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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number 0-15956
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Bank of Granite Corporation
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(Exact name of registrant as specified in its charter)
North Carolina 56-1550545
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 128, Granite Falls, N.C. 28630
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code (704) 496-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock NASDAQ
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
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(Title of class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 21, 1995 was $147,555,788.
As of March 21, 1995, the Registrant had outstanding 5,961,850 shares of
Common Stock, $1.00 par value.
Documents Incorporated by Reference
PARTS I AND II: Annual Report to Shareholders for the fiscal year ended
December 31, 1994 (with the exception of those portions which are specifically
incorporated by reference in this Form 10-K, the Annual Report to Shareholders
is not deemed to be filed as part of this report).
PART III: Definitive Proxy Statement dated March 16, 1995 as filed pursuant
to Section 14 of the Securities Exchange Act of 1934 in connection with the
1995 Annual Meeting of Shareholders.
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FORM 10-K CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
1994 1995
ANNUAL PROXY
REPORT REPORT
PART I PAGE PAGE
<S> <C> <C> <C>
Item 1 Business
Executive Officers of the Registrant
Item 2 Properties
Item 3 Legal Proceedings None
Item 4 Submission of Matters to a Vote of Security Holders None
PART II
Item 5 Market for the Registrant's Common Equity and Related
Shareholder Matters 1 & 35 3
Item 6 Selected Financial Data 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation 12 - 19
Item 8 Financial Statements and Supplementary Data 20 - 34
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure None
PART III
Item 10 Directors and Executive Officers of the Registrant 6
Item 11 Executive Compensation 7 - 10
Item 12 Security Ownership of Certain Beneficial Owners and
Management 3 - 6
Item 13 Certain Relationships and Related Transactions 13
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Forms 8-K 20 - 34
</TABLE>
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PART I
ITEM 1 - BUSINESS
Bank of Granite Corporation (the "Registrant") is a Delaware Corporation
organized June 1, 1987 as a holding company. The Registrant currently engages
in no operations other than the ownership and operation of Bank of Granite (the
"Bank"), a state bank chartered under the laws of North Carolina in 1906. The
Registrant conducts its business from ten banking offices located in Caldwell,
Catawba, and Burke counties in North Carolina. As of December 31, 1994, the
Bank was the eleventh largest bank in North Carolina.
GENERAL BUSINESS
The Bank's principal activities include the taking of demand and time deposits
and the making of loans, secured and unsecured, to individuals, associations,
partnerships, and corporations. Bank of Granite is an independent community
bank. The majority of its customers are individuals and small businesses. No
material part of its business is dependent upon a single customer or a few
customers whose loss would have an adverse effect on the business of the Bank.
No material portion of the business of the Bank is seasonal.
TERRITORY SERVED AND COMPETITION
The Bank now operates banking offices in Granite Falls, Lenoir, and the
Hibriten and Whitnel sections of Lenoir, Hudson, Newton, Morganton, Hickory,
and the Springs Road and Viewmont sections of Hickory for a total of ten
offices. Banking laws of North Carolina allow statewide branching, resulting
in commercial banking in the state being extremely competitive. There are five
other commercial banks located in the Bank's service area in Caldwell County,
one savings bank, and two credit unions. The most recent FDIC figures
available indicate that Bank of Granite has funds on deposit amounting to 32%
of the total commercial bank deposits in Caldwell County as of June 30, 1994.
There are eight commercial banks, one savings bank, and nine credit unions
located in the Bank's service area in Catawba County. The most recent FDIC
figures available show that Bank of Granite's deposits comprise 14% of the
total commercial bank deposits in Catawba County as of June 30, 1994.
On July 10, 1989 Bank of Granite opened a full service office in Morganton.
Competing in the same service area are four other commercial banks, five credit
unions, one savings and loan, and one savings bank. The most recent FDIC
figures available show that Bank of Granite's deposits comprise 4% of the total
commercial bank deposits in Burke County as of June 30, 1994.
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EMPLOYEES
As of December 31, 1994, Bank of Granite had 159 full-time equivalent
employees. The Registrant considers its relationship with its employees to be
excellent.
SUPERVISION AND REGULATION
The following summaries of statutes and regulations affecting bank holding
companies and banks do not purport to be complete. Such summaries are
qualified in their entirety by reference to such statutes and regulations.
The Bank Holding Company Act
The Registrant is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
required to register as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board").
A bank holding company is required to file with the Federal Reserve Board
annual reports and other information regarding its business operations and
those of its subsidiaries. It is also subject to examination by the Federal
Reserve Board and is required to obtain Federal Reserve Board approval prior to
acquiring, directly or indirectly, more than 5% of the voting stock of such
bank, unless it already owns a majority of the voting stock of such bank.
Furthermore, a bank holding company is, with limited exceptions, prohibited
from acquiring direct or indirect ownership or control of any voting stock of
any company which is not a bank or a bank holding company, and must engage only
in the business of banking or managing or controlling banks or furnishing
services to or performing services for its subsidiary banks. One of the
exceptions to this prohibition is the ownership of shares of a company the
activities of which the Federal Reserve Board has determined to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.
A bank holding company and its subsidiaries are also prohibited from acquiring
any voting share of, or interest in, any banks located outside of the state in
which the operations of the bank holding company's subsidiaries are located,
unless the acquisition is specifically authorized by the statutes of the state
in which the target is located. Certain southeastern states and
municipalities, including North Carolina, have enacted legislation which
authorizes interstate acquisitions of banking organizations by bank holding
companies within the southeast, subject to certain conditions and restrictions.
