-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MyhYuoYo/Kv+xiPg3V2XdB94S+M+Oxk4ZDtnNH2sbwE848fe1gIqp01fegBJIwev t/juAX98g5yiRdX0bInXnw== 0000950168-97-000803.txt : 19970401 0000950168-97-000803.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950168-97-000803 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970422 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANLY CAPITAL CORP CENTRAL INDEX KEY: 0000898171 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 561814206 STATE OF INCORPORATION: NC FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-22062 FILM NUMBER: 97569798 BUSINESS ADDRESS: STREET 1: 167 N SECOND ST STREET 2: PO BOX 338 CITY: ALBEMARLE STATE: NC ZIP: 28001 BUSINESS PHONE: 7049836181 MAIL ADDRESS: STREET 1: P O BOX 338 CITY: ALBEMARLE STATE: NC ZIP: 28002-0338 DEF 14A 1 STANLY CAPITAL CORP. DEF14A PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] CHECK THE APPROPRIATE BOX: [ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (under Rule 14a-6(e)(2)) [x] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to SS. 240.14a-11(c) or SS. 240.14a-12 STANLY CAPITAL CORP (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement) PAYMENT OF FILING FEES (Check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. 1) Title of each class of securities to which transaction applies: 2) Aggregate number of securities to which transaction applies: 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): 4) Proposed maximum aggregate value of transaction: 5) Total fee paid: [ ] Fee paid previously with preliminary materials [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: 2) Form, Schedule or Registration Statement No.: 3) Filing Party: 4) Date Filed: 3/31/97 -1- STANLY CAPITAL CORP 167 NORTH SECOND STREET ALBEMARLE, NORTH CAROLINA 28001 NOTICE OF ANNUAL MEETING OF SHAREHOLDERS NOTICE is hereby given that the Annual Meeting of Shareholders of Stanly Capital Corp (the "Company") will be held as follows: PLACE: Stanly County Agri-Civic Center 26032 Newt Road Albemarle, North Carolina DATE: Tuesday, April 22, 1997 TIME: 6:00 p.m. - Dinner 7:30 p.m. - Business Meeting The purposes of the meeting are: 1. To amend Article I of the Articles of Incorporation of Stanly Capital Corp in order to change the name of the Company from Stanly Capital Corp to "Uwharrie Capital Corp"; 2. To elect seven directors of the Company; 3. To ratify the appointment of Dixon, Odom & Co., L.L.P. as the Company's independent public accountants for 1997; and 4. To transact such other business as may properly be presented for action at the meeting. YOU ARE INVITED TO ATTEND THE ANNUAL MEETING IN PERSON. HOWEVER, EVEN IF YOU PLAN TO ATTEND, YOU ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED APPOINTMENT OF PROXY AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED FOR THAT PURPOSE TO ENSURE THAT A QUORUM IS PRESENT AT THE MEETING. THE GIVING OF AN APPOINTMENT OF PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE IT OR TO ATTEND THE MEETING AND VOTE IN PERSON. BY ORDER OF THE BOARD OF DIRECTORS /s/ Roger L. Dick ROGER L. DICK PRESIDENT AND CHIEF EXECUTIVE OFFICER MARCH 25, 1997 STANLY CAPITAL CORP 167 NORTH SECOND STREET ALBEMARLE, NORTH CAROLINA 28001 (704) 983-6181 PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS This Proxy Statement is being furnished in connection with the solicitation by the Board of Directors of Stanly Capital Corp (the "Company") of appointments of proxy for use at the annual meeting of the Company's shareholders (the "Annual Meeting") to be held on Tuesday, April 22, 1997, at 7:30 p.m., in the Stanly County Agri-Civic Center, 26032 Newt Road, Albemarle, North Carolina, and at any adjournments thereof. The Company's proxy solicitation materials are first being mailed to shareholders on or about March 31, 1997. In this Proxy Statement, the Company's subsidiary bank, Bank of Stanly, is referred to as the "Bank". VOTING OF PROXIES Persons named in the enclosed appointment of proxy as proxies (the "Proxies") to represent shareholders at the Annual Meeting are Roger L. Dick, Dawn L. Melton and Tamara M. Singletary. Shares represented by each appointment of proxy which is properly executed, returned and not revoked, will be voted in accordance with the directions contained therein. If no directions are given, such shares will be voted "FOR" the election of each of the seven nominees for director named in Proposal 2, and "FOR" Proposals 1 and 3. If, at or before the time of the Annual Meeting, any nominee named in Proposal 2 has become unavailable for any reason, the proxies will be authorized to vote for a substitute nominee. On such other matters as may come before the meeting, the proxies will be authorized to vote in accordance with their best judgment. RECORD DATE The close of business on March 7, 1997, has been fixed as the record date (the "Record Date") for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. Only those shareholders of record on that date will be eligible to vote on the proposals described herein. VOTING SECURITIES The Company's voting securities are the shares of its common stock, par value $1.25 per share, of which 2,170,964 shares were issued and outstanding on February 28, 1997. VOTING PROCEDURES; VOTES REQUIRED FOR APPROVAL At the Annual Meeting, each shareholder will be entitled to one vote for each share held of record on the Record Date on each matter submitted for voting and, in the election of directors, for each director to be elected. In accordance with North Carolina law, shareholders will not be entitled to vote cumulatively in the election of directors. In the election of directors, the seven nominees receiving the highest number of votes will be elected. For Proposals 1 and 3 to be approved, a majority of the shares represented in person and by proxy and entitled to vote at the Annual Meeting must be voted in favor of approval. Abstentions and broker nonvotes will have no effect in the voting at the Annual Meeting. REVOCATION OF APPOINTMENT OF PROXY Any shareholder who executes an appointment of proxy has the right to revoke it at any time before it is exercised by filing with the Secretary of the Company either an instrument revoking it or a duly executed appointment of proxy bearing a later date, or by attending the Annual Meeting and announcing his or her intention to vote in person. EXPENSES OF SOLICITATION The Company will pay the cost of preparing, assembling and mailing this Proxy Statement. Appointments of proxy also may be solicited personally or by telephone by the Company's and the Bank's directors, officers and employees without additional compensation. BENEFICIAL OWNERSHIP OF SECURITIES BY MANAGEMENT AND NOMINEES As of February 28, 1997, there were no persons who were known to management of the Company to beneficially own more than 5% of the Company's common stock. The following table lists the individual beneficial ownership of the Company's common stock as of February 28, 1997, by the Company's current directors and nominees for director, by the Company's executive officer named in the Summary Compensation Table below, and by all current directors, nominees and executive officers of the Company as a group. NAME OF AMOUNT AND NATURE OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1,2) PERCENT OF CLASS (1) ---------------- -------------------------- -------------------- William S. Aldridge, Jr. 3,217 .15 Cynthia H. Beane 9,803 .45 Joe S. Brooks 3,738 .17 Ronald T. Burleson 7,493 .35 Barton D. Burpeau, Jr. 1,575 .07 William F. Clayton 2,180 .10 John J. Earnhardt, Jr. 1,150 .05 G. Chad Efird 8,607 .40 W. Kermit Efird 27,428 1.26 James L. Harris 286 .01 Eric M. Johnsen, M.D. 14,558 .67 James F. Link, D.V.M. 200 .01 Jerry J. Long 3,812 .18 W. Chester Lowder 786 .04 James R. Mauney, Sr. 8,557 .39 Pamela S. Morton 336 .02 John P. Murray, M.D. 6,346 .29 Kent E. Newport 429 .02 Catherine A. Pickler 1,074 .05 George T. Reaves 2,881 1.33 A. James Russell 574 .03 B. A. Smith 1,546 .07 2 NAME OF AMOUNT AND NATURE OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1,2) PERCENT OF CLASS (1) ---------------- -------------------------- -------------------- Boyce E. Thompson 4,471 .20 Douglas V. Waddell 384 .02 Roger L. Dick 13,122 .60 All current directors, nominees for director and executive officers as a group (29 persons) 169,686 (3) 7.69 (1) Except as otherwise noted, to the best knowledge of management of the Company, the individuals named or included in the group above exercise sole voting and investment power with respect to all shares shown as beneficially owned. The calculations of the percentage of class beneficially owned by each individual and by the group as a whole are based on a total of 2,205,923 shares which equal to the shares currently outstanding plus the number of shares capable of being issued to that individual (if any) and to the group as a whole within 60 days upon the exercise of stock options held by that individual (if any) and by the group, respectively. (2) Includes shares over which the named individual shares voting and investment power as follows: Mr. Aldridge - 2,881 shares; Ms. Beane - 9,546 shares; Mr. Brooks - 3,538 shares; Mr. Burleson - 1,138 shares; Mr. Burpeau - 1,223 shares; Mr. C. Efird - 8,271 shares; Mr. K. Efird - 27,076 shares; Dr. Johnsen - 14,206 shares; Mr. Long - 3,363 shares; Mr. Lowder - 574 shares; Mr. Mauney - 6,829 shares; Dr. Murray - 5,563 shares; Mr. Newport - 224 shares; Mr. Russell - 174 shares; Mr. Thompson - 2,877 shares. (3) Includes a total of 29,626 shares as to which the persons included in the group exercise sole voting and investment power, and 105,101 shares as to which such power is shared. Also includes an aggregate of 34,959 shares which executive officers included in the group could purchase under currently exercisable stock options. REPORTS OF CHANGES IN BENEFICIAL OWNERSHIP Directors and executive officers of the Company are required by federal law to file reports with the Securities and Exchange Commission regarding the amount of and changes in their beneficial ownership of the Company's common stock. In November 1996, Richard E. Clayton, Sr., former Executive Vice President of the Bank, exercised stock options covering 26,324 shares of common stock following his resignation from the Bank and sold those shares on the same day, for which the required report was not filed by its due date. A report has been filed to cover such transaction. PROPOSAL 1: AMENDMENT OF ARTICLES OF INCORPORATION To better reflect the geographical area beyond Stanly County which the Company serves and to signify the Company's commitment to the vision and business opportunities within the new emerging economy of the Uwharrie Lakes region, the Board of Directors of the Company recommends to shareholders that Article I of the Articles of Incorporation of Stanly Capital Corp be amended in order to change the name of the Company from Stanly Capital Corp to "Uwharrie Capital Corp". The text of Article I as proposed to be amended is as follows: "The name of the corporation is Uwharrie Capital Corp (herein referred to as the "Corporation")." 3 THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE AMENDMENT OF THE ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE COMPANY FROM STANLY CAPITAL CORP TO "UWHARRIE CAPITAL CORP". PROPOSAL 2: ELECTION OF DIRECTORS NOMINEES The Company's Bylaws provide for a Board of Directors composed of 18 members divided into three classes, each consisting of six directors who are elected to terms of three years. Each year the terms of six directors expire and six persons are elected as directors for new three-year terms. Due to the death of Director Paul J. Cox, Cynthia H. Beane was appointed to serve on the Board of Directors in 1996 to fill the unexpired one-year term of Mr. Cox. The Board of Directors intends to nominate the seven persons named below for election by shareholders at the Annual Meeting as directors of the Company for the terms specified below or until their respective successors are duly elected and qualified. With the exception of Cynthia H. Beane who currently serves as a director of the Company, all of the nominees are new nominees. In order to continue to evenly stagger the terms of the directors on the Board of Directors, Ms. Beane has been nominated to serve a two-year term.
POSITIONS YEAR IN WHICH WITH FIRST ELECTED/ PRINCIPAL OCCUPATION NAME AND AGE COMPANY PROPOSED TERM EXPIRES AND BUSINESS EXPERIENCE FOR PAST 5 YEARS Cynthia H. Beane Director 1996/1999 Cynthia H. Beane, CPA, Albemarle, NC (48) (certified public accountant) Joe S. Brooks Nominee ---/2000 Partner, Brothers Precision Tool Company, (47) Albemarle, NC (tool and die shop) Ronald T. Burleson Nominee ---/2000 Partner, Thurman Burleson & Sons Farm, (47) Richfield, NC (farming operation) James F. Link, D.V.M. Nominee ---/2000 Veterinarian and Owner, North Stanly Animal (44) Clinic, New London, NC Kent E. Newport Nominee ---/2000 President, KDC, Inc. DBA Coy's Laundromat, (35) Albemarle, NC (coin laundry and self-service carwash) George T. Reaves Nominee ---/2000 Retired, previously Vice President Traffic (69) and Transportation, Collins & Aikman Corporation, Albemarle, NC (manufacturer of automotive fabrics, upholstery, yarns) A. James Russell Nominee ---/2000 Construction Manager, J.T. Russell & Sons, (42) Inc., Albemarle, NC (highway heavy utility construction)
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" EACH OF THE NOMINEES NAMED ABOVE. 4 INCUMBENT DIRECTORS The Company's current Board of Directors includes 11 directors whose terms will continue after the Annual Meeting. The following table contains information about those 11 incumbent directors.
