risk Weighted Assets) $ 82,743 12.3% $ 53,855 8.0% $ 67,319 10.0%
Tier I Capital (to Risk Weighted Assets) 74,312 11.0 26,928 4.0 40,392 6.0
Tier I Capital (to Average Assets) 74,312 7.7 38,638 4.0 48,297 5.0
A summary of Mecklenburg's required and actual capital components follows:
To Be Well Capitalized
To Be Well Capitalized
Under Prompt Corrective
For Capital Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- ---------- ---------- ----------
As of December 31, 1997:
----------------------------------------
Total Capital (to Risk Weighted Assets) $ 21,359 15.1% $ 11,352 8.0% $ 14,190 10.0%
Tier I Capital (to Risk Weighted Assets) 19,772 13.9 5,676 4.0 8,514 6.0
Tier I Capital (to Average Assets) 19,772 7.3 10,805 4.0 13,507 5.0
As of December 31, 1996:
----------------------------------------
Total Capital (to Risk Weighted Assets) $ 19,155 14.9% $ 10,286 8.0% $ 12,858 10.0%
Tier I Capital (to Risk Weighted Assets) 17,980 14.0 5,143 4.0 7,715 6.0
Tier I Capital (to Average Assets) 17,980 6.8 10,551 4.0 13,189 5.0
15. LEASE OBLIGATIONS
The Company leases a portion of its facilities under various operating
leases. Rental expense related to such leases amounted to approximately
$1,160,000, $1,100,000 and $825,000 in 1997, 1996 and 1995, respectively.
Noncancelable, long-term lease commitments at December 31, 1997 range from
$1,000,000 in 1998 to $700,000 in 2002.
FS-31
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend
credit, lines of credit and standby letters of credit. These instruments
involve elements of credit risk in excess of amounts recognized in the
accompanying financial statements.
The Company's risk of loss in the event of nonperformance by the other
party to the commitment to extend credit, line of credit and standby letter
of credit is represented by the contractual amount of these instruments.
The Company uses the same credit policies in making commitments under such
instruments as it does for on-balance sheet instruments. The amount of
collateral obtained, if any, is based on management's credit evaluation of
the counterparty. Collateral held varies, but may include accounts
receivable, inventory, real estate and time deposits with financial
institutions. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
As of December 31, 1997 and 1996, outstanding financial instruments whose
contract amounts represent credit risk were as follows:
1997 1996
---- ----
Unfunded loans and lines of credit $ 201,744 $ 149,789
========= =========
Standby letters of credit $ 3,265 $ 4,435
========= =========
The Company's lending is concentrated primarily in North Carolina. Credit
has been extended to certain of the Company's customers through multiple
lending transactions.
Mecklenburg used 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.
Mecklenburg managed 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 amount potentially subject to credit risk is much
smaller. As of December 31, 1997, the aggregate notional principal amount
of all outstanding financial instrument contracts used for interest rate
management totaled approximately $31 million. At December 31, 1997, the
carrying amount of financial instruments used for interest rate risk
management was approximately $17,000 and the estimated market value was
$33,000.
FS-32
TRIANGLE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. COMMITMENTS AND CONTINGENCIES (Continued)
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, 1997, off-balance sheet financial
instruments and their related fair value methods and assumptions, and fair
values are as follows:
Estimated Contract or
Carrying Fair Notional
Amount Value Amount
------- ------- ----------
Financial instruments used for interest rate
risk management, the designated asset or
liability and terms:
Interest rate swap agreements:
Certificates of deposit:
Receive fixed 5.97% pay 3 month
LIBOR February 1997 - March 1998
Receive 3 month fixed 6.00%, pay 3 $ -- $ 8 $ 8,000
month LIBOR March 1997 - March 1998) -- 8 8,000
------- ------- --------
$ -- $ 16 $ 16,000
======= ======= ========
Purchased interest rate floors:
Unassigned (Strike price 5%, 3
month LIBOR index, March 1996 -
January 1997) $ 17 $ 17 $ 15,000
======= ======= ========
Various legal proceedings against the Company and its subsidiaries have
arisen from time to time in the normal course of business. Management
believes liabilities arising from these proceedings, if any, will have no
material adverse effect on the financial positions or results of operations
of the Company or its subsidiaries.
17. RELATED PARTY TRANSACTIONS
In the normal course of business certain directors and executive officers
of the Company, including their immediate families and companies in which
they have an interest, were loan customers. Activity in these loans is
summarized as follows :
1997 1996
------- -------
Balance, beginning of year $ 4,008 $ 4,827
Loans made 1,038 2,705
Payment received (1,420) (3,100)
Changes in composition 1,450 (424)
------- -------
Balance, end of year $ 5,076 $ 4,008
======= =======
FS-33
18. PARENT COMPANY FINANCIAL DATA
The Company's principal asset is its investment in its subsidiaries.