At the present time, the following states and municipality have enacted
reciprocal legislation: Alabama, Arkansas, Florida, Georgia, Kentucky,
Louisiana, Maryland, Mississippi, North Carolina, South Carolina, Tennessee,
Texas,
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Virginia, West Virginia, and Washington, D. C. As a result of such
legislation, the Registrant may become an acquisition target of banking
organizations located in those states or municipality which have enacted
reciprocal legislation. Moreover, the ability of the Company to compete in its
service area may be adversely affected by the entry of additional large bank
holding companies into the area.
A bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in arrangements in connection with the extension of credit or
provision of any property or service. Thus, an affiliate of a bank holding
company may not extend credit, lease, sell property or furnish any services or
fix or vary the consideration for such on the condition that (i) the customer
must obtain or provide some additional credit, property or services from or to
its bank holding company subsidiaries thereof, or (ii) the customer may not
obtain some other credit, property or services from a competitor, except to the
extent reasonable conditions are imposed to assure the soundness of the credit
extended.
The Federal Reserve Board has cease-and-desist powers over parent bank holding
companies and non-banking subsidiaries where their action would constitute a
serious threat to the safety, soundness or stability of a subsidiary bank.
While the Registrant is not presently subject to any regulatory restrictions on
dividends, the Registrant's ability to pay dividends will depend to a large
extent on the amount of dividends paid by the Bank and any other subsequently
acquired entities. The Bank, as a North Carolina banking corporation, may pay
dividends only out of undivided profits as determined pursuant to North
Carolina General Statutes Section 53-87. As of December 31, 1994, the Bank had
undivided profits of approximately $51.2 million. Additionally, current
federal regulations require that the Bank maintain a ratio of total capital to
assets, as defined by regulatory authorities, in excess of 6%. As of December
31, 1994 this ratio was 15.20%, leaving approximately $26.5 million of the
Bank's undivided profits available for the payment of dividends. The Bank is,
and such other entities may be, subject to regulatory restrictions on the
payment of dividends.
In an effort to achieve a measurement of capital adequacy that is more
sensitive to the individual risk profiles of financial institutions, the
various financial institution regulators mandate minimum capital regulations
and guidelines that categorize various components of capital and types of
assets and measure capital adequacy in relation to a particular institution's
relative levels of those capital components and the level of risk associated
with various types of assets of that financial institution. The FDIC and the
FRB statements of policy on "risk-based capital" require the Company to
maintain a level of capital commensurate with the risk profile assigned to its
assets in accordance with the policy
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statements. The capital standards call for minimum total capital of 8 percent
of risk-adjusted assets. At December 31, 1994, the Company's tier 1 ratio and
capital ratio to risk-adjusted assets was 20.8% and 22.1% respectively. The
Company's leverage ratio at December 31, 1994 was 16.0%. The Company is in
compliance with all regulatory capital requirements.
The Company cannot predict what other legislation might be enacted or what
other regulation might be adopted or, if enacted or adopted, the effect
thereof.
The Bank is subject to supervision and regulation, of which regular bank
examinations are a part, by the Federal Deposit Insurance Corporation and North
Carolina State Banking Commission. The Bank is a member of the Federal Deposit
Insurance Corporation (the "FDIC"), which currently insures the deposits of
each member bank to a maximum of $100,000 per depositor. For this protection,
each bank pays a semi-annual statutory assessment and is subject to the rules
and regulations of the FDIC.
Federal banking laws applicable to all depository financial institutions, among
other things, (i) afford federal bank regulatory agencies with powers to
prevent unsafe and unsound banking practices; (ii) restrict preferential loans
by banks to "insiders" of banks; (iii) require banks to keep information on
loans to major shareholders and executive officers, and (iv) bar certain
directory and officer interlocks between financial institutions. The
prohibitions against preferential loans and certain director and officer
interlocks may inhibit the ability of the Bank and the Registrant to obtain
experienced and capable officers and directors, to replace presently proposed
officers and directors, or to add to their number.
The Registrant is an "affiliate" of the Bank within the meaning of the Federal
Reserve Act, which imposes restrictions on loans by the Bank to the Registrant,
on investments by the Bank in the stock or securities of the Registrant, and on
the use of such stock or securities as collateral security for loans by the
Bank to any borrower. The Registrant is also subject to certain restrictions
with respect to engaging in the business of issuing, underwriting and
distributing securities.
Shareholders of banks (including bank holding companies which own stock in
banks) may be compelled by bank regulatory authorities to invest additional
capital in the event their banks experience either significant loan losses or
rapid growth of loans or deposits. In addition, the Registrant may also be
required to provide additional capital to any additional banks which it
acquires as a condition to obtaining the approvals and consents of regulatory
authorities in connection with such acquisitions.
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Effects of Governmental Monetary Policy and Economic Controls
The Registrant is directly affected by governmental monetary policy and by
regulatory measures affecting the banking industry in general. Of primary
importance is the Federal Reserve Board, whose actions directly affect the
money supply and, in general, affect banks' lending abilities by increasing or
decreasing the cost and availability of bank credit in order to combat
recession and curb inflationary pressures in the economy by open market
operations in the United States government securities, changes in the discount
rate on member bank borrowings, and changes in reserve requirements against
bank deposits.
Deregulation of interest rates paid by banks on deposits and the types of
deposits that may be offered by banks have eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates have increased banks' costs of funds and made them more
sensitive to fluctuations in money market rates.
In view of changing conditions in the national economy and money markets, as
well as the effect of actions by monetary and fiscal authorities, no prediction
can be made as to possible future changes in interest rates, deposit levels,
loan demand or the business and earnings of the Registrant.
ITEM 2 - PROPERTIES
Bank of Granite has a total of ten offices. The home office (Granite Falls)
and four offices (Lenoir, Hibriten, Hudson and Whitnel) are located in Caldwell
County, North Carolina. The Hickory, Springs Road, Viewmont, and Newton
offices are located in Catawba County, North Carolina and the Morganton office
is located in Burke County, North Carolina.