YEAR IN WHICH POSITIONS FIRST ELECTED/ PRINCIPAL OCCUPATION WITH CURRENT TERM AND BUSINESS EXPERIENCE NAME AND AGE COMPANY EXPIRES (1) FOR PAST 5 YEARS - ----------------------- ------- ------------ ----------------------------- William S. Aldridge, Jr. Director 1993/1999 Manager, Secretary-Treasurer and co- (69) owner, Stanly Funeral Home, Inc. Albemarle, NC William F. Clayton Director 1992/1998 Cost office supervisor for Aluminum (49) Company of America (ALCOA), Badin, NC (aluminum products manufacturer) G. Chad Efird Director 1993/1999 Retired; previously, Technical (74) Supervisor, Aluminum Company of America (ALCOA), Badin, NC (aluminum products manufacturer) Jerry J. Long Director 1992/1998 President, Secretary and co-owner, Long's (65) Diamond Broker, Albemarle, NC (diamond broker) W. Chester Lowder Director 1995/1999 Director of Field Services, North Carolina (48) Farm Bureau Federation, Raleigh, NC (agricultural service agency); President, Fork "L" Farm, Inc., Norwood, NC (farming operation) Pamela S. Morton Director 1992/1998 Principal, Endy Elementary (44) School, Albemarle, NC, previously Personnel Director, Stanly County Schools, Albemarle, NC John P. Murray, M.D. Director 1996/1998 Retired; previously, physician and owner, (55) Albemarle Ear, Nose and Throat, Albemarle, NC Catherine A. Pickler Director 1995/1998 Homemaker and community volunteer, (62) New London, NC B. A. Smith Director 1996/1999 Retired, Stanfield, NC; previously, pilot (63) and Base Commander, United States Air Force Boyce E. Thompson Director 1992/1998 Treasurer, Stanly Fixtures Co., (46) Inc., Norwood, NC (store fixtures manufacturer) Douglas V. Waddell Director 1995/1999 Retired; previously, Manager, Sears (68) & Roebuck - Automotive Department, Albemarle, NC (retail store)
(1) The year first elected indicates the year in which each individual was first elected a director of the Bank or the Company, as applicable, and does not reflect breaks in certain of the named individuals' tenures as directors of the Bank or the Company, as applicable. 5 DIRECTOR COMPENSATION For service during 1997, each director will be paid a fee of $200 for each Board of Directors meeting attended and $100 for attendance at each meeting of a committee. During 1994, the Company adopted a plan under which individual directors may elect each year to defer receipt of all or a designated portion of their fees for that year. Amounts so deferred earn interest at rates tied to market indices selected quarterly by the plan administrators, and such amounts become payable in the future (in a lump sum or annual installments) as specified by the director at the time of his or her deferral election. During 1996, Directors Lowder, K. Efird, Long and Thompson deferred compensation pursuant to such plan. MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors of the Company held 12 regular meetings and 3 special meetings during 1996. Each incumbent director attended 75% or more of the aggregate number of meetings of the Board of Directors and of any committees on which he or she served with the exception of Directors Johnsen, Lowder and Morton whose absences were due to prior business commitments. The Company's Board of Directors has several standing committees, including an Examining Committee, a Personnel Committee, a Compensation Committee and a Nominating Committee. The current members of the Examining Committee are Boyce E. Thompson - Chairman, William F. Clayton, James L. Harris, Jerry J. Long and John P. Murray, M. D. The Examining Committee reviews the annual audit reports of the Company's independent auditors and the examination reports issued by bank regulatory agencies, and oversees the work of the Company's internal auditor. The Examining Committee met 11 times during 1996. The current members of the Personnel Committee are G. Chad Efird - Chairman, Pamela S. Morton, B.A. Smith and Douglas V. Waddell. The Personnel Committee is authorized to consider and make recommendations to the Board of Directors for action on matters pertaining to the compensation of employees (other than executive officers) of the Company and the Bank and to establish personnel policies for the Company and the Bank. The Personnel Committee did not meet during 1996. The Board of Directors has voted that, beginning in 1997, the Compensation Committee will also function as the Personnel Committee. The current members of the Compensation Committee are G. Chad Efird - Chairman, William F. Clayton, W. Chester Lowder, James R. Mauney, Pamela S. Morton, B.A. Smith, Jr. and Douglas V. Waddell. The Compensation Committee is authorized to consider and make recommendations to the Board of Directors for action on matters pertaining to the compensation of executive officers of the Company and the Bank. The Compensation Committee met two times during 1996. The current members of the Nominating Committee are Jerry J. Long - Chairman, William S. Aldridge, Jr., W. Kermit Efird, Eric M. Johnsen, M.D. and Pamela S. Morton. The Nominating Committee recommends candidates to the Company's Board of Directors for selection as nominees 6 for election as directors of the Company. The Nominating Committee met two times during 1996. In making its recommendations, the Nominating Committee will consider candidates recommended by shareholders. Recommendations of nominee candidates by shareholders for the 1998 Annual Meeting should be submitted in writing to the Chief Executive Officer of the Company by September 30, 1997, and should be accompanied by a statement of each candidate's qualifications to serve as a director. EXECUTIVE OFFICERS The following table contains information about the current executive officers of the Company and the Bank.
EMPLOYED CURRENT POSITIONS BY BANK NAME AND AGE WITH COMPANY AND/OR BANK SINCE - -------------------- -------------------------------- -------- Roger L. Dick (45) President and Chief Executive Officer of Company and Bank 1983 Jackie S. Jernigan (42) Executive Vice President of Bank (retail banking) 1983 Dawn L. Melton (36) Executive Vice President of Company (technology) 1983 Tamara M. Singletary (37) Executive Vice President of Company (investor relations) 1983 Thomas H. Swaringen (53) Executive Vice President of Bank (credit administration) 1990
Effective April 14, 1997, Ron B. Davis will begin employment with the Bank as President. Roger Dick, President and Chief Executive Officer of the Company and the Bank, will remain President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank. EXECUTIVE COMPENSATION The following table shows, for 1996, 1995 and 1994, the compensation paid to or received or deferred by the Company's chief executive officer. No other current executive officer of the Company or the Bank received compensation for 1996 which exceeded $100,000.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS PAYOUTS OTHER ALL ANNUAL RESTRICTED OTHER NAME AND COMPEN- STOCK OPTIONS/ LTIP COMPEN- PRINCIPAL SALARY BONUS SATION AWARDS SARS PAYOUTS SATION POSITION YEAR ($)(1) ($)(2) ($)(3) ($) (#) ($) ($)(4) - ----------------------- ---- ---------- ------------ ---------- ------- ------- -------- -------- Roger L. Dick, President 1996 $107,966 $5,398 -0- -0- 63,703(5) -0- $6,802 and Chief Executive Officer of the Company and the Bank 1995 95,865 3,607 -0- -0- -0- -0- 5,968 1994 95,104 3,571 -0- -0- -0- -0- 6,028
(1) Includes amounts deferred at Mr. Dick's election pursuant to the Company's Section 401(k) savings plan. (2) Includes all cash bonuses received for each year by Mr. Dick. At the end of each year the Company's Board of Directors may approve the payment of annual cash bonuses to individual officers based on the Company's results of operations and their individual performance during the year. The payment and amounts of any such bonuses are determined solely by the Company's Board of Directors. In addition to discretionary cash 7 bonuses, during 1996 the Company maintained an incentive plan under which, at the end of each calendar quarter, each of certain officers and employees could receive a cash bonus (equal to 5.0% of their quarterly salary) if the Company's financial performance for that quarter equaled or exceeded budgeted amounts. (3) In addition to compensation paid in cash, the Company's executive officers receive certain personal benefits. However, the aggregate value of non-cash benefits received by Mr. Dick during each year did not exceed 10% of cash compensation paid to him. (4) Consists entirely of the Company's contributions on behalf of Mr. Dick to the Company's Section 401(k)savings plan. (5) The number of shares covered by options increased to 65,614 as a result of a 3% stock dividend declared in December 1996. STOCK OPTIONS The following table contains information with regard to grants of stock options during 1996 to Roger L. Dick, President and Chief Executive Officer of the Company and the Bank.
STOCK OPTION GRANTS IN 1996 INDIVIDUAL GRANTS Number of Securities Underlying % of Options Granted Options to Employees in Exercise or Base Name Granted (#)(1) Fiscal Year Price ($) Per Share Expiration Date - ---- -------------- ------------------- ------------------- -------------- Roger L. Dick 63,703(2) 47% $6.00 (2) 4/15/06
(1) One-fifth of the options vest and become exercisable in each of the five years beginning April 15, 1997, assuming Mr. Dick remains employed by the Company. If Mr. Dick's employment terminates before the end of the vesting period, Mr. Dick may exercise vested options for varying periods after termination (depending on the manner of termination) in accordance with the plan. (2) The number of shares covered by options increased to 65,614 and the exercise price decreased to $5.825 as a result of a 3% stock dividend declared in December 1996. The following table contains information with respect to stock options exercised during 1996, and held at December 31, 1996, by Roger L. Dick, President and Chief Executive Officer of the Company and the Bank. 8 AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS AT FY-END AT FY-END (#) ($)(2) SHARES ACQUIRED ON VALUE EXERCISE REALIZED NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------- ---------------- ----------- ------------ ------------- ----------- ------------- Roger L. Dick 13,726 $33,313 -0- 65,614 -0- $109,903
(1) Represents the aggregate fair market value on the date of exercise (based on an estimated market value of $6.00 per share) of shares acquired upon such exercise, minus the aggregate exercise or purchase price of those shares. (2) Represents the aggregate fair market value at December 31, 1996 (based on an estimated market value of $7.50 per share) of shares underlying unexercised options held on that date, minus the aggregate exercise or purchase price of those shares. TRANSACTIONS WITH MANAGEMENT The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with certain of the Company's and the Bank's directors and executive officers and their associates. All loans included in such transactions were made on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing at the time for comparable transactions with other persons, and do not involve more than the normal risk of collectibility or present other unfavorable features. PROPOSAL 3: RATIFICATION OF APPOINTMENT OF ACCOUNTANTS The Board of Directors has appointed the firm of Dixon, Odom & Co., L.L.P., Certified Public Accountants, as the Company's independent accountants for 1997, and a proposal to ratify that appointment will be submitted for shareholder approval at the Annual Meeting. A representative of Dixon, Odom & Co., L.L.P. is expected to be present at the Annual Meeting and available to respond to appropriate questions, and will have the opportunity to make a statement if he desires to do so. On August 31, 1996, the Company discontinued the services of McGladry & Pullen, L.L.P. and engaged Dixon, Odom & Co., L.L.P. as the Company's independent certified public accountants. In connection with McGladry & Pullen's audits of the financial statements of the Company for the prior three fiscal years, there were no disagreements with the Company on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of McGladry & Pullen, L.L.P., would have caused them to make reference to the subject of the disagreement in connection with their report. In addition, during these periods there was no adverse opinion or disclaimer of opinion or any modification of opinion as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Company's Board of Directors. 9 THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF DIXON, ODOM & CO., L.L.P. AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR 1997. OTHER MATTERS The Board of Directors knows of no other business that will be brought before the Annual Meeting. Should other matters properly be presented for action at the Annual Meeting, the Proxies, or their substitutes, will be authorized to vote shares represented by appointments of proxy according to their best judgment. PROPOSALS OF SHAREHOLDERS Any proposal of a shareholder which is intended to be presented at the Company's 1998 Annual Meeting must be received by the Company at its main office in Albemarle, North Carolina, no later than November 28, 1997, to be considered timely received for inclusion in the proxy statement and appointment of proxy to be distributed in connection with that meeting. ADDITIONAL INFORMATION A COPY OF THE COMPANY'S 1996 ANNUAL REPORT ON FORM 10-K WILL BE PROVIDED WITHOUT CHARGE TO ANY SHAREHOLDER ENTITLED TO VOTE AT THE ANNUAL MEETING UPON THAT SHAREHOLDER'S WRITTEN REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO JUDY H. MILLER SECRETARY, STANLY CAPITAL CORP, 167 NORTH SECOND STREET, ALBEMARLE, NORTH CAROLINA 28001. 9 STANLY CAPITAL CORP 1996 ANNUAL REPORT TO SHAREHOLDERS This page left blank intentionally. DESCRIPTION OF BUSINESS Stanly Capital Corp ("the Company") was incorporated under the laws of the State of North Carolina as a one bank holding company for Bank of Stanly ("the Bank"). The Company commenced operations on July 1, 1993. Bank of Stanly was incorporated under the laws of the State of North Carolina on September 28, 1983. It commenced operations on January 26, 1984. Since commencement of operations, the Bank has engaged in retail and commercial banking business. The Bank has three banking offices in the city of Albemarle, one office in the town of Norwood, and one office in the town of Oakboro, Stanly County, North Carolina. The Bank conducts a general banking business through its five offices. Its depository services include personal and commercial checking, savings, money market, certificates of deposit accounts and individual retirement accounts tailored to meet customers' needs. In addition to other commercial related products, a program called Business Manager(R) is offered to better serve our business community. Business Manager(R) is an accounts receivable billing system where commercial accounts receivable are purchased and serviced by the Bank. The Bank provides fixed and variable rate loans which include mortgage, home equity lines of credit, consumer and commercial loans, and other lines of credit for both consumer and commercial customers. The Bank also offers MasterCard(R) credit cards. Another service offered through the Bank is a Visa(R) Check Card which functions as a point-of-sale (POS) and automated teller machine (ATM) card. Customers can use the Check Card for purchases at any merchant accepting Visa and at any ATM displaying the HONOR(R) and CIRRUS(R) networks regionally and worldwide, respectively. Other services include rental of safe deposit boxes, night depository, wire transfers, incoming and outgoing collection items, notary service, check safekeeping, and direct deposit. The Bank has two wholly-owned subsidiaries. The Strategic Alliance Corporation is a broker-dealer through the National Association of Securities Dealers offering a full range of financial and investment planning services to Stanly County customers through its marketing division, BOS Financial. In addition, The Strategic Alliance Corporation offers services to clients outside Stanly County. BOS Agency, Inc. is a corporate entity that recognizes the risk management needs of customers and brings life insurance, long-term health care, medicare supplement and other insurance industry products to customers' financial portfolios. At December 31, 1996, the Bank, through a joint venture agreement with another community bank, had a 50 percent ownership interest in Corporate Data Services, Inc., a company that provides operations and data processing services. (Products offered through BOS Financial and The Strategic Alliance Corporation are not FDIC insured, are not obligations of Bank of Stanly, are not guaranteed by the Bank, and may involve investment risk, including the possible loss of principal.) The Strategic Alliance Corporation Member NASD/SIPC 3 STANLY CAPITAL CORP AND SUBSIDIARY FINANCIAL HIGHLIGHTS