Condensed financial statements for the parent company as of December 31,
1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 are
as follows:
1997 1996
-------- --------
Condensed Balance Sheets
Cash $ 16,161 $ 368
Investments in wholly-owned subsidiaries 131,865 105,136
Loan to subsidiary 6,200 --
Other assets 1,373 365
-------- --------
Total assets $155,599 $105,869
======== ========
Short-term debt $ 15,705 $ --
Other liabilities 233 133
Junior subordinated deferred interest debentures
20,568 --
-------- --------
Total liabilities 36,506 133
Shareholders' equity 119,093 105,736
-------- --------
Total liabilities and shareholders' equity $155,599 $105,869
======== ========
Condensed Statements of Income 1997 1996 1995
------- ------- -------
Dividends from wholly-owned subsidiaries $ 6,204 $ 3,447 $ 588
Interest income 773 8 --
------- ------- -------
Total income 6,977 3,455 588
Interest expense 1,441 -- --
Other expenses 179 117 236
------- ------- -------
Total expenses 1,620 117 236
------- ------- -------
Income before equity in earnings
of wholly-owned subsidiaries 5,357 3,338 352
Equity in undistributed earnings
of wholly-owned subsidiaries 11,227 9,882 8,762
------- ------- -------
Net income $16,584 $13,220 $ 9,114
======= ======= =======
Condensed Statements of Cash Flows 1997 1996 1995
-------- ------- -------
Cash flows from operating activities:
Net income $ 16,584 $13,220 $ 9,114
Equity in undistributed earnings of
wholly-owned subsidiaries (11,227) (9,882) (8,762)
Amortization of debt issuance cost 10 -- --
Decrease (increase) in other assets 226 (309) 378
Increase (decrease) in other liabilities 100 38 (44)
-------- ------- -------
Net cash provided by operating activities 5,693 3,067 686
-------- ------- -------
Cash flows from investing activities:
Investment in subsidiary (12,375) 254 (1,070)
Net increase in loans to subsidiary (6,200) -- --
Purchases of common securities (617) -- --
-------- ------- -------
Net cash provided by (used in)
investing activities (19,192) 254 (1,070)
-------- ------- -------
(Continued)
FS-34
18. PARENT COMPANY FINANCIAL DATA (Continued)
Cash flows from financing activities: 1997 1996 1995
-------- -------- --------
Net increase in masternotes $ 15,705 $ -- $ --
Proceeds from junior subordinated debentures 20,568 -- --
Common shares issued to the public -- -- 1,300
Shares issued under stock plans 1,584 527 446
Dividends (5,206) (3,531) (2,015)
Cash issued for fractional shares -- (3) (11)
Debt issuance cost (627) -- --
Repurchased shares (2,732) (277) (188)
-------- -------- --------
Net cash provided by (used in) financing activities 29,292 (3,284) (468)
-------- -------- --------
Net increase (decrease) in cash 15,793 37 (852)
Cash at beginning of year 368 331 1,183
-------- -------- --------
Cash at end of year $ 16,161 $ 368 $ 331
======== ======== ========
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires the disclosure of estimated fair values for financial instruments.
Quoted market prices, if available, are utilized as an estimate of the fair
value of financial instruments. Because no quoted market prices exist for a
significant part of the Company's financial instruments, the fair value of
such instruments has been derived based on management's assumptions with
respect to future economic conditions, the amount and timing of future cash
flows and estimated discount rates. Different assumptions could
significantly affect these estimates. Accordingly, the net realizable value
could be materially different from the estimates presented below. In
addition, these estimates are only indicative of individual financial
instruments' values and should not be considered an indication of the fair
value of the Company taken as a whole.
The carrying values of cash and due from banks, Federal funds sold and
interest-bearing deposits in banks are equal to the fair value due to the
nature of the financial instruments. The fair value of securities is
estimated based upon bid quotations received from various securities
dealers. Loans held for sale are considered short term assets that are
carried at market value at December 31, 1996. The fair value of the
Company's loans is determined by discounting the scheduled cash flows
through the loan's estimated maturity using estimated market discount rates
that most reflect the credit and interest rate risk inherent in the loan.
The estimate of maturity is based upon the stated average maturity of
management's estimates of prepayments considering current economic
conditions and prevailing interest rates.
The fair value of deposits with no stated maturities, such as
noninterest-bearing deposits, interest checking, money market and savings
accounts, are equal to the amount payable as required by SFAS No. 107. The
fair value of time deposits, such as certificates of deposit and Individual
Retirement Accounts, are based on the discounted contractual cash flows.
The discount rate is estimated using rates currently offered for deposits
of similar maturities.
Short-term debt includes repurchase agreements and Federal funds purchased,
which reprice daily or monthly to allow for their market value to equal
their carrying value. The fair value of FHLB advances and the corporation
obligated manditorily redeemable capital securities were determined by
discounting contractual cash flows using current rates for similar
borrowings.