The Granite Falls office (home office) is a contemporary style two story
building containing approximately 8,735 square feet and is situated on a large
lot containing approximately 1.2 acres of land. A masonry and frame storage
building containing 735 square feet is also located on this property.
Buildings and land are owned by the Bank. In addition the bank owns an
adjoining 100' x 221' lot. At present this partially paved lot provides 25
parking spaces. Future use of the lot could include a new four lane drive-in
system.
The Operations Center and lot is located one block northwest of the Granite
Falls office. The building is 70' x 168' and contains 11,769 square feet. It
is brick and block type construction and has a concrete slab floor. The
building is situated on a 1.05 acre lot. Approximately 8,000 square feet of
the building houses the Bank's Data Processing Center. This area contains a
computer room,
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data entry department, capture room, proof room, control room, three offices,
employee lounge and baths. The remaining area incorporates a large assembly
room, as well as, an 892 square feet area to house our Consumer Credit
Administration, and an area of 1,027 square feet to house Human Resources,
Marketing and Training Directors. Also on the property is a small 15 x 25
building which houses our print shop.
The Lenoir office, a Williamsburg style masonry two story building, was
constructed in 1959 and contains 7,400 square feet. A separate drive-in window
building of the same style architecture contains 220 square feet. In addition
to providing drive-in services, the facility has a walk-up window and an
automated teller machine (ATM). The buildings and land are owned by the Bank.
A major expansion completed in 1986 at this site now provides approximately
1,800 square feet of floor space for additional offices and increased lobby
space.
The Hudson office was completely renovated during 1991. The adjoining building
was purchased along with approximately 450 square feet being added to the prior
facility. This additional space brings the total inside area to 4,235 square
feet and the total land area to 4.10 acres. The entire exterior received a
face lift of dryvit, a stucco type finish. There are four drive-in lanes and a
drive-up automated teller machine (ATM). Inside the large lobby is bordered by
two teller lines that provide stations for seven tellers, four offices and a
conference room.
The Whitnel office was remodeled in 1993, extending drive-in lanes to three and
adding a fourth lane for an island ATM. The total square footage of the
building is now 2,530 square feet. The newly renovated building has two
offices, a five position teller line, two bathrooms, an employee break room,
vault, and mechanical room. The building is situated on a lot containing
45,500 square feet. The building and land are owned by the Bank.
In November, 1994, a permanent building was completed to house the Hibriten
office, replacing two modular units which served as the banking office. The
building is situated on 2.10 acres of land and contains 2,480 square feet. It
has five drive-up lanes including one for the ATM unit. Inside there are five
lobby teller stations, two offices, lobby, and employee break room. Two
handicap spaces are provided in the 36 space paved parking lot.
The Hickory office was completed in 1979. The two story structure is 54' x
81', containing 9,515 square feet. The building is constructed of ribbed
masonry block and architectural concrete on a steel frame, situated on a 100' x
200' lot. Both land and building are owned and occupied by the Bank. The
first floor has seven teller stations, four drive-in lanes, vault, and an
automated teller machine (ATM). The second floor is comprised of eight
offices, a conference room, four note teller desks, a document
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storage area and a lobby which consists of two waiting areas.
Adjacent to the Hickory office is the Bank of Granite Plaza which was purchased
in 1988. The brick frame building was renovated by an exterior face lift,
composed of ribbed masonry block and dryvit facing. The interior was also
redesigned providing office space for rental. A portion of the building has a
second floor of 3,760 square feet. One tenant leases both floors, 27 offices -
a total of 7,520 square feet. The other section of the building is one story
with a total of 7,572 square feet, and contains twenty offices. The bank
retains the conference room and the remainder of the building has been leased
to various tenants. Most all leases have conditional options to renew. The
building is situated on a lot equal to the size of the building.
The Newton office was completed in 1984. The single story structure is 43' x
84'. The building is constructed of ribbed masonry block and architectural
concrete on a steel frame, situated on a 200' x 200' lot. Both land and
building are owned by the Bank. The building has two offices and conference
room, five teller stations, four drive-in lanes, vault, and a drive-up
automated teller machine (ATM).
The Springs Road office was completed in 1987 and is a 43' x 84' structure of
ribbed masonry block and architectural concrete on a steel frame and is located
on a 1.6 acre lot. The building has two offices, and a conference room, five
teller stations, four drive-in teller lanes and a drive-up automated teller
machine (ATM).
In February, 1992, a ribbed masonry block and architectural concrete building
on a steel frame was completed and replaced the modular unit which previously
served as the Viewmont office. The new facility, containing approximately
4,200 square feet, provides five teller stations, four drive-in lanes, drive-up
ATM, two offices, and a conference room. The edifice is located on a two acre
lot leased by the Bank with an option to purchase at a later date.
In January, 1994, the Bank purchased a building located at 201 East Meeting
Street along with an additional 25' x 120' lot. This additional lot enabled
the bank to construct a retaining wall and increase drive-in lanes to five
including one for an ATM unit. Other renovations included adding partitions on
the first floor to make two new offices, and also a unisex bathroom on the
first floor. The lobby received a new ceiling, wall covering and carpet. The
office moved into the renovated facility in July, 1994. This two story brick
building contains approximately 5,400 square feet.
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ITEM 3 - LEGAL PROCEEDINGS
There were no significant legal proceedings outstanding at December 31, 1994.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders in the Fourth Quarter
of the Company's fiscal year.
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS' MATTERS
The information required by this item is set forth on Page 1 in the Company's
1994 ANNUAL REPORT TO SHAREHOLDERS under the heading "Market and Dividend
Summary," and on Page 3 of the 1995 PROXY STATEMENT under the heading
"Principal Holders of Voting Securities." The above information is incorporated
by reference.