Percent (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 1996 1995 Change - ------------------------------------------------------------------------------------------------------------------- FOR THE YEAR: Net Income $ 1,025 $ 781 31.2 Per share (1) .47 .36 30.6 Cash dividends paid 216 190 13.7 Per share .10 .09 11.1 Average shares outstanding (1) 2,183,342 2,199,550 (.7) - ------------------------------------------------------------------------------------------------------------------- AT YEAR-END: Total assets $ 133,876 $ 120,839 10.8 Total earning assets 126,371 114,208 10.7 Loans, net of unearned income 100,852 90,948 10.9 Total interest-bearing liabilities 109,169 98,885 10.4 Shareholders' equity 11,303 10,913 3.6 Book value per share (1) 5.20 4.99 4.2 - ------------------------------------------------------------------------------------------------------------------- AVERAGES FOR THE YEAR: Total assets $ 128,193 $ 113,535 12.9 Total earning assets 121,548 106,817 13.8 Loans, net of unearned income 97,201 82,630 17.6 Total interest-bearing liabilities 104,919 92,859 13.0 Shareholders' equity 11,123 10,445 6.5 - ------------------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS (IN PERCENTAGE): Return on average assets .80 .69 Return on average shareholders' equity 9.22 7.48 Average equity to average assets 8.68 9.20 Net interest margin (fully tax equivalent 4.70 4.73 basis) Allowance as % of loans 1.04 1.07 Allowance as % of nonperforming loans 316 542 Allowance as % of nonperforming assets 252 368 Nonperforming assets to loans .41 .29 Net charge-offs to average loans .06 .03 Dividend payout ratio 21.10 24.28 - -------------------------------------------------------------------------------------------------------------------
1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end have been adjusted to reflect the 3% stock dividend issued in 1996. * * * * MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS It is the philosophy of the Company to promote a strong local shareholder base; therefore, the Company's common stock is neither listed nor traded on a broker-dealer market. Management of the Company makes every reasonable effort to match willing buyers with willing sellers as they become known for the purpose of private negotiations for the purchase or sale of the Company's common stock. In addition, Stanly Capital Corp has adopted a program of on-going open market purchases of shares of the Company's stock. The combination of private trades and Company purchases has provided adequate liquidity for the investors of Stanly Capital Corp stock without the cost of brokerage fees. Approximately 84,356 shares of stock were traded during 1996. During December of 1996 and 1995, the Company paid cash dividends of $.10 and $.09 per share, respectively, and issued a 3% stock dividend each year. As of December 31, 1996, Stanly Capital Corp had 1,612 shareholders of record. 4 (Logo of Dixon, Odom & Co., L.L.P. appears here) DIXON, ODOM & CO., LLP Certified Public Accountants To the Shareholders and Board of Directors Stanly Capital Corp We have audited the accompanying consolidated balance sheet of Stanly Capital Corp and subsidiary (the "Company") as of December 31, 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Stanly Capital Corp and subsidiary as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Dixon, Odom & Co., L.L.P. High Point, North Carolina January 20, 1997 (Logo of McGladrey & Pullen, LLP appears here) McGLADREY & PULLEN, LLP ----------------------- Certified Public Accountants and Consultants INDEPENDENT AUDITOR'S REPORT - -------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT To the Board of Directors Stanly Capital Corp Albemarle, North Carolina We have audited the consolidated balance sheet of Stanly Capital Corp and Subsidiary as of December 31, 1995 and the related statements of income, shareholders' equity and cash flows for the year then ended. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Stanly Capital Corp and Subsidiary as of December 31, 1995, and the result of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ McGladrey & Pullen, LLP Charlotte, North Carolina January 17, 1996 5 STANLY CAPITAL CORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- ASSETS Cash and due from banks $4,583,678 $ 3,307,786 Due from banks, interest-bearing 299,494 145,746 Investment securities available for sale, at fair value 25,220,437 23,113,769 Loans 100,852,450 90,948,068 Less allowance for loan losses 1,049,833 975,475 --------------- --------------- Net loans 99,802,617 89,972,593 Premises and equipment, net 2,117,249 2,097,302 Interest receivable 857,794 865,806 Other assets 994,318 1,335,908 -------------- --------------- Total assets $ 133,875,587 $ 120,838,910 =============== =============== LIABILITIES Deposits Demand, noninterest-bearing $ 12,852,376 $ 10,182,794 Money market and NOW accounts 24,112,851 23,273,775 Savings accounts 27,706,578 24,493,506 Time deposits, $100,000 and over 6,502,755 5,190,183 Other time deposits 33,424,904 32,653,680 --------------- ---------------- Total deposits 104,599,464 95,793,938 Federal funds purchased and securities sold under repurchase agreements 8,156,145 7,312,340 Other short-term borrowed funds 3,000,000 - Long-term debt 6,265,660 5,962,212 Interest payable 176,042 164,565 Other liabilities 374,871 693,174 --------------- ---------------- Total liabilities 122,572,182 109,926,229 Off balance sheet items, commitments and contingencies - Note 10 SHAREHOLDERS' EQUITY Common stock, $1.25 par value 6,000,000 shares authorized; shares issued and outstanding of 2,174,982 and 2,123,999, respectively 2,718,728 2,654,999 Additional paid-in capital 4,593,661 4,376,560 Undivided profits 3,738,055 3,367,929 Net unrealized gain on securities available for sale, net of related tax effect 252,961 513,193 --------------- ---------------- Total shareholders' equity 11,303,405 10,912,681 --------------- ================ Total liabilities and shareholders' equity $ 133,875,587 $ 120,838,910 =============== ================
The accompanying notes are an integral part of the consolidated financial statements. 6 STANLY CAPITAL CORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- INTEREST INCOME Loans, including fees $ 8,551,597 $ 7,421,870 Investment securities U. S. Treasury 342,402 440,340 U. S. Government agencies and corporations 700,636 633,859 State and political subdivisions 349,680 354,157 Other 52,633 46,600 Short-term investments 43,371 16,592 ------------- ------------- Total interest income 10,040,319 8,913,418 ------------- ------------- INTEREST EXPENSE Time deposits, $100,000 and over 314,446 288,461 Other interest-bearing deposits 3,371,130 3,036,683 Federal funds purchased and securities sold under repurchase agreements 345,622 290,027 Other short-term borrowed funds 49,047 24,978 Long-term debt 431,176 411,186 ------------- ------------- Total interest expense 4,511,421 4,051,335 ------------- ------------- NET INTEREST INCOME 5,528,898 4,862,083 Provision for loan losses 136,845 77,346 ------------- ------------- Net interest income after provision for loan losses 5,392,053 4,784,737 ------------- ------------- NONINTEREST INCOME Service charges on deposit accounts 901,360 774,783 Other service fees and commissions 390,854 354,063 Gains on securities sold 29,367 57,985 Other income (expense) 39,626 ( 4,141) ------------- ------------- Total noninterest income 1,361,207 1,182,690 ------------- ------------- NONINTEREST EXPENSE Salaries and employee benefits 2,542,272 2,266,308 Net occupancy expense 221,036 211,870 Equipment expense 432,837 411,023 Data processing costs 493,139 481,348 Other operating expense 1,587,867 1,617,462 ------------- ------------- Total noninterest expenses 5,277,151 4,988,011 ------------- ------------- Income before income taxes 1,476,109 979,416 Income taxes 450,720 198,357 ============= ============= NET INCOME $ 1,025,389 $ 781,059 ============= ============= Net income per common share $ .47 $ .36 Average shares outstanding 2,183,342 2,199,550
The accompanying notes are an integral part of the consolidated financial statements. 7 STANLY CAPITAL CORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996 AND 1995
Additional Net Unrealized Common Stock Paid-in Undivided Gain (Loss) on Shares Amount Capital Profits Securities ------ ------ ---------- --------- -------------- YEAR ENDED DECEMBER 31, 1995 Balance at beginning of year 2,144,134 $ 2,642,668 $ 4,376,183 $ 3,130,525 $ (425,634) Net income - - - 781,059 - Common stock issued pursuant to: 3% stock dividend 61,465 76,831 277,207 (354,038) - Stock options exercised 32,123 40,154 49,338 - - Repurchases of common stock (83,723) (104,654) (374,968) - - Dividends paid - $.09 per share - - - (189,617) - Increase in investment in unconsolidated subsidiary - - 48,800 - - - Net increase in fair value of securities available for sale - - - - 938,827 ============= ============= ============ ============= ============= Balance at end of year 2,123,999 $ 2,654,999 $ 4,376,560 $ 3,367,929 $ 513,193 ============= ============= ============ ============= ============= YEAR ENDED DECEMBER 31, 1996 Balance at beginning of year 2,123,999 $ 2,654,999 $ 4,376,560 $ 3,367,929 $ 513,193 Net income - - - 1,025,389 - Common stock issued pursuant to: 3% stock dividend 62,698 78,372 360,514 (438,886) - Stock options exercised 42,850 53,563 140,270 - - Repurchases of common stock (54,565) (68,206) (283,683) Dividends paid - $.10 per share - - - (216,377) - Net decrease in fair value of securities available for sale - - - - (260,232) ------------- ------------- ------------ ------------- ------------- Balance at end of year 2,174,982 $ 2,718,728 $ 4,593,661 $ 3,738,055 $ 252,961 ============= ============= ============ ============= =============
The accompanying notes are an integral part of the consolidated financial statements. 8 STANLY CAPITAL CORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995 ---- ---- OPERATING ACTIVITIES Net income $ 1,025,389 $ 781,059 Adjustments to reconcile net income to net cash provided by operations: Depreciation 235,280 212,378 Accretion of security premiums (17,959) (39,471) Provision for loan losses 136,845 77,346 Deferred income tax expense 158,716 96,686 Gain on sale of securities available for sale, net (29,367) (57,985) Loss on disposals of premises and equipment 14,752 4,098 (Gain) loss on sale of foreclosed properties (6,779) 31,393 Net change in interest receivable 8,012 (54,395) Net change in other assets 20,327 743,057 Net change in interest payable 11,477 17,044 Net change in accrued and other liabilities 11,463 232,372 --------------- --------------- Net cash provided by operating activities 1,568,156 2,043,582 --------------- --------------- INVESTING ACTIVITIES Proceeds from sales of securities available for sale 7,198,862 7,652,006 Proceeds from maturities of securities available for sale 317,821 2,150,000 Purchase of securities available for sale (10,003,476) (7,895,654) Net increase in loans made to customers (10,090,781) (10,734,869) Purchase of premises and equipment (269,979) (229,779) Proceeds from sale of foreclosed properties 130,691 24,900 --------------- --------------- Net cash used by investing activities (12,716,862) (9,033,396) --------------- --------------- FINANCING ACTIVITIES Net increase in deposit accounts 8,805,526 2,558,931 Net increase (decrease) in federal funds purchased (2,850,000) 550,000 Net increase in securities sold under repurchase agreements 3,693,805 4,462,339 Proceeds from long-term advances from Federal Home Loan Bank 2,000,000 - Repayment of long-term advances from Federal Home Loan Bank (1,696,552) (624,138) Net proceeds from short-term advances from Federal Home Loan Bank 3,000,000 - Repurchases of common stock (351,889) (479,622) Proceeds from issuance of common stock 193,833 89,492 Dividends paid (216,377) (189,617) --------------- --------------- Net cash provided by financing activities 12,578,346 6,367,385 --------------- --------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,429,640 (622,429) Cash and cash equivalents at beginning of year 3,453,532 4,075,961 =============== =============== Cash and cash equivalents at end of year $ 4,883,172 $ 3,453,532 =============== =============== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 4,499,944 $ 4,034,292 Income taxes paid 457,000 6,000 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Foreclosure of collateral in partial satisfaction of debt 123,912 - Increase (decrease) in fair value of securities available for sale, net of deferred taxes (benefit); 1996 - $(167,219), 1995 - $603,268 (260,232) 938,827 Increase in investment accounted for using the equity method, net of deferred tax of $31,200 - 48,000 Stock dividends 1996 - 62,698 shares; 1995 - 61,465 shares 438,886 354,038