FS-35
19. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The fair value of off-balance sheet financial instruments has not been
considered in determining on balance sheet fair value. The fair value of
unfunded loans and lines of credit and standby letters of credit
approximates the stated value since they are either short term in nature or
subject to immediate repricing. The following table presents information
for financial assets and liabilities as of December 31, 1997 and 1996:
1997 1996
----------------------- -----------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ---------- ---------- ----------
Financial assets:
Cash and due from banks $ 50,398 $ 50,398 $ 40,178 $ 40,178
Federal funds sold 1,549 1,549 2,558 2,558
Interest-bearing deposits in banks 23,027 23,027 879 879
Securities 506,713 507,866 384,622 385,177
Loans held for sale -- -- 2,413 2,413
Loans, less allowance for loan losses 942,595 952,575 752,399 754,160
Interest receivable 12,626 12,626 10,428 10,428
---------- ---------- ---------- ----------
Total financial assets $1,536,908 $1,548,041 $1,193,477 $1,195,793
========== ========== ========== ==========
Financial liabilities:
Deposits $1,191,926 $1,199,616 $1,025,752 $1,026,872
Short-term debt 61,506 61,502 38,980 38,980
Federal Home Loan Bank of Atlanta advances 193,500 194,745 58,000 58,000
Corporation obligated manditorily redeemable capital
securities 19,951 18,093 -- --
Interest payable 8,546 8,546 8,584 8,584
---------- ---------- ---------- ----------
Total financial liabilities $1,475,429 $1,482,502 $1,131,316 $1,132,436
========== ========== ========== ==========
The Company's remaining assets and liabilities are not considered financial
instruments.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for the years ended December
31, 1997 and 1996 is as follows:
1997: Fourth Third Second First
------- ------- ------- -------
Interest income $29,041 $27,720 $25,633 $24,154
Interest expense 14,411 14,228 12,605 11,718
Provision for loan losses 874 1,105 935 544
Noninterest income 2,883 2,972 4,867 2,491
Noninterest expense 11,612 9,043 8,433 8,489
Income tax expense 1,622 2,179 3,160 2,219
------- ------- ------- -------
Net income $ 3,405 $ 4,137 $ 5,367 $ 3,675
======= ======= ======= =======
Basic earnings per share $ .26 $ .32 $ .42 $ .28
======= ======= ======= =======
Diluted earnings per share $ .25 $ .31 $ .40 $ .28
======= ======= ======= =======
FS-36
20. QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)
1996: Fourth Third Second First
------- ------- ------- -------
Interest income $23,561 $23,481 $22,265 $20,652
Interest expense 11,558 11,764 11,045 9,960
Provision for loan losses 828 348 747 407
Noninterest income 2,059 2,305 3,124 2,460
Noninterest expense 8,168 8,507 8,071 8,015
Income tax expense 1,724 1,924 1,905 1,716
------- ------- ------- -------
Net income $ 3,342 $ 3,243 $ 3,621 $ 3,014
======= ======= ======= =======
Basic earnings per share $ .27 $ .26 $ .28 $ .24
======= ======= ======= =======
Diluted earnings per share $ .26 $ .25 $ .28 $ .23
======= ======= ======= =======
21. OTHER INVESTING AND FINANCING ACTIVITIES
Excluded from the consolidated statements of cash flows was the effect of
transfers to trading securities of $41,867,000 during 1997; transfers to
securities held to maturity of $4,557,000 and $22,149,000 in 1996 and 1995,
respectively and transfers to securities available for sale of $44,332,000
in 1995.
The Company acquired ten branches and divested of two branches in 1997 and
acquired five branches and divested of one branch in 1996. In conjunction
with these transactions, assets acquired and liabilities assumed were as
follows:
1997 1996
--------- ---------
Deposits $ 173,584 $ 80,195
Loans (51,931) 117
Premium paid on deposits (15,824) (5,026)
Premises and equipment (3,028) (1,015)
Other assets (593) (132)
Other liabilities 405 142
--------- ---------
Net cash acquired $ 102,613 $ 74,281
========= =========
22. YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the
Company's computer programs that have date-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. The Company
has made a preliminary assessment of its software and does not believe it
has any significant systems that require modifications. An outside firm is
undergoing an extensive study of all of the Company's internal and external
systems and this is expected to be completed in 1998. As such, the costs of
becoming year 2000 compliant cannot be estimated at this time.
Additionally, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that an
inadequate conversion of a significant loan customer would not have a
material adverse effect on the Company.
FS-37
23. PENDING ACQUISITIONS
On October 16, 1997, the Company entered into an agreement to acquire
Guaranty State Bancorp ("Guaranty") and its commercial bank subsidiary,
Guaranty State Bank, both located in Durham, North Carolina. As of December
31, 1997, Guaranty had approximately $107 million in assets. The
transaction will be accounted for using the pooling of interests method of
accounting. All regulatory approvals have been obtained and Guaranty
shareholders are to meet on March 30, 1998 to vote on the proposed
acquisition. The transaction is expected to be consummated in April 1998.
On March 4, 1998, Triangle entered in an agreement to acquire United
Federal Savings Bank, Rocky Mount, North Carolina ("United Federal").
United Federal is a federally-chartered savings bank whose deposits are
insured by the Savings Association Insurance Fund of the FDIC. At December
31, 1997, United Federal had total assets of approximately $304 million.
The United Federal acquisition will be accounted for using the pooling of
interests method of accounting and is subject to the approval of United
Federal's shareholders and all applicable regulatory agencies. The
transaction is expected to be consummated in the third quarter of 1998.
FS-38