ITEM 6 - SELECTED FINANCIAL DATA
The information required by this item is set forth on Page 10 in the Company's
1994 ANNUAL REPORT TO SHAREHOLDERS under the heading "Selected Financial Date,"
of which information is incorporated herein by reference.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is set forth on Pages 12 through 19 in
the Company's 1994 ANNUAL REPORT TO SHAREHOLDERS under the heading "Managements
Discussion and Analysis", which is incorporated herein by reference.
ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA
The Consolidated financial statements, and notes thereto and the independent
auditors' report on Pages 20 through 34 of the 1994 ANNUAL REPORT TO
SHAREHOLDERS for the year ended December 31, 1994 are incorporated herein by
reference. The 1994 ANNUAL REPORT TO SHAREHOLDERS for the year ended December
31, 1994 is filed herein as Exhibit 13 as part of this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There has been no disagreement with accountants on accounting and financial
disclosure as defined by Item 304 of Regulation S-K.
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PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth on Pages 5-6 under the
heading "Directors and Executive Officers of Bank of Granite Corporation" in
the definitive proxy materials of the Company filed in connection with its 1995
ANNUAL MEETING OF SHAREHOLDERS. The information required by this item
contained in such definitive proxy materials is incorporated herein by
reference.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this item is set forth on Pages 7 through 10 in
the definitive proxy materials of the Company filed in connection with its 1995
ANNUAL MEETING OF SHAREHOLDERS, which information is incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is set forth on Pages 3-6 in the
definitive proxy materials of the Company filed in connection with its 1995
ANNUAL MEETING OF SHAREHOLDERS, which information is incorporated herein by
reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth on Page 13 under the
heading "Transactions with Officers and Directors" in the definitive proxy
materials of the Company filed in connection with its 1995 ANNUAL MEETING OF
SHAREHOLDERS, which information is incorporated herein by reference.
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
1. Financial Statements
The information required by this item is set forth on Pages 20 through
34 in the Company's 1994 ANNUAL REPORT TO SHAREHOLDERS, which is
incorporated herein by reference.
2. Financial Statement Schedules
None
13. Annual Report to Security Holders.
21. Subsidiaries of the Registrant
Bank of Granite Corporation has one subsidiary, Bank of Granite,
incorporated in 1906 and operates in North Carolina.
27. Financial Data Schedule (for SEC use only)
B. No Reports on Form 8-K were filed during the year.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on behalf
by the undersigned, there unto duly authorized.
BANK OF GRANITE CORPORATION
By: s/John A. Forlines, Jr.
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John A. Forlines, Jr.
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
s/John A. Forlines, Jr. Chairman and Chief March 21, 1995
------------------------ Executive Officer
John A. Forlines, Jr.
s/Randall C. Hall Vice President and March 21, 1995
------------------------ Chief Financial
Randall C. Hall Officer and Principal
Accounting Officer
s/John N. Bray Director March 21, 1995
------------------------
John N. Bray
s/Robert E. Cline Director March 21, 1995
------------------------
Robert E. Cline
s/John A. Forlines, Jr. Director March 21, 1995
------------------------
John A. Forlines, Jr.
s/Barbara F. Freiman Director March 21, 1995
------------------------
Barbara F. Freiman
s/William F. Howard, III Director March 21, 1995
------------------------
William F. Howard, III
s/Myron L. Moore, Jr. Director March 21, 1995
------------------------
Myron L. Moore, Jr.
s/Charles M. Snipes Director March 21, 1995
------------------------
Charles M. Snipes
</TABLE>
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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
Management's Discussion and Analysis is provided to assist in understanding
and evaluating the Company's results of operations and financial condition. The
following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. In 1987 Bank
of Granite Corporation (the "Company") was formed under a plan whereby all
previously issued shares of Bank of Granite stock were exchanged for shares of
the Company. The Bank then became a wholly owned subsidiary of the Company. All
information is presented as consolidated data.
RESULTS OF OPERATIONS
The following discussion relates to the operations for the year ended
December 31, 1994 compared to the year ended December 31, 1993, the year ended
December 31, 1993 compared to the year ended December 31, 1992, and the year
ended December 31, 1992 compared to the year ended December 31, 1991. All per
share amounts have been adjusted to reflect a 5-for-4 stock split effected in
the form of a 25% stock dividend in 1994.
1994 COMPARED TO 1993
Net income for 1994 was $9,842,273 or $1.64 per share compared to $8,749,266
or $1.46 per share in 1993. The 12.5% increase in net income resulted primarily
from the subsidiary Bank's continued successful efforts to increase net
interest income over the previous period. Net interest income increased to
$20,059,106 in 1994 compared to $16,865,043 in 1993. The increase in interest
income was attributable to increases in interest rates and growth in loan
volume. The prime rate increased six times during 1994 from 6.00% to 8.5% and
loans grew 10.67% to $269,851,459. The increase in interest expense resulted
from a growth of 4.42% in interest-bearing deposits. Other income increased to
$4,256,494 in 1994 compared to $4,211,175 in 1993, primarily due to increases
in volume of service charges on deposit accounts. The $120,378 increase in
service charges on deposit accounts reflects growth in deposit accounts. Other
service fees and commissions, and other income reflect a decrease of $75,056
compared to last year. The decrease is a result of rising interest rates which
negatively impacted fees associated with originating and renewing mortgage
loans. In 1994 the Company earned $328,137 for originating mortgage loan
compared to $487,020 last year. Management continued to place emphasis on
non-traditional banking services such as annuities and leasing which produced
$106,453 in non-interest income. Additionally, sales of the guaranteed portions
of small business administration loans produced $268,068 in income. Other
expenses increased to $9,146,805 in 1994 compared to $7,641,494 in 1993.