The accompanying notes are an integral part of the consolidated financial statements. 9 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------ NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES Nature of Business Stanly Capital Corp ("the Company") was incorporated under North Carolina law for the purpose of becoming the holding company for Bank of Stanly ("the Bank"). Regulatory approval was initially sought in March 1993, and was subsequently received. On July 1,1993, the Bank became a wholly-owned subsidiary of the Company whereby the common stock of the Bank was deemed shares of the Company. Bank of Stanly was incorporated on September 28, 1983, under the laws of the State of North Carolina and began operations on January 26, 1984, in Albemarle, North Carolina. Deposits with the Bank are insured by the Federal Deposit Insurance Corporation ("FDIC"); thus, the Bank is under regulation of both the FDIC and the North Carolina State Banking Commission. Through its five branch locations in Stanly County, the Bank provides a wide range of deposit accounts, commercial, consumer, home equity and residential mortgage loans, safe deposit boxes and automated banking. In 1987, the Bank established a wholly-owned subsidiary, BOS Agency, Inc. ("BOS Agency"), which engages in investment and insurance product sales. In 1989, the Bank established a second wholly-owned subsidiary, BOS Financial Corporation, for the purpose of conducting business as a broker/dealer in securities. During 1993, BOS Financial Corporation changed its name to The Strategic Alliance Corporation ("Strategic Alliance") and was licensed as a broker/dealer by the National Association of Securities Dealers. Basis of Financial Statement Presentation The accounting and reporting policies of the Bank conform to generally accepted accounting principles and general practices within the financial services industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of the Company, the Bank and its wholly-owned subsidiaries, BOS Agency and Strategic Alliance. All significant intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The Bank has available lines of credit for federal funds in the amount of $9,000,000. From time to time, the Bank may have deposits in excess of insurance coverage at other institutions. Securities Held To Maturity Securities classified as held to maturity are debt securities the Company has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. Based on the Company's financial position and liquidity, management believes the Company has the ability to hold these securities for the foreseeable future. 10 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------ NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Securities Available For Sale Securities classified as available for sale are those debt and equity securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital consideration, and other similar factors. Securities available for sale are carried at fair value. Unrealized gains or losses are reported as increases or decreases in shareholders' equity, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Loans Loans are stated at the amount of unpaid principal, reduced by unearned fees and an allowance for loan losses. Interest on loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. The accrual of interest is discontinued on loans (1) which are past due ninety days or more if collateral is inadequate to cover principal and interest, or (2) immediately if management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is doubtful. Upon such discontinuance, all unpaid accrued interest is reversed. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield on the related loan. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operations and reduced by net charge-offs. The Company makes continuous credit reviews of the loan portfolio and considers current economic conditions, historical loss experience, review of specific problem loans and other factors in determining the adequacy of the allowance balance. The Company adopted FASB Statement No. 114, "Accounting by Creditors for Impairment of a Loan," and FASB Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," during the three-month period ended September 30, 1995. FASB Statements No. 114 and No. 118 were effective as of January 1, 1995 for the Company. FASB Statement No. 114 requires all creditors to measure the impairment of a loan based upon the present value of the loan's future cash flows discounted using the loan's effective interest rate. The loan can also be valued at its fair value or the market price of its underlying collateral if the loan is primarily collateral dependent. FASB Statement No. 118 amended FASB Statement No. 114 by adding disclosure requirements for impaired loans and it permits greater latitude in the manner in which income on impaired loans may be recognized as long as the creditor's policies are disclosed. FASB Statement No. 114 does not apply to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment and, therefore, did not have an effect on the Company's reporting for impaired loans since the majority of the Company's loans, consisting of residential first mortgages, residential construction loans, home equity loans, and consumer loans, are collectively assessed, and the Company's possible impaired loans, all of which have the primary risk characteristic of being delinquent 90 days or more, are collateral dependent, and the fair value of such collateral has been assessed to be in excess of the carrying basis in such loans. Loans are charged off when management determines collectibility of principal and accrued interest unlikely. No loans were deemed impaired at December 31, 1996, and there is no specific FASB Statement No. 114 allowance associated with the portfolio. 11 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Foreclosed Property Property acquired through foreclosure or other proceedings is initially recorded at fair value upon foreclosure establishing a new cost basis. After foreclosure, valuations are performed and the foreclosed property is adjusted to the lower of cost or fair market value of the properties less costs to sell. Any write-down at the time of transfer to foreclosed properties is charged to the allowance for loan losses. Subsequent write-downs are charged to other expenses. Property is evaluated regularly to ensure that the recorded amount is supported by its current fair market value. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Additions and major replacements or betterments which extend the useful lives of premises and equipment are capitalized. Maintenance, repairs and minor improvements are expensed as incurred. Depreciation is computed principally by the straight-line method over estimated useful lives, except in the case of leasehold improvements, which are amortized over the term of the leases, if shorter. Useful lives range from five years for furniture and fixtures to ten to thirty years for leasehold improvements and buildings, respectively. Upon retirement or other disposition of the assets, the cost and the related accumulated depreciation are removed from the accounts and any gains or losses are reflected in income. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The Company currently accounts for its stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (see Note 13). Since the Company is not required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, it has elected only to comply with the disclosure requirements set forth in the Statement, which includes disclosing pro forma net income as if the fair value based method of accounting had been applied. (See Note 13.) Income Taxes The Company and its subsidiaries file a consolidated Federal income tax return and separate North Carolina income tax returns. The provision for income taxes in the accompanying financial statements is provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Fair Value of Financial Instruments Financial Accounting Standards Board Statement No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In 12 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certainfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying market value nor liquidation value of the Company. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: CARRYING AMOUNTS APPROXIMATE FAIR VALUES for the following instruments: Cash and cash equivalents Accrued interest receivable and payable Variable rate loans that reprice frequently where no significant change in credit risk has occurred Variable rate money market, demand, NOW and savings accounts Variable rate time deposits Federal funds purchased and securities sold under repurchase agreements Short-term borrowed funds QUOTED MARKET PRICES, where available, or if not available, based on quoted market prices of comparable instruments for the following: Securities available for sale DISCOUNTED CASH FLOWS using interest rates currently being offered on instruments with similar terms and with similar credit quality: Long-term debt All loans, except variable rate loans described above Fixed rate time deposits Earnings per Common Share Earnings per common share is calculated on the basis of the weighted average number of common shares outstanding retroactively restated to reflect the 3% stock dividend effective in December 1996 and 1995. Common stock equivalents in the form of outstanding stock options have not been included in the computation of earnings per common share since the dilutive effect is insignificant. As a result of the reorganization and merger, all of the shares of the Bank were deemed to be shares of the Company. All common stock transactions subsequent to the reorganization and merger have resulted in Stanly Capital Corp shares being issued. Investment in Joint Venture During 1992, the Company entered into a joint venture agreement to form Corporate Data Services, Inc. ("CDS"), a company that provides operations and data processing services for community banks. The Company had a 50% ownership interest at December 31, 1996 and 1995. The Company utilizes the equity method to account for its ownership in the joint venture. - -------------------------------------------------------------------------------- 13 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------- NOTE 2 - SECURITIES Carrying amounts and fair values of securities available for sale are summarized below:
--------------- -- -------------- -- --------------- -- ---------------- Gross Gross Estimated Amortized Unrealized Unrealized Market December 31, 1996 Cost Gains Losses Value - ----------------- --------------- -- -------------- -- --------------- -- ---------------- U.S. Treasury securities $ 3,980,298 18,860 - 3,999,158 U.S. Government agencies and corporations 2,005,132 - 18,412 1,986,720 State and political subdivisions 5,490,780 328,619 - 5,819,399 Mortgage-backed securities 12,025,046 78,766 - 12,103,812 --------------- -------------- --------------- ---------------- Total debt securities 23,501,256 426,245 18,412 23,909,089 FHLB and other stock 1,303,673 7,675 - 1,311,348 --------------- -------------- --------------- ---------------- Total securities available for sale $ 24,804,929 $ 433,920 $ 18,412 $ 25,220,437 =============== ============== =============== ================
--------------- -- -------------- -- --------------- -- ---------------- Gross Gross Estimated Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value - ----------------- --------------- -- -------------- -- --------------- -- ---------------- U.S. Treasury securities $ 7,009,344 $ 94,396 $ - $ 7,103,740 U.S. Government agencies and corporations 2,008,229 8,801 - 2,017,030 State and political subdivisions 5,749,305 445,545 - 6,194,850 Mortgage-backed securities 7,018,807 290,367 - 7,309,174 --------------- -------------- --------------- ---------------- Total debt securities 21,785,685 839,109 - 22,624,794 FHLB and other stock 485,125 3,850 - 488,975 --------------- -------------- --------------- ---------------- Total securities available for sale $ 22,270,810 $ 842,959 $ - $ 23,113,769 =============== ============== =============== ================
At December 31, 1996 and 1995, there were no debt securities being held to maturity. An analysis of the unrealized holding gain (loss) and the related income tax effect for the years ended December 31, 1996 and 1995 is as follows:
Net Increase Unrealized Deferred Income Tax (Decrease) in Holding Gain (Loss) Asset (Liability) Stockholders' Equity ------------------- -------------------- -------------------- Balance, December 31, 1994 $ (699,136) $ 273,502 $ (425,634) Increase in valuation allowance 1,542,095 (603,268) 938,827 ----------------- ----------------- ---------------- Balance, December 31, 1995 842,959 (329,766) 513,193 Decrease in valuation allowance (427,451) 167,219 (260,232) ================= ================= ================ Balance, December 31, 1996 $ 415,508 $ (162,547) $ 252,961 ================= ================= ================
14 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------- NOTE 2 - SECURITIES (CONTINUED) The amortized cost and fair value of debt securities available for sale at December 31, 1996, by contractual maturities, are as follows:
After After In One One Year Five Years After Year Through Through Ten Amortized Cost or Less Five Years Ten Years Years Total - -------------- -------------- ------------- -------------- ------------- U.S. Treasury $ - $ - $ 3,980,298 $ - $ 3,980,298 U.S. Agency 1,000,274 1,004,858 - 2,005,132 State and political 50,289 250,202 883,755 4,306,657 5,490,780 Mortgage-backed securities 146,314 452,435 1,006,987 10,419,310 12,025,046 -------------- ------------- -------------- -------------- -------------- Total $ 1,196,754 $ 702,637 $ 6,875,898 $ 14,725,967 $ 23,501,256 ============== ============= ============== ============== ============== Fair Value U.S. Treasury $ - $ - $ 3,999,158 $ - $ 3,999,158 U.S. Agency 1,002,500 - 984,220 - 1,986,720 State and political 50,289 252,272 941,921 4,574,917 5,819,399 Mortgage-backed securities 146,969 451,950 1,051,777 10,453,116 12,103,812 -------------- ------------- -------------- -------------- -------------- Total $ 1,199,758 $ 704,222 $ 6,977,076 $ 15,028,033 $ 23,909,089 ============== ============= ============== ============== ==============