Salaries and employee benefits increased by $827,899, accounting for 55.00% of
the total increase in non-interest expense. Equipment rentals, depreciation and
maintenance expense increased $59,317 or 7.93% as a result of purchases of
additional computer software and related peripherals. FDIC premiums increased
by $53,451 or 8.76% reflecting a growth in deposits. A non-recurring loss on
the sale of other real estate owned amounted to $111,547 or 7.41% of the total
increase in non-interest expense. Telephone and telegraph expenses increased
$101,485 or 6.74% of the total increase in non-interest expense due to the
installation and operation of a new telephone system.
1993 COMPARED TO 1992
Net income for 1993 was $8,749,266 or $1.46 per share compared to $7,807,285
or $1.32 per share in 1992. The 12.1% increase in net income resulted primarily
from the subsidiary Bank's continued successful efforts to increase net
interest income over previous periods coupled with efforts to increase its
non-interest income over previous periods. Net interest income increased to
$16,865,043 in 1993 compared to $15,336,204 in 1992. The increase in interest
income was attributable to growth in volume. Interest rates remained flat
during 1993, resulting in maturing loans and investments repricing at lower
yielding rates. The decrease in interest expense resulted from higher yielding
deposits maturing and reinvesting at lower interest rates. Other income
increased to $4,211,175 in 1993 compared to $4,058,640 in 1992 primarily due to
an increase in both rate and volume in other service fees and commission and
other income. Management continued to place emphasis on non-traditional banking
services relatively new to the Bank, such as annuities, leasing, and
originating mortgage loans, which produced $565,730 in non-interest income
compared to $440,631 in 1992. Additionally, sales of the guaranteed portion of
small business administration loans produced $314,416. Other expenses increased
to $7,641,494 in 1993 compared to $7,310,170 in 1992. Salaries and employee
benefits increased by $210,317, accounting for 63.5% of the total increase in
non-interest expense. Equipment rentals, depreciation and maintenance expense
increased $69,768 or 11.5% as a result of purchases of computer software and
related peripherals. FDIC premiums increased $30,714 as a result of deposit
growth.
12
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
1992 COMPARED TO 1991
Net income for 1992 was $7,807,285 or $1.32 per share compared to $6,893,299
or $1.17 per share in 1991. The 13.3% increase in net income resulted primarily
from the subsidiary Bank's continued efforts to increase its non-interest
income over previous periods. Net interest income increased to $15,336,204 in
1992 compared to $13,939,676 in 1991. The decrease in interest income was
attributable to interest rates. Interest rates declined during 1992, resulting
in maturing loans and investments repricing at lower yielding rates. The
decrease in interest expenses resulted from higher yielding deposits maturing
and repricing at lower rates. Other income increased to $4,058,640 in 1992
compared to $3,457,955 in 1991, primarily due to an increase in both rate and
volume in service charges on deposit accounts and other service fees and
commissions. Management continued to place emphasis on non-traditional banking
services relatively new to the Bank, such as leasing and originating mortgage
loans, which produced $440,631 in non-interest income. Other expenses increased
to $7,310,170 in 1992 compared to $7,004,332 in 1991. Salaries and employee
benefits increased by $269,640, accounting for 88.2% of the total increase in
non-interest expense.
RETURN ON ASSETS
Bar chart showing 1991 through 1994 reflecting increases in percentage form.
NET INTEREST INCOME
Net interest income (the difference between interest earned on
interest-earning assets and interest paid on interest-bearing liabilities,
primarily deposits in the Company's subsidiary bank) represents the most
significant portion of the Company's earnings. It is management's on-going
policy to maximize net interest income. Net interest income totaled
$20,059,106, $16,865,043 and $15,336,204 for 1994, 1993 and 1992, respectively,
representing an increase of 18.9% for 1994 over 1993, 10.0% for 1993 over 1992
and 10.0% for 1992 over 1991. Interest rate spreads have been at least 4.2%
over the last three years, and the Company continues efforts to maximize these
favorable spreads by management of both loan and deposit rates in order to
support the overall earnings growth. The table at left presents the daily
average balances, interest income/expense and average rates earned and paid on
interest-earning assets and interest-bearing liabilities of the Company for the
last three years.
13
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992
Interest Interest Interest
Avg. Income/ Avg. Avg. Income/ Avg. Avg. Income/ Avg.
Dollars in thousands Balance Expense Rate Balance Expense Rate Balance Expense Rate
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $ 18,744 $ 17,306 $ 15,098
Net loans(1) 252,321 $23,368 9.3% 231,178 $19,853 8.6% 220,842 $19,757 8.9%
Taxable securities 62,497 3,290 5.3% 60,300 3,464 5.7% 54,341 3,737 6.9%
Non-taxable securities(2) 49,087 2,719 8.4% 43,713 2,562 8.9% 36,939 2,368 9.7%
Federal funds sold and securities
purchased under agreement to resell 4,053 196 4.8% 7,513 235 3.1% 3,043 115 3.8%
Bank premises and equipment, net 7,575 6,492 6,443
Other assets 4,897 4,683 4,818
Total assets $399,174 $371,185 $341,524
Total interest earning assets $371,707 $29,573 8.3% $345,328 $26,114 7.9% $318,427 $25,977 8.5%
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $271,408 $ 9,383 3.5% $258,162 $ 9,179 3.6% $241,161 $10,525 4.4%
Non-interest bearing deposits 62,169 55,637 48,986
Federal funds purchased and securities
sold under agreement to repurchase 3,490 127 3.6% 2,711 66 2.4% 3,486 108 3.1%
Other liabilities 2,455 4 .2% 2,519 4 .2% 2,515 8 .3%
Shareholders' equity 59,652 52,156 45,376
Total liabilities and
shareholders' equity $399,174 $371,185 $341,524
Total interest bearing liabilities $274,956 $ 9,514 3.5% $260,915 $ 9,249 3.5% $244,728 $10,641 4.3%
Net interest earned and net yield
on earning assets(3) $20,059 5.4% $16,865 5.3% $15,336 5.2%
Interest rate spread(4) 4.8% 4.4% 4.2%
</TABLE>
(1) Non-accrual loans have been included.