After After Weighted In One One Year Five Years After Average Year Through Through Ten Percentage Yields or Less Five Years Ten Years Years Total - ----------------- -------------- ------------- -------------- ------------- ---------------- U.S. Treasury - % - % 6.40% - % 6.40% U.S. Agency 7.49 - 5.85 - 6.68 State and political 7.69 10.18 9.45 9.27 9.32 Mortgage-backed securities 6.70 6.00 6.28 6.70 6.67 ---------------- ---------------- ---------------- ---------------- ---------------- Total 7.40% 7.50% 6.72% 7.48% 7.26% ================ ================ ================ ================ ================
(1) Yield on tax exempt bonds computed on a tax-equivalent basis. Results from sales of securities available for sale for the years ended December 31, 1996 and 1995 are as follows:
1996 1995 ---- ---- Gross proceeds from sales $ 7,198,862 $ 7,652,006 =============== =============== Realized gains from sales $ 41,098 $ 60,656 Realized losses from sales (11,731) (2,671) --------------- --------------- Net realized gains $ 29,367 $ 57,985 =============== ===============
At December 31, 1996 and 1995, securities available for sale with a carrying amount of $10,863,459 and $14,310,840, respectively, were pledged as collateral on public deposits and for other purposes as required or permitted by law. - -------------------------------------------------------------------------------- 15 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------- NOTE 3 - LOANS The composition of net loans as of December 31, 1996 and 1995 is as follows:
1996 1995 ---- ---- Commercial $ 13,647,142 $ 11,976,105 Real estate - construction 3,716,121 3,096,589 Real estate - consumer and commercial mortgage 72,522,068 65,588,457 Consumer 10,889,647 10,251,675 Other 112,378 50,995 --------------- --------------- 100,887,356 90,963,821 Deduct: Allowance for loan losses (1,049,833) (975,475) Unearned net loan fees (34,906) (15,753) --------------- --------------- Loans, net $ 99,802,617 $ 89,972,593 =============== ===============
Although the Bank's loan portfolio is diversified, there is a concentration of mortgage real estate loans, primarily one to four family residential mortgage loans, which represent about one-half of the total loan portfolio. Commercial loans, secured primarily by real estate, to finance manufacturing buildings, shopping center locations, commercial buildings and equipment comprise about one-fifth of total loan dollars. There is not a concentration of a particular type of credit in this group of commercial loans. An analysis of fixed-rate loan maturities and repricing frequencies of variable-rate loans as of December 31, 1996 follows: Fixed-rate loans with a maturity of: Three months or less $ 2,012,814 Over three months through twelve months 4,336,642 Over one year through five years 16,357,497 Over five years 18,124,674 ---------------- Total fixed-rate loans 40,831,627 ---------------- Variable-rate loans with a repricing frequency of: Quarterly or more frequently 57,261,736 Annually or more frequently, but less frequently than quarterly 1,954,164 Every five years or more frequently, but less frequently than annually 804,923 Less frequently than every five years - ---------------- Total variable-rate loans 60,020,823 ---------------- Total loans $ 100,852,450 ================
Nonaccruing loans totaled $331,738 and $180,070 at December 31, 1996 and 1995, respectively, which had the effect of reducing net income $14,815 in 1996 and $12,457 in 1995. When loans exceed 90 days past due, they are placed in nonaccrual status. At December 31, 1996 and 1995, loans past due 90 days totaled $57,000 and $63,000, respectively. The Company's loan policies are written to address each lending category, specifically related to loan-to-value ratios and collateralization methods. This takes into consideration economic and credit risk of lending areas and customers associated with each category. - -------------------------------------------------------------------------------- 16 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ----------- NOTE 4 - ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for the years ended December 31, 1996 and 1995 are listed below:
1996 1995 ---- ---- Balance, beginning of year $ 975,475 $ 922,409 --------------- --------------- Charge offs: Commercial 2,200 - Real estate 13,000 - Consumer 60,425 60,063 --------------- --------------- Total charge-offs 75,625 60,063 --------------- --------------- Recoveries: Commercial - 1,000 Real estate - 6,000 Consumer 13,138 28,783 --------------- --------------- Total recoveries 13,138 35,783 --------------- --------------- Net charge-offs 62,487 24,280 Provision charged against income 136,845 77,346 --------------- --------------- Balance, end of year $ 1,049,833 $ 975,475 =============== ===============
Ratios relative to the allowance for loan losses, nonperforming loans and net charge-offs for the years ended December 31, 1996 and 1995 are reflected below:
1996 1995 ---- ---- Allowance for loan losses to total loans 1.04% 1.07% Allowance for loan losses to non-performing loans 316.5 541.7 Nonperforming loans to average loans .34 .22 Net charge-offs to gross loans outstanding .06 .03
The method used for rating the loan portfolio provides for early detection of problem loans and an adequate loan loss provision is established quarterly for loans considered to be loss, doubtful and substandard. This identification process begins with loans previously identified by examiners and also includes loans from management's assessment of credit reviews, payment history, loan to value ratio and weakness in credit. Changes in the ratio of the allowance for loans losses to total loans and nonperforming loans reflects this assessment. The allocation of the allowance for loan losses applicable to each category of loans at December 31, 1996 and 1995 is presented below:
1996 1995 ----------------------------------- -------------------------------------- Percent of Percent of Each Category Each Category Amount to Total Loans Amount to Total Loans ----------- ----------------- ----------- ----------------- Commercial $ 44,932 14% $ 26,764 13% Real estate - construction - 4% - 3% Real estate - mortgage 212,780 72% 262,288 72% Consumer 6,002 10% 14,715 12% Unallocated 786,119 N/A 671,708 N/A ------------- ----------- ------------- ---------- Total $ 1,049,833 100% $ 975,475 100% ============= =========== ============= ==========
- -------------------------------------------------------------------------------- 17 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 5 - PREMISES AND EQUIPMENT The major classes of premises and equipment and the total accumulated depreciation at December 31, 1996 and 1995 are listed below: 1996 1995 ---- ---- Land $ 341,686 $ 341,686 Buildings and improvements 1,865,538 1,798,120 Furniture and equipment 1,616,309 1,575,032 --------------- -------------- 3,823,533 3,714,838 Less accumulated depreciation 1,706,284 1,617,536 --------------- -------------- $ 2,117,249 $ 2,097,302 =============== ============== - -------------------------------------------------------------------------------- NOTE 6 - DEPOSITS The composition of deposits at December 31, 1996 and 1995 is as follows: 1996 1995 ---- ---- Demand deposits $ 12,852,376 12% $ 10,182,794 11% Money market and NOW accounts 24,112,851 23 23,273,775 24 Savings 27,706,578 27 24,493,506 26 Time deposits, $100,000 and over 6,502,755 6 5,190,183 5 Other time deposits 33,424,904 32 32,653,680 34 --------------- ---------------- $ 104,599,464 100% $ 95,793,938 100% =============== ================ The maturities of fixed-rate time deposits at December 31, 1996 are reflected in the table below. Time Deposits Other $100,000 and Over Time Deposits ---------------------- --------------- Remaining Maturities Three months or less $ 2,370,846 $ 11,915,959 Three through twelve months 3,442,978 16,128,431 Over twelve months 688,931 5,380,514 ---------------- ---------------- Total $ 6,502,755 $ 33,424,904 ================ ================ - -------------------------------------------------------------------------------- NOTE 7 - SHORT-TERM BORROWED FUNDS 1996 1995 Amount Rate Amount Rate -------------------- --------------------- At year-end Federal funds purchased $ - - $ 2,850,000 6.00% Securities sold under agreement to repurchase 8,156,145 4.16% 4,462,340 4.45 Short-term advances from FHLB 3,000,000 5.45 - - ------------- ------------- $11,156,145 4.51% $ 7,312,340 5.05% ============= ============= 18 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 7 - SHORT-TERM BORROWINGS (CONTINUED) 1996 1995 Amount Rate Amount Rate ----------------------------------------- Average for the year Federal funds purchased $ 1,556,126 5.68% $ 1,656,616 6.08% Securities sold under agreement to repurchase 5,763,748 4.46 3,672,203 5.16 Short-term advances from FHLB 866,667 5.66 404,932 6.17 -------------- ------------ $ 8,186,541 4.82% $ 5,733,751 5.49% ============== ============ Maximum month-end balance Federal funds purchased $ 4,675,000 $ 4,225,000 Securities sold under agreement to repurchase 8,156,145 4,462,340 Short-term advances from FHLB 3,000,000 - Federal funds purchased represent unsecured overnight borrowings from other financial institutions. Securities sold under agreement to repurchase represent short-term borrowings collateralized by securities of the United States government or its agencies. - -------------------------------------------------------------------------------- NOTE 8 - LONG-TERM DEBT Advances from the Federal Home Loan Bank of Atlanta ("FHLB") with original maturities of one year or more consist of the following at December 31, 1996 and 1995: Maturing Year Ending Interest December 31 Rate (%) 1996 1995 ----------- -------- ---- ---- 1996 6.41 - 6.94 $ - $ 1,696,552 1997 6.41 - 6.94 621,552 621,552 1998 6.41 - 6.94 1,596,552 596,552 1999 6.41 - 6.94 571,552 571,552 2000 6.41 - 6.94 471,552 471,552 Thereafter 6.41 - 7.53 3,004,452 2,004,452 -------------- ------------- $ 6,265,660 $ 5,962,212 ============== ============= Pursuant to collateral agreements with the FHLB, advances are collateralized by all the Company's stock in FHLB and its qualifying first mortgage loans with principal balances of $43,456,511 and $40,309,515 at December 31, 1996 and 1995, respectively. Total credit available from the FHLB for short- or long-term borrowing at December 31, 1996 was $21,000,000. - -------------------------------------------------------------------------------- 19 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 9 - INCOME TAX MATTERS The components of income tax expense for the years ended December 31 are summarized as follows: 1996 1995 ---- ---- Current tax expense $ 292,004 $ 101,671 Deferred tax expense 158,716 96,686 --------------- -------------- $ 450,720 $ 198,357 ================ =============== The effective income tax rates for 1996 and 1995 were 30.5% and 20.3%, respectively. The reasons for the differences between the effective rates and income taxes computed at the statutory federal income tax rate of 34% for each of those years are as follows: 1996 1995 ---- ---- Income taxes at statutory federal rate $ 501,876 $ 333,002 Increases (decreases) resulting from: Tax exempt interest, net (114,380) (106,748) State income taxes, net of federal benefit 38,085 - Other 25,139 (27,897) ------------- --------------- $ 450,720 $ 198,357 ============= =============== Deferred tax assets and liabilities arising from temporary differences and carryforwards at December 31, 1996 and 1995 are summarized as follows: 1996 1995 ---- ---- Deferred tax assets relating to: Bad debt reserves $ 311,784 $ 259,176 Income tax credit carryforwards - 111,693 Charitable contributions carryforward - 20,995 Deferred compensation 16,112 9,326 Other 3,589 7,487 -------------- ------------ Total deferred tax asset 331,485 408,677 -------------- ------------ Deferred tax liabilities relating to: Net unrealized gain on securities available for sale (162,547) (329,766) Depreciation (46,618) (52,607) Deferred loans fees and costs (87,513) - Basis difference in equity investment (31,200) (31,200) -------------- ------------ Total deferred tax liability (327,878) (413,573) -------------- ------------ Net deferred tax asset (liability) $ 3,607 $ (4,896) ============= ============= The net deferred tax asset of $3,607 at December 31, 1996 is included in other assets on the accompanying consolidated balance sheet. The 1995 consolidated balance sheet reflects deferred tax assets of $324,870 in other assets and deferred tax liabilities of $329,766 in other liabilities. - -------------------------------------------------------------------------------- 20 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 10 - COMMITMENTS AND CONTINGENCIES Financial instruments with off-balance-sheet risk The Company is a 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 with the unfunded loans and lines of credit or standby letters 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 borrower. 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. Credit card commitments are unsecured. As of December 31, 1996 and 1995, outstanding financial instruments whose contract amounts represent credit risk were as follows: 1996 1995 ---- ---- Commitments to extend credit $ 13,108,188 $ 11,321,987 Credit card commitments 1,913,015 1,579,140 Standby letters of credit 348,388 532,760 ------------- -------------- $15,369,591 $13,433,887 ============= ============== Contingencies In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the financial statements. Financial instruments with concentration of credit risk The Bank makes commercial, agricultural, real estate mortgage, home equity and consumer loans primarily in Stanly County. A substantial portion of the Bank's customers' abilities to honor their contracts is dependent on the business economy in Albemarle, North Carolina and surrounding areas. Although the Bank's loan portfolio is diversified, there is a concentration of mortgage loans in the portfolio. The Bank's policies for real estate lending require collateralization with 20% equity or that the loan be underwritten to conform to Fannie-Mae guidelines that would allow securitization and/or sale of the loans. Lending policy for all loans requires that they be supported by sufficient cash flows. Credit losses related to this real estate concentration are consistent with credit losses experienced in the portfolio as a whole. - -------------------------------------------------------------------------------- NOTE 11 - 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 a 10% or more beneficial interest, were loan customers. Loans to such groups totaled $2,727,314 and $4,234,445 at December 31, 1996 and 1995 as summarized below.