(2) Yields on tax-exempt investments have been adjusted to a tax equivalent
basis using 34.31% for 1994, and 34% for 1993 and 1992.
(3) Net yield on earning assets is computed by dividing net interest earned by
average earning assets.
(4) The interest rate spread is the interest earning assets rate less the
interest earning liabilities rate.
================================================================================
Changes in interest income and interest expense can result from variances in
both volume and rates. The following table sets forth the dollar amount of
increase (decrease) in interest income and interest expense resulting from
changes in the volume of interest earning assets and interest bearing
liabilities and from changes in yields and rates.
INTEREST RATE / VOLUME ANALYSIS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 Compared to 1993 1993 Compared to 1992
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Taxable investment securities $ 120 $ (294) $ (174) $ 376 $ (649) $ (273)
Non-taxable investment securities 307 (150) 157 416 (222) 194
Federal funds sold (138) 99 (39) 155 (35) 120
Loans 1,878 1,637 3,515 913 (817) 96
--------------------------------------------------------------------------------------------------------
Total $2,167 $1,292 $3,459 $1,860 $(1,723) $ 137
========================================================================================================
INTEREST BEARING LIABILITIES:
Savings deposits $ 73 $ (28) $ 45 $ 67 $ (95) $ (28)
Other time deposits 33 (26) 7 208 (1,334) (1,126)
Other 235 (22) 213 241 (479) (238)
--------------------------------------------------------------------------------------------------------
Total $ 341 $ (76) $ 265 $ 516 $(1,908) $(1,392)
========================================================================================================
</TABLE>
(1) The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variances.
================================================================================
14
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objectives of the Company's liquidity management policy include providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for on-going operations of the
Company and regulatory requirements. Liquidity requirements of the Company are
met primarily through two categories of funds. The first is core deposits which
includes demand deposits, savings accounts and certificates of deposits. The
Company considers these to be a stable portion of the Company's liability mix
and the result of on-going stable consumer and commercial banking
relationships. At December 31, 1994 core deposits totaled $271,431,564 or
79.06% of the Company's total deposits. The other principal method of funding
utilized by the Company is through large denomination certificates of deposit,
federal funds purchased, repurchase agreements and other short-term borrowings.
The Company's policy is to emphasize core deposit growth rather than growth of
purchased liabilities as the cost of purchased liabilities are greater.
The majority of the Company's deposits are rate-sensitive instruments with
rates which tend to fluctuate with market rates. This, coupled with the
Company's short-term certificates of deposit, has increased the opportunities
for deposit repricing. The Company is placing greater significance on
monitoring and management of the Company's asset/liability position. The
Company's policy of managing its interest margin (gap between interest earning
assets compared to interest-bearing liabilities) is to maximize net interest
income while maintaining a stable deposit base. The Company's deposit base is
not generally subject to volatility experienced in national financial markets
in recent years; however, the Company does realize the importance of minimizing
such volatility while at the same time maintaining and improving earnings. A
common method used to manage interest rate sensitivity is to measure, over
various time periods, the interest rate sensitivity positions, or gaps;
however, this method addresses on the magnitude of timing differences and does
not address earnings or market value. Therefore, management prepares on a
regular basis earnings projections based on a range of interest rate scenarios
of rising, flat and declining rates in order to more accurately measure
interest rate risk.
Interest-bearing liabilities and the loan portfolio are generally repriced to
current market rates. The Bank's balance sheet is asset-sensitive, meaning that
in a given period there will be more assets than liabilities subject to
immediate repricing as the market rates change. Because a major portion of the
loan portfolio is repriced immediately as market rates change and exceed
immediately sensitive interest-bearing deposits, the earning position could
improve in a rising rate environment and could deteriorate in a declining rate
environment, depending on the correlation of rate changes in these two
categories.
INTEREST RATE SENSITIVITY
<TABLE>
<CAPTION>
DECEMBER 31, 1994
Interest Sensitivity in Days Non-Sensitive
and Sensitive
Dollars in thousands 1-90 Days 91-180 Days 181-365 Days Total Over One Year Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal funds sold $ 1,000 $ 1,000 $ 1,000
Securities:
U.S. Treasury 1,000 $ 1,000 $ 4,499 6,499 $ 13,025 19,524
U.S. Government agencies 2,000 2,000 8,001 12,001 24,498 36,499
States and political subdivisions 571 1,908 860 3,339 47,018 50,357
Other 7,741 7,741
Loans
Real estate:
Construction 16,697 231 650 17,578 3,150 20,728
Mortgage 87,789 1,055 1,520 90,364 8,589 98,953
Commercial, financial and agricultural 110,336 1,187 1,963 113,486 3,516 117,002
Consumer 12,676 2,658 4,163 19,497 13,660 33,157
All other 11 11 11
------------------------------------------------------------------------------------------------------------------------------------
Total interest earning assets $232,080 $ 10,039 $ 21,656 $263,775 $121,197 $384,972
====================================================================================================================================
Interest Bearing Liabilities
Interest bearing deposits:
Savings and NOW accounts $ 71,673 $ 71,673 $ 71,673
Money market accounts 34,556 34,556 34,556
Time deposits of $100,000 or more 38,338 $ 16,079 $ 12,757 67,174 $ 4,724 71,898
Other time deposits 38,485 24,406 16,699 79,590 18,650 98,240
Federal funds purchased and securities
sold under agreements to repurchase 3,280 3,280 3,280
Other borrowed funds 21 21 21
------------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities $186,353 $ 40,485 $ 29,456 $256,294 $ 23,374 $279,668
====================================================================================================================================
Interest sensitivity gap $ 45,727 $(30,446) $ (7,800) $ 7,481
Cumulative gap $ 45,727 $ 15,281 $ 7,481 $ 7,481
Interest earning assets as a percentage
of interest bearing liabilities 125% 25% 74% 103%
------------------------------------------------------------------------------------------------------------------------------------
All securities as presented are at amortized cost.
====================================================================================================================================
</TABLE>
15
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
The following table presents the maturity and distribution of the Company's
loans by type, including maturity and fixed rate loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
<TABLE>
<CAPTION>
Dollars in thousands DECEMBER 31, 1994
One to Five Years
Loan Maturities One Year Five Years or More Total
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Real estate:
Construction $ 8,647 $ 10,034 $ 2,047 $ 20,728
Mortgage 30,782 57,854 10,317 98,953
Commercial, financial and agricultural 61,192 51,065 4,745 117,002
Consumer 14,246 18,196 715 33,157
All other 11 11
------------------------------------------------------------------------------------------------------
Total $114,878 $137,149 $ 17,824 $269,851
======================================================================================================
Predetermined rate, maturity greater than one year $ 37,086 $ 14,292 $ 51,378
Variable rate or maturing within one year $114,878 100,063 3,532 218,473
------------------------------------------------------------------------------------------------------
Total $114,878 $137,149 $ 17,824 $269,851
======================================================================================================
</TABLE>
DEPOSITS
The Company's yield on interest-bearing liabilities remained level at 3.5% in
1994 compared to last year. This is a direct result of consumer deposit
restructuring. Although interest rates moved upward during the year,
depositors, still skeptical about the economic environment, maintained
relatively larger balances in lower yielding, yet highly accessible money
market demand accounts, NOW accounts, savings accounts and non-interest bearing
demand accounts. Certificates of deposit increased $8,261,946 or 5.10%. The
yield on certificates of deposit remained flat as long-term, higher yielding
certificates matured and reinvested at lower rates. An increased customer
awareness of interest rates increases the importance of rate management by the
Company. The Company continuously monitors market pricing, competitors' rates,
and internal interest rate spreads to maintain the Company's growth and
profitability. Deposits being the principal source of funds for continued
growth, the Company attempts to structure rates so as to promote deposit and
asset growth while at the same time increasing the overall profitability of the
Company. The daily average amounts of deposits of the Company are summarized
below.
DEPOSITS
(IN MILLIONS)
Bar chart showing 1990 through 1994 increases in deposits.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
Dollars in thousands 1994 1993 1992
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Non-interest bearing deposits $ 62,169 $ 55,637 $ 48,986
Interest bearing deposits 271,408 258,162 241,161
------------------------------------------------------------------------------------------------------
Total $333,577 $313,799 $290,147
======================================================================================================
</TABLE>
The above table includes certificates of deposit $100,000 and over which at
December 31, 1994 totaled $71,898,000. Of this total $38,338,000 had scheduled
maturities or repriced within three months, $16,079,000 within six months,
$12,757,000 within six to twelve months and $4,724,000 within thirteen to sixty
months.
ASSETS SHAREHOLDERS' EQUITY
(IN MILLIONS) (IN MILLIONS)
Bar chart showing 1990 through 1994 Bar chart showing 1990 through 1994
showing increases in assets. showing increases in shareholders'
equity.
16
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
CAPITAL RESOURCES
Future growth and expansion of the Company is dictated by the ability to
generate capital which is generated principally by earnings of the subsidiary
Bank. As of December 31, 1994 the Company's ratio of total capital to
risk-adjusted assets was 22.07%. The Company is one of the soundest and most
strongly capitalized in the nation, and fully expects to be able to meet future
capital needs caused by growth and expansion as well as regulatory capital
requirements. The Company is not aware of any current recommendation by
regulatory authorities which if implemented would materially affect the
Company's liquidity, capital resources or operations.
LOANS
(NET) (IN MILLIONS)
Bar chart showing 1990 through 1994 increases in loan amounts.
LOANS
Historically, the Company has made both consumer and commercial loans within
its market area. The Company generally considers its market to be Caldwell,
Catawba and Burke counties of North Carolina. Total loans at December 31, 1994
were $269,851,459. This compares with $243,825,155 at December 31, 1993, an
increase of $26,026,309 or 10.67%. The Company places emphasis on consumer
based installment loans and commercial loans to small and medium sized
business. The Company has a diversified loan portfolio with no concentrations
to any one borrower, industry or market region. The amounts and types of loans
outstanding for the past five years ended December 31 are shown on the
following table.
LOANS
<TABLE>
<CAPTION>
DECEMBER 31,
Dollars in thousands 1994 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Real estate:
Construction $ 20,728 $ 18,020 $ 16,219 $ 15,548 $ 13,757
Mortgage 98,953 85,456 65,688 48,119 33,480
Commercial, financial and agricultural 117,002 111,076 121,795 128,541 140,530
Consumer 33,156 29,233 26,010 27,837 29,959
All other loans 419 377 259 350 382
-------------------------------------------------------------------------------------------------------------
Subtotal 270,258 244,162 229,971 220,395 218,108
Net deferred origination fees (407) (337) (193) (37) (3)
-------------------------------------------------------------------------------------------------------------
Total $269,851 $243,825 $229,778 $220,358 $218,105
=============================================================================================================
Nonperforming assets at December 31 are as follows:
Restructured loans $ 253 $ 350
Foreclosed properties 273 $ 281 $ 12 $ 90
Nonaccrual loans 744 86 174 267 225
Loans 90 days or more past due
and still accruing 1,231 685 649 1,090 1,075
-------------------------------------------------------------------------------------------------------------
Total $ 2,228 $ 1,394 $ 1,104 $ 1,369 $ 1,390
=============================================================================================================
</TABLE>
Any loans classified by regulatory examiners as loss, doubtful, substandard
or special mention that have not been disclosed hereunder, or under "Loans" or
"Asset Quality" narrative discussions do not (i) represent or result from
trends or uncertainties that management expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
===============================================================================
The composition of the portfolio remained level with real estate loans
comprising 44% of the portfolio compared to 42% in 1993; commercial loans
comprising 43% of the portfolio compared to 46% in 1993; and consumer loans
comprising 12% compared to 12% in 1993. Commercial loans of $117,001,581,
consumer loans of $33,156,501 and real estate mortgage loans of $98,953,041 are
loans for which the principal source of repayment is derived from the ongoing
cash flow of the business. Real estate construction loans of $20,727,600 are
loans for which the principal source of repayment comes from the sale of real
estate or from obtaining permanent financing.
===============================================================================
17
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
-------------------------------------------------------------------------------
PROVISIONS AND ALLOWANCES FOR LOAN LOSSES
Management determines the allowance for loans losses based on a number of
factors including reviewing and evaluating the Company's loan portfolio in
order to identify potential problem loans, credit concentrations and other risk
factors connected to the loans portfolio as well as current and projected
economic conditions locally and nationally. Upon loan origination, management
evaluates the relative quality of each loan and assigns a corresponding loan
grade. All loans are periodically reviewed to determine whether any changes in
these loan grades are necessary. This loan grading system assists management in
determining the overall risk in the loan portfolio.
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance for loan losses in the
accounting period in which they are determined by management to be
uncollectible. Recoveries during the period are credited to the allowance for
loan losses.
Management realizes that general economic trends greatly affect loan losses
and no assurances can be made that further charges to the loan loss allowance
may not be significant in relation to the amount provided during a particular
period or that further evaluation of the loan portfolio based on conditions
then prevailing may not require sizeable additions to the allowance, thus
necessitating similarly sizeable charges to operations. The allowance for loan
losses was 1.50% of net loans outstanding at December 31, 1994, 1993 and 1992,
which was consistent with both management's desire for strong reserves, and
credit quality of the loan portfolio. The ratio of net charge-offs during the
year to average loans outstanding during the year were .12%, .15% and .21% for
1994, 1993 and 1992, respectively. These ratios reflect management's
conservative lending, and effective efforts to recover credit losses.
The following tables present the allocation of the allowance for loan losses
by category, and an analysis of the allowance for loan losses.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31,
Dollars in thousands 1994 1993 1992 1991 1990
Percent of Percent of Percent of Percent of Percent of
Loans To Loans To Loans To Loans To Loans To
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $2,398 43.4% $1,667 45.6% $1,462 53.0% $1,157 58.3% $ 983 64.4%
Real Estate 1,106 44.3% 1,138 42.3% 983 35.6% 446 28.9% 237 21.7%
Consumer 400 12.3% 617 12.0% 455 11.3% 445 12.6% 357 13.7%
All Other Loans 0 0% 1 .1% 1 .1% 2 .2% 9 .2%
Unallocated 92 N/A 180 N/A 490 N/A 941 N/A 1,314 N/A
------------------------------------------------------------------------------------------------------------------------------
Total $3,996 100.0% $3,603 100.0% $3,391 100.0% $2,991 100.0% $2,900 100.0%
==============================================================================================================================
==============================================================================================================================
</TABLE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES FOR THE YEARS ENDED DECEMBER 31,
Dollars in thousands 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $3,603 $3,391 $2,991 $2,900 $2,364
------------------------------------------------------------------------------------------------------------------------------
Loans charged off:
Commercial, financial and agricultural 136 331 330 634 377
Credit cards and related plans 10 3 17 19 14
Installment loans to individuals 246 63 203 152 205
------------------------------------------------------------------------------------------------------------------------------
Total charge-offs 392 397 550 805 596
------------------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 57 5 24 53 75
Credit cards and related plans 1 3 8 2 3
Installment loans to individuals 23 26 38 22 36
------------------------------------------------------------------------------------------------------------------------------
Total recoveries 81 34 70 77 114
------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 311 363 480 728 482
------------------------------------------------------------------------------------------------------------------------------
Additions charged to operations 704 575 880 819 1,018
------------------------------------------------------------------------------------------------------------------------------
BALANCE AT END OF YEAR $3,996 $3,603 $3,391 $2,991 $2,900
==============================================================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the period .12% .15% .21% .34% .23%
==============================================================================================================================
</TABLE>
18
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
INVESTMENT SECURITIES
At December 31, 1994, the securities classified as available for sale,
carried at fair value, totaled $42,567,008 with an amortized cost of
$43,761,624. Securities available for sale are securities which will be held
for an indefinite period of time, including securities that management intends
to use as a part of its asset/liability strategy, or that may be sold in
response to changes in interest rates, changes in prepayment risk or the need
to increase regulatory capital or other similar factors. Securities available
for sale consist of U.S. Treasury Notes with an average life of 1 year 7
months, U.S. Government Agencies with an average life of 2 years 1 month, and
other bonds, notes and debentures with an average life of 10 years. Held to
maturity securities totaled $70,358,672 with a fair value of $68,744,157 at
December 31, 1994. Management determined that it has both the ability and
intent to hold those securities classified as held to maturity securities until
maturity. Investment securities consist of U.S. Treasury Notes with an average
life of 1 year 7 months, U.S. Government Agencies with an average life of 1
year 9 months, and municipal bonds with an average life of 6 years 5 months.
During the year, $20,975,000 in securities matured and were reinvested along
with $977,126 of funds in excess of consumer demand.
INVESTMENT SECURITIES MATURITIES AND YIELDS