1996 1995 ---- ---- Balance, beginning $ 4,234,445 $ 2,882,749 Loans made 7,771,662 2,907,724 Payments received (7,976,645) (2,140,410) Changes in composition (1,302,148) 584,382 --------------- --------------- Balance, ending $ 2,727,314 $ 4,234,445 =============== =============== - -------------------------------------------------------------------------------
21 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 12 - REGULATORY RESTRICTIONS The Company and its subsidiary, Bank of Stanly, are subject to certain requirements imposed by state and federal banking statutes and regulations. These requirements, among other things, establish minimum levels of capital, restrict the amount of dividends that may be distributed, and require that reserves on deposit liabilities be maintained in the form of vault cash or noninterest-bearing deposits with the Federal Reserve Bank. North Carolina law prohibits Stanly Capital Corp from making any distributions to shareholders, including the payment of cash dividends, which would render it insolvent or unable to meet its obligations as they become due in the ordinary course of business. At December 31, 1996, Stanly Capital Corp had consolidated shareholders' equity of $11,303,405. As a North Carolina banking corporation, the subsidiary bank may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31, 1996, the bank had undivided profits of $4,605,721 and total capital of $11,179,363. The Company and its subsidiary bank are subject to federal regulatory risk-based capital guidelines for banks and bank holding companies. Both must meet specific capital guidelines that involve quantitative measure of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices which measure Total and Tier 1 Capital to risk- weighted assets and Tier 1 Capital to average assets. Quantitative measures established by regulation to ensure capital adequacy and the Company's consolidated capital ratios are set forth in the table below. The Company expects to meet or exceed these minimums without altering current operations or strategy. Adequately Well Actual Capitalized Capitalized --------------------------------------------------------------------------- As of December 31, 1996: Total Capital (to risk weighted assets) 14.0% 8% 10% Tier 1 Capital (to risk weighted assets) 12.8 4 6 Tier 1 Capital (to average assets) 8.2 4 5 As of December 31, 1995: Total Capital (to risk weighted assets) 14.7% 8% 10% Tier 1 Capital (to risk weighted assets) 13.5 4 6 Tier 1 Capital (to average assets) 9.4 4 5 --------------------------------------------------------------------------- As of December 31, 1996, the most recent notification from the FDIC categorized the bank subsidiary as adequately capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. For the reserve maintenance period in effect at December 31, 1996, the subsidiary bank was required to maintain reserve balances in cash or on deposit with the Federal Reserve Bank in the aggregate amount of $763,000 as reserves on deposit liabilities. - -------------------------------------------------------------------------------- 22 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 13 - STOCK MATTERS On December 5, 1996, the Company issued a 3% stock dividend to shareholders of record on November 15, 1996. Based on the number of common shares outstanding on the record date, the Company issued 62,698 new shares and paid $4,883 cash-in-lieu of fractional shares resulting from the stock dividend. On December 6, 1995 the Company issued a 3% stock dividend to shareholders of record on November 21, 1995. Based on the number of common shares outstanding on the record date, the Company issued 61,465 new shares and paid $3,434 cash-in-lieu of fractional shares resulting from the stock dividend. All references to number of shares and price per share in the information presented below regarding stock options have been adjusted to reflect the above-described stock dividends. During 1996 the Company adopted the 1996 Employee Stock Option Plan, under which options to purchase an aggregate of 212,400 shares of the Company's common stock may be granted to officers and other full-time key employees of the Company and its subsidiaries. Employees may exercise their options in established increments according to vesting schedules, and the options will expire if not exercised within ten years of the date of grant. Option prices under the plan shall not be less than the fair market value of the stock at the date of grant. During 1996 the Company granted options for the purchase of 144,687 shares under this plan. The fair value of each option grant is estimated on the grant date using an option-pricing model with the following assumptions for grants in 1996: dividend yield of 2%, risk-free interest rate of 6%, and expected lives of seven years for the options. Under a prior Incentive Stock Option Plan, various grants were awarded during the period from October 1985 through January 1990. All options granted under that plan have been exercised except for options to purchase 1,442 shares which are exercisable in 1997. No additional options may be granted under this plan. Summaries of the status of the Company's stock option plans as of December 31, 1996 and the changes during 1996 and 1995 are presented below: Outstanding Options Exercisable Options ------------------------------ ----------------------------- Per Share Total Per Share Total Year of Year of Number Exercise Exercise Number Exercise Exercise Grant Expiration Outstanding Price Price Outstanding Price Price ----- ---------- ----------- ----- ----- ----------- ----- ----- 1987 1997 1,442 $ 3.469 $ 5,002 1,442 $ 3.469 $ 5,002 1996 2006 139,378 5.825 811,877 19,663 5.825 114,537 ------------ ---------- ----------- --------- 140,820 $ 816,879 21,105 $ 119,539 ============ ========== =========== ========= 1996 1995 --------------------- ---------------------- Weighted Weighted Average Average Number Exercise Number Exercise of Shares Price of Shares Price ---------- ---------- -------- -------------- Balance at the beginning of the year 38,983 $4.283 71,106 $3.607 Options granted 144,687 5.832 - - Options exercised (42,850) 4.524 (32,123) 2.786 ----------- --------- Balance at the end of the year 140,820 $5.801 38,983 $4.283 =========== ========= Total options exercisable at end of year 21,105 38,983 =========== ========= Weighted average fair value of options granted during the year $1.20 =========== 23 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 13 - STOCK MATTERS (CONTINUED) - -------------------------------------------------------------------------------- If the Company had used the fair value based method of accounting for its employee stock options, as prescribed by Statement of Financial Accounting Standards No. 123, compensation cost included in determining net income for the year ended December 31, 1996 would have increased by approximately $54,000, resulting in net income and net income per common share for the year of $971,389 and $.45, respectively. - -------------------------------------------------------------------------------- NOTE 14 - ASSOCIATE BENEFIT/ DIRECTORS DEFERRED COMPENSATION PLANS 1996 Employee Stock Purchase Plan On April 23, 1996, the Company adopted an employee stock purchase plan under Section 423 of the Internal Revenue Code which provides for the periodic grant of options to purchase shares of the Company's common stock to eligible employees of the Company and its subsidiaries. The purchase price for each separate grant will be a percentage of the fair market value of a share of common stock on the date of grant as set by a committee designated by the Board of Directors. Under this plan, the Company may grant up to an aggregate of 63,720 shares. The plan was implemented January 1, 1997 for a term of two years. Employees' Savings Plus and Profit Sharing Plan The Company has established an associate tax deferred savings plan under Section 401(k) of the Internal Revenue Code of 1986. All associates are eligible to participate upon completion of one year of employment. The Company's annual contribution to the plan was $104,876 in 1996 and $93,905 in 1995, determined as follows: o One percent of each participant's compensation. o A matching contribution equivalent to 100% of the first 5% of each associate's compensation contributed to the plan. o A discretionary contribution, subject to approval by the Board of Directors, limited to an amount not to exceed the maximum amount deductible for income tax purposes. Directors' Deferred Compensation Plan The Company has established a Directors Deferred Compensation Plan in accordance with the laws of the State of North Carolina. Each Director may elect to defer receipt for services rendered to the Corporation as a Director during the term of his or her service by entering into a written deferred compensation election. The balance in deferred directors compensation was $41,312 and $23,912 at December 31, 1996 and 1995, respectively. - -------------------------------------------------------------------------------- NOTE 15 - NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. Those standards are based on consistent application of a financial components approach that focuses on control. Under the financial components approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This statement supercedes SFAS No. 122 and is effective, as originally issued, for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125," which defers for one year the application of SFAS No. 125 to certain transactions. SFAS No. 125, as amended, is not expected to have a material impact on the Company's financial statements. - -------------------------------------------------------------------------------- 24 STANLY CAPITAL CORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK The following table reflects a comparison of carrying amounts and the estimated fair value of the financial instruments as of December 31. 1996 1995 --------------------- ----------------- Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value ------------------------------------------ ------------------------------ FINANCIAL ASSETS Cash and cash equivalents 4,883 $ 4,883$ 3,454$ 3,454 Securities available for sale 25,220 25,220 23,114 23,114 Variable rate loans 59,860 59,860 52,521 52,521 Other loans 40,992 40,908 38,427 38,833 --------- ------------ ----------------- Total loans 100,852 100,768 90,948 91,354 --------- ------------ ------------------ Accrued interest receivable 858 858 866 866 ------------------------------------------ ------------ ------------------ FINANCIAL LIABILITIES Deposits Variable rate, payable on demand $ 64,672 $ 64,672 $ 57,950 $ 57,950 Fixed-rate time certificates of deposit 39,927 39,969 37,844 38,186 --------- ------------ ------------------ Total deposits 104,599 104,641 95,794 96,136 --------- ------------ ------------------ Short-term borrowing 11,156 11,156 7,312 7,312 Long-term debt 6,266 6,349 5,962 6,218 Accrued interest payable 176 176 165 165 ------------------------------------------ ------------- ----------------- At December 31, 1996 the Bank had outstanding standby letters of credit and commitments to extend credit. These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed, and, therefore, they were deemed to have no current fair market value. See Note 10. It should be noted that the estimated fair values disclosed in this table do not represent market values of all assets and liabilities of the Company and should not be interpreted to represent the underlying value of the Company. Interest Rate Risk The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, fair values of the Company's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are more likely to prepay in a rising rate environment and less likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company's overall interest rate risk. - -------------------------------------------------------------------------------- 25 STANLY CAPITAL CORP AND SUBSIDIARY SELECTED FINANCIAL DATA In Thousands Except Per Share And Shares Outstanding Information - -------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Summary of Operations Interest Income $ 10,040 $ 8,913 $ 7,692 $ 7,025 $ 7,467 Interest Expense 4,511 4,051 3,008 2,589 3,105 ---------- ---------- --------- --------- -------- Net Interest Income 5,529 4,862 4,684 4,436 4,362 Provision for Loan Losses 137 77 181 185 375 Noninterest Income 1,361 1,183 270 1,183 1,284 Noninterest Expense 5,277 4,988 4,551 4,116 3,949 Income taxes 451 199 (38) 303 355 ---------- ---------- --------- --------- -------- Net Income $ 1,025 $ 781 $ 260 $ 1,015 $ 967 ========== ========== ========== ========== ========= Per Common Share Net Income (1) $ .47 $ .36 $ .12 $ .46 $ .44 Cash dividends .10 .09 .09 .08 - Book Value (1) 5.20 4.99 4.34 4.71 4.14 Weighted Average Shares Outstanding (1) 2,183,342 2,199,550 2,217,308 2,212,846 2,198,619 - -------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Selected year-end balances Assets $133,876 $120,839 $112,124 $102,383 $94,506 Loans 100,852 90,948 80,074 69,171 63,680 Securities 25,220 23,114 23,543 26,596 24,770 Deposits 104,599 95,794 93,235 84,469 82,729 Borrowed funds 17,421 13,275 8,886 7,161 2,225 Shareholders' equity 11,303 10,913 9,724 10,413 9,147 Selected average balances Assets $128,193 $113,535 $108,972 $ 97,905 $92,866 Loans 97,201 82,630 75,657 65,880 58,908 Securities 23,594 23,916 25,833 25,398 26,339 Deposits 90,026 80,968 80,068 75,674 75,673 Borrowed funds 14,893 11,891 8,451 3,664 1,053 Shareholders' equity 11,123 10,445 10,278 9,789 8,551 - -------------------------------------------------------------------------------- 1) Net income per share, book value per share, weighted average shares outstanding and shares outstanding at year-end for 1992 through 1995 have been adjusted to reflect 3% stock dividends issued in 1996, 1995, 1994 and 1993. 26 STANLY CAPITAL CORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- OPERATING RESULTS AND THE COMPANY'S FINANCIAL CONDITION ARE PRESENTED IN THE FOLLOWING NARRATIVE AND FINANCIAL TABLES. THE COMMENTS ARE INTENDED TO SUPPLEMENT AND SHOULD BE REVIEWED IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED FOOTNOTES APPEARING ON PAGES 5 - 24. REFERENCES TO CHANGES IN ASSETS AND LIABILITIES REPRESENT END OF PERIOD BALANCES UNLESS OTHERWISE NOTED. EARNINGS OVERVIEW Stanly Capital Corp (the "Company") produced record earnings exceeding $1.0 million in 1996 and generated another year of continued growth and development. The Company's growth is particularly strong when compared to the slow economic development in its service area, which is relatively flat. Assets at December 31, 1996 were $133.9 million, an increase of 10.8% compared to $120.8 million one year ago. Net income in 1996 reflected an increase of 31.2% compared to 1995 earnings and produced per share earnings of $.47 compared to $.36 in the prior year. Growth in net interest income, supported by an increase in non-interest revenues accounted for the earnings increase. Net income for the years ended 1996 and 1995 and certain key financial performance ratios are reflected below: 1996 1995 ------------------------------------------------------------------------ Net Income $ 1,025,389 $ 781,059 Return on average assets .80% .69% Return on average equity 9.22% 7.48% Average equity to average assets 8.68% 9.20% Dividend payout ratio 21.10% 24.28% ------------------------------------------------------------------------ The Company has managed to achieve good performance while developing its strategy to remain a strong, viable financial institution. At a time when other banks were showing record earnings, the Company strategically moved to invest in technology in order to develop new and enhanced services. This development, which began in 1993, has provided the capacity to grow the organization and leverage the high cost of delivering competitive services. Management believes this strategy will enable the Company to remain competitive with larger institutions and allow its service area to enjoy the benefits of a local financial institution and the strength its capital investment provides to the community. NET INTEREST INCOME The Company's major source of revenue is net interest income, which is the excess of interest income earned on loans and securities over interest expense paid on deposits and borrowings. Net interest income, as reflected on the consolidated income statement, increased $667 thousand or 13.7% for the year ended December 31, 1996, as compared with the prior year. This improvement can be attributed primarily to the increase in interest income generated by growth in the loan portfolio. Yield on loans during 1996 was 8.80% compared to 8.98% in 1995, resulting from a small market rate decline in early 1996 and slightly higher rates in 1995 compared to 1996. Securities available for sale produced income of $1.4 million, which reflected a yield of 6.92% on a tax equivalent basis, during the twelve months of 1996 compared to $1.5 million, a tax equivalent yield of 6.96%, during the same period of 1995. Interest expense on deposits increased by $360 thousand or 10.8% due to higher balances. The weighted average rate paid on all interest-bearing deposits was 4.09% in 1996 compared to 4.11% in 1995. 27 STANLY CAPITAL CORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- The cost of short-term borrowed funds increased $79 thousand or 25.1%, due to an increase of $2.5 million in the average outstanding balance in federal funds purchased, securities sold under repurchase agreements and short-term borrowings from the Federal Home Loan Bank. Interest expense paid on long-term debt increased $20 thousand, due to increase in average balances outstanding. After experiencing several periods of small net interest margin declines, the Company's net interest margin, the difference between the tax-equivalent yield on earning assets and the rate paid on funds to support those assets, remained stable during 1996 and 1995. Other financial institutions have also experienced past and present declines in net interest margin due to the competitive nature of the financial services industry and periods of interest rate changes. The Company has been pleased with its ability to manage the mix and pricing of its interest-bearing assets and liabilities to minimize the effect of interest rate changes on its balance sheet and the resulting net interest income. There were no wide swings in interest rates during 1996 or 1995 and rate changes in these periods did not significantly impact the margin. Financial Table 1 presents a detailed analysis of the components of the Company's net interest income. The exhibit discloses the dollar change in average assets and liabilities along with the associated changes in yields and interest income and expense. Net interest margin on a tax equivalent basis was 4.70% and 4.73% in 1996 and 1995, respectively, as reflected in the table. BALANCE SHEET ANALYSIS With a continued moderate interest rate environment, loan demand remained strong in 1996, primarily in mortgage and commercial loans. Gross outstanding loans at December 31, 1996 totaled $100.9 million, $9.9 million greater than at December 31, 1995 representing an increase of 10.9%. During December 1996 the Bank securitized a $4.9 million pool of mortgage loans with FannieMae and these previous loans balances moved into investments on the balance sheet. When this transaction is considered, loan production in 1996 totaled $14.8 million, an increase of 16.3%. Investment securities, including net unrealized gains, totaled $25.2 million at December 31, 1996 compared to $23.1 million at this period end in 1995, an increase of $2.1 million. Although deposit and economic growth has been relatively flat in its service area, the Company attracted local funds totaling $12.5 million, composed of an increase in deposits of $8.8 million and increase in securities sold to customers under repurchase agreement in the amount of $3.7 million during 1996 compared 1995, reflecting percentage growth of 12.5%. Other sources of funds consisting of federal funds purchased and advances from Federal Home Loan Bank increased $454 thousand during this period, providing additional funding for the interest-earning asset growth. loans. NONPERFORMING ASSETS Nonperforming assets, composed of nonaccrual loans and foreclosed real estate, remain at a level below the peer group averages, reflective of the Company's ongoing commitment to maintaining asset quality. Nonaccrual loans at December 31, 1996 were $332 thousand and represented .33% of outstanding loans compared with $180 thousand reflecting a ratio of .20% at December 31, 1995. Foreclosed real estate totaled $85 thousand at year end 1996 and year end 1995. 28 STANLY CAPITAL CORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- PROVISION AND ALLOWANCE FOR LOAN LOSSES The Company uses a rating method to determine an adequate level of provision for loan losses which additionally provides early detection of problem loans. This identification process begins with management's assessment of credit reviews, payment histories of borrowers, loan-to-value ratio, and identified weakness in the credit. The loans are graded and management establishes a standard percentage to reserve for each rating. Included in the calculation are loans previously identified by examiners as loss, doubtful or substandard. The transactions in the allowance for loan losses are summarized in the Note 4 to the consolidated financial statements. The ratio of net charge-offs to average loans is currently an excellent ratio compared to bank peers reflecting .06% in 1996 and .03% in 1995. The amount of provision expensed during 1996 was $137 thousand compared to $77 thousand for the same period in 1995. This increase is due mainly to the growth experienced in the loan portfolio. NONINTEREST INCOME Total noninterest income, exclusive of securities gains (losses), increased by $179 thousand in the twelve months ended December 31, 1996 compared to this period in 1995, an increase of 15.1%. The main component, service charges on deposit accounts, amounted to $901 thousand in 1996 compared to $775 thousand in 1995. This represents an increase of $126 thousand or 16.3% resulting from new products, growth in deposit accounts and increased fees. Another factor with some significant influence to this category is the Bank's brokerage and insurance subsidiaries, which contributed commission and fee income of $244 thousand in 1996 and $223 thousand in 1995, and also the sale of foreclosed property, which resulted in a gain of $7 thousand and a loss of $31 thousand in these periods, respectively. NONINTEREST EXPENSE For the twelve months ended December 31, 1996 compared to the same period of 1995, noninterest expenses increased by $289 thousand, reflecting a moderate percentage increase of 5.8%. The increase is due primarily to increased personnel expense and normal increases in operating expenses. Total personnel expense grew $276 thousand or 12.2%. Salaries expense increased $252 thousand, due largely to higher base salaries, additional staff, and increase in incentive pay plans. Employee benefits were up $24 thousand or 5.9% associated to the growth in salaries. Data processing costs increased by $12 thousand or 2.4% in 1996 compared to 1995. Occupancy expenses have been relatively stable reflecting expenses of $221 thousand and $212 thousand in the two periods, respectively. Equipment expense, which includes the cost of depreciation and maintenance associated with furniture, network computers and other equipment and amortization of software, reflected an increase of $22 thousand or 5.3%. Remaining combined categories of noninterest expense declined by $30 thousand or 1.8%. Expenses for professional fees, which includes accounting, consulting and legal expenses, decreased by $46 thousand or 14.8%. The cost of FDIC insurance premiums declined from $102 in 1995 to $2 in 1996 contributing to the overall decline for this group of expenses. Marketing, including the cost of advertising, sales promotion, public relations, donations and business development, totaled $205 thousand in 1996 compared to $178 thousand in 1995, an increase of $27 thousand. Other expenses, not individually itemized, increased a total of $91 thousand when comparing the two periods. 29 STANLY CAPITAL CORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- CAPITAL RESOURCES The Company continues to maintain strong capital ratios that will support additional asset growth. As of December 31, 1996 and 1995, capital as a percentage of total assets was 8.4%, which exceeds the Company's strategic goal of maintaining this ratio at 8%. The capital position, which is maintained through the retention of earnings and controlled growth, remains strong. Regulatory agencies divide capital into Tier I (consisting of shareholders' equity less ineligible intangible assets) and Tier II (consisting of the allowable portion of the reserve for loan losses and certain long-term debt) and measure capital adequacy by applying both capital levels to a banking company's risk-adjusted assets and off-balance sheet items. Regulatory requirements presently specify that Tier I capital should exclude the market appreciation or depreciation of securities available-for-sale arising from valuation adjustments under FASB 115. In addition to these capital ratios, regulatory agencies have established a Tier I leverage ratio which measures Tier I capital to average assets less ineligible intangible assets. Regulatory guidelines require a minimum of total capital to risk-adjusted assets ratio of 8 percent with one-half consisting of tangible common shareholders' equity and a minimum Tier I leverage ratio of 3 percent. Banks which meet or exceed a Tier I ratio of 6 percent, a total capital ratio of 10 percent and a Tier I leverage ratio of 5 percent are considered well capitalized by regulatory standards. At December 31, 1996, the Company's Tier I to risk-adjusted assets ratio was 12.92% with total capital at 14.1% of risk-adjusted assets and Tier I leverage ratio at 8.33%. The Company expects to continue to exceed these minimums without altering current operations or strategy. DIVIDENDS During 1996 the Board of Directors of Stanly Capital Corp declared a cash dividend of $.10 per share compared to the cash dividend of $.09 in 1995. A 3% stock dividend, which increases each shareholder's investment in the Company, was declared in both years. INCOME TAX EXPENSE Income taxes computed at the statutory rate are reduced primarily by the eligible amount of interest earned on state and municipal securities. Income tax expense calculated for 1996 totaled $451 thousand, an effective tax rate of 30.5%. During 1995 the Company experienced some tax benefit from the completion of bond sales transactions recognized as securities losses in December 1994. The effective tax rate in 1995 was 20.3%. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements and accompany footnotes have been prepared in accordance with generally accepted accounting principles (`GAAP"), which require the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The assets and liabilities of the Company are primarily monetary in nature and changes in interest rates have a greater impact on the Company's performance than do the effects of inflation. LIQUIDITY Liquidity, the ability to raise cash when needed without adversely impacting profits, is managed primarily by the selection of asset mix and the maturity mix of liabilities. Maturities and the marketability of securities and other funding sources provide a source of liquidity to meet deposit fluctuations. Maturities in the securities portfolio, presented in Note 2, are supported by cash flows from mortgage-backed securities that have longer-term contractual maturities. 30 STANLY CAPITAL CORP AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ---------- Other funding sources currently include $9 million in federal funds lines of credit from correspondent banks and a $21 million line of credit from the Federal Home Loan Bank. The Company can also borrow from the Federal Reserve Bank discount window. Growth in deposits is typically the primary source of funding for loans, supported by long-term credit available from the Federal Home Loan Bank. At December 31, 1996 none of the Company's federal funds lines were being used. Advances from the Federal Home Loan Bank at that date were $3.0 million in short-term borrowings and $6.3 million in long-term debt. INTEREST RATE SENSITIVITY The major component of income for Stanly Capital Corp is net interest income, the difference between yield earned on assets and interest paid on liabilities. This differential or margin can vary over time as changes in interest rates occur. The volatility of changes in this differential can be measured by the timing (or repricing) difference between maturing assets and liabilities. To identify interest rate sensitivity, a common measure is a gap analysis which reflects the difference or gap between rate sensitive assets and liabilities over various time periods. Gap analysis at December 31, 1996 is reflected in Financial Table 3. While management reviews this information, it has implemented the use of a simulation model which calculates expected net interest income based on projected interest-earning assets, interest-bearing liabilities and interest rates and provides a more relevant view of interest rate risk than traditional gap tables. The simulation allows comparison of flat, rising and falling rate scenarios to determine sensitivity of earnings to changes in interest rates. The model reflects that a fluctuation in rates of 2.00% would impact margin by less than 2%. The principal goals of the Company's asset liability management are the maintenance of adequate liquidity and the management of interest rate risk. Interest rate risk management attempts to balance the effects of interest rate changes on interest-sensitive assets and liabilities to protect net interest income from wide fluctuations that could result from changes in interest rates. The Asset Liability Management Committee monitors market changes in interest rates and assists with pricing loans and deposit products consistent with funding source needs and asset growth projections. 31 STANLY CAPITAL CORP AND SUBSIDIARY FINANCIAL TABLES FINANCIAL TABLE 1
AVERAGE BALANCE AND YIELD INFORMATION 1996 1995 (in thousands) Interest Average Interest Average Average Income/ Yield/ Average Income/ Yield/ Balance Expense Rate (1) Balance Expense Rate (1) ----------------------------------------------------------------------------------------- INTEREST EARNING ASSETS Taxable securities $ 17,679 $ 1,095 6.19% $ 18,034 $ 1,120 6.21% Non-taxable securities 5,915 350 9.10% 5,882 354 9.26% Short-term investments 753 43 5.71% 271 17 6.27% Loans, gross (2) 97,201 8,552 8.80% 82,630 7,422 8.98% ----------------------------------------------------------------------------------------- Total interest-earning assets 121,548 10,040 8.41% 106,817 8,913 8.52% ----------------------------------------------------------------------------------------- NON-EARNING ASSETS Cash and due from banks 3,761 3,472 Premises and equipment, net 2,069 2,050 Interest receivable and other 815 1,196 ------------ ------------ Total non-earning assets 6,645 6,718 ------------ ------------ Total assets $ 128,193 $ 113,535 ============ ============ INTEREST-BEARING LIABILITIES Savings deposits $ 27,050 $ 1,100 4.07% $ 19,831 $ 836 4.22% Transaction and MMDA deposits 23,153 462 2.00% 23,041 510 2.21% Other time deposits 39,823 2,124 5.33% 38,096 1,979 5.19% ----------------------------------------------------------------------------------------- Total deposits 90,026 3,686 4.09% 80,968 3,325 4.11% Short-term borrowed funds 8,187 394 4.82% 5,734 315 5.49% Long-term debt 6,706 431 6.43% 6,157 411 6.68% ----------------------------------------------------------------------------------------- Total interest-bearing 104,919 4,511 4.30% 92,859 4,051 4.36% liabilities ----------------------------------------------------------------------------------------- NONINTEREST LIABILITIES Transaction deposits, interest payable and other 12,151 10,231 ------------ ------------ Total liabilities 117,070 103,090 ------------ ------------ SHAREHOLDERS' EQUITY 11,123 10,445 ------------ ------------ Total liabilities and shareholders' equity $ 128,193 $ 113,535 ============ ============ INTEREST RATE SPREAD 4.11% 4.16% NET INTEREST INCOME AND NET INTEREST MARGIN $ 5,529 4.70% $ 4,862 4.73% ========= ==========
1) Yields related to securities and loans exempt from federal and/or state income taxes are stated on a fully tax-equivalent basis, assuming a 35% tax rate. 2) Nonaccrual loans are included in loans, net of unearned income. 32 STANLY CAPITAL CORP AND SUBSIDIARY FINANCIAL TABLES FINANCIAL TABLE 2 AVERAGE BALANCE SHEETS AND YIELD INFORMATION (In thousands) 1996 Compared to 1995 - ------------------------------------------------------------------------- Income/ Variance Expense Attributable to Variance Volume Rate ------------------------------------------ EARNING ASSETS Taxable securities $ (25) $ (22) $ (3) Non-taxable securities (4) 2 (6) Short-term investments 26 29 Loans, gross 1,130 1,295 (165) ----------- ------------ ----------- Total earning assets 1,127 1,304 (177) ----------- ------------ ----------- INTEREST-BEARING LIABILITIES Savings deposits 264 299 (35) Transaction and MMDA deposits (48) 2 (50) Other time deposits 145 91 54 Short-term borrowed funds 79 126 (47) Long-term debt 20 37 (17) ----------- ------------ ----------- Total interest-bearing liabilities 460 555 (95) ----------- ------------ ----------- NET INTEREST INCOME $ 667 $ 749 $ (82) =========== ============ =========== - ------------------------------------------------------------------------- The above table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (I) changes attributable to volume (changes in volume multiplied by the prior period's rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period's volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate. 33 STANLY CAPITAL CORP AND SUBSIDIARY FINANCIAL TABLES FINANCIAL TABLE 3 INTEREST RATE GAP (In thousands)
1 - 90 3 - 6 6 - 12 1 - 5 Non-sensitive days months months years and over 5 yrs. Total - --------------------------------------------------------------------------------------------------------------------------- EARNING ASSETS Due from banks 299 - - - - 299 Investment securities 1,200 252 452 6,977 15,028 23,909 FHLB and other stock - - - - 1,311 1,311 Variable rate loans 56,547 917 900 812 - 59,176 Fixed rate loans 2,910 1,432 2,896 16,388 18,050 41,676 -------------- -------------- --------------- --------------- --------------- --------------- Total earning assets 60,956 2,601 4,248 24,177 34,389 126,371 -------------- -------------- --------------- --------------- --------------- --------------- INTEREST-BEARING LIABILITIES Deposits 58,672 10,731 8,750 6,062 7,532 91,747 Short-term borrowed funds 11,156 - - - - 11,156 Long-term debt 474 24 123 4,063 1,582 6,266 -------------- -------------- --------------- --------------- --------------- --------------- Ttal interest bearing liabilities 70,302 10,755 8,873 10,125 9,114 109,169 -------------- -------------- --------------- --------------- --------------- --------------- Interest rate gap (9,346) (8,154) (4,625) 14,052 25,275 Cumulative gap (9,346) (17,500) (22,125) (8,073) 17,202 RATIOS Cumulative gap to total earning assets (.07) (.14) (.18) (.06) .14 Cumulative rate sensitive assets to rate sensitive liabilities .87 .78 .75 .92 1.16 - ----------------------------------------------------------------------------------------------------------
34 STANLY CAPITAL CORP BOARD OF DIRECTORS WILLIAM S. ALDRIDGE, JR. W. KERMIT EFIRD PAMELA S. MORTON Manager, Secretary-Treasurer & President Principal - Endy Elementary Co-owner Rocky River Springs Fish House, Inc. School Stanly Funeral Home, Inc. (Restaurant) CYNTHIA H. BEANE JAMES L. HARRIS JOHN P. MURRAY, M.D. Certified Public Accountant Retired-Specialty Sales Manager Physician - Albemarle Ear, Cynthia H. Beane, Proprietor Southwire Company Nose and Throat (Electrical wire and cable manufacturer) BARTON D. BURPEAU, JR. ERIC M. JOHNSEN, M.D. CATHERINE A. PICKLER Special Agent President Homemaker & Community North Carolina State Bureau of Stanly Family Care Clinic Volunteer Investigation (Physician) WILLIAM F. CLAYTON JERRY J. LONG B. A. SMITH Cost Office Supervisor President, Secretary & Co-owner Retired - Pilot and Base Aluminum Company of America Long's Diamond Broker Commander, United States (Aluminum products manufacturer) Previously Long's Jewelers, Inc. Air Force (Retail jewelry company) JOHN J. EARNHARDT, JR. W. CHESTER LOWDER BOYCE E. THOMPSON President Director of Field Services - Treasurer C.K. Earnhardt & Son, Inc. N.C. Farm Bureau Federation Stanly Fixtures Company, Inc. (Asphalt paving) President (Store fixtures manufacturer) Fork L Farm Inc. G. CHAD EFIRD JAMES R. MAUNEY, SR. DOUGLAS V. WADDELL Retired-Technical Supervisor Retired-President and Owner Retired-Automotive Department Aluminum Company of America Mauney Feed Mill Manager (Aluminum products manufacturer) (Feed, fertilizer and grain sales) Sears Roebuck and Co - ---------------------------------------- ----------------------------------------- ------------------------------------
EXECUTIVE OFFICERS ROGER L. DICK TAMARA M. SINGLETARY President/Chief Executive Officer Executive Vice President-Investor Relations Stanly Capital Corp and Bank of Stanly Stanly Capital Corp JACQUELINE S. JERNIGAN THOMAS H. SWARINGEN Executive Vice President-Retail Banking Executive Vice President-Credit Administration Bank of Stanly Bank of Stanly DAWN L. MELTON Executive Vice President-Technology Stanly Capital Corp
****************************************************************************** APPENDIX STANLY CAPITAL CORP 167 NORTH SECOND STREET ALBEMARLE, NORTH CAROLINA 28001 APPOINTMENT OF PROXY SOLICITED BY BOARD OF DIRECTORS The undersigned hereby appoints Roger L. Dick, Dawn L. Melton and Tamara M. Singletary (the "Proxies"), or any of them, as attorneys and proxies, with power of substitution, to vote all outstanding shares of the common stock of Stanly Capital Corp (the "Company") held of record by the undersigned on March 7, 1997, at the Annual Meeting of Shareholders of the Company to be held at the Stanly County Agri-Civic Center at 26032 Newt Road, Albemarle, North Carolina, at 7:30 p.m. on April 22, 1997, and at any adjournments thereof: 1. AMENDMENT OF ARTICLE I OF ARTICLES OF INCORPORATION: Proposal to change the name of the company from Stanly Capital Corp to "Uwharrie Capital Corp". [ ] FOR [ ] AGAINST [ ] ABSTAIN 2. ELECTION OF DIRECTORS: Proposal to elect seven directors of the Company for the terms as indicated or until their successors are duly elected and qualified. [ ] FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY (EXCEPT AS INDICATED OTHERWISE TO VOTE FOR ALL NOMINEES BELOW) LISTED BELOW NOMINEES: Two year term: CYNTHIA H. BEANE Three year term: JOE S. BROOKS, RONALD T. BURLESON, JAMES F. LINK, D.V.M., KENT E. NEWPORT, GEORGE T. REAVES, A. JAMES RUSSELL (INSTRUCTION: To withhold authority to vote for any individual nominee, write that nominee's name on the line provided.) 3. RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS: Proposal to ratify the appointment of Dixon, Odom & Co., L.L.P. as the Company's independent accountants for 1997. [ ] FOR [ ] AGAINST [ ] ABSTAIN 4. OTHER BUSINESS: The Proxies are authorized to vote the shares represented by this Appointment of Proxy according to their best judgment on such other matters as may be presented for action at the Annual Meeting. THE SHARES REPRESENTED BY THIS APPOINTMENT OF PROXY WILL BE VOTED BY THE PROXIES IN ACCORDANCE WITH THE SPECIFIC INSTRUCTIONS ABOVE. IN THE ABSENCE OF INSTRUCTIONS, THE PROXIES WILL VOTE SUCH SHARES "FOR" THE ELECTION OF EACH OF THE NOMINEES LISTED IN PROPOSAL 2 ABOVE AND "FOR" PROPOSALS 1 AND 3 ABOVE. IF, AT OR BEFORE THE TIME OF THE MEETING, ANY OF THE NOMINEES LISTED IN PROPOSAL 2 FOR ANY REASON HAVE BECOME UNAVAILABLE FOR ELECTION OR UNABLE TO SERVE AS DIRECTORS, THE PROXIES HAVE THE DISCRETION TO VOTE FOR A SUBSTITUTE NOMINEE OR NOMINEES. THIS APPOINTMENT OF PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS EXERCISED BY FILING WITH THE SECRETARY OF THE COMPANY AN INSTRUMENT REVOKING IT OR A DULY EXECUTED APPOINTMENT OF PROXY BEARING A LATER DATE, OR BY ATTENDING THE ANNUAL MEETING AND REQUESTING THE RIGHT TO VOTE IN PERSON. Date: , 1997 (SEAL) (Signature) (SEAL) (Signature, if shares held jointly) INSTRUCTION: PLEASE SIGN ABOVE EXACTLY AS YOUR NAME APPEARS ON THIS APPOINTMENT OF PROXY. JOINT OWNERS OF SHARES SHOULD BOTH SIGN. FIDUCIARIES OR OTHER PERSONS SIGNING IN A REPRESENTATIVE CAPACITY SHOULD INDICATE THE CAPACITY IN WHICH THEY ARE SIGNING. PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN THIS PROXY CARD IN THE ENCLOSED ENVELOPE. -----END PRIVACY-ENHANCED MESSAGE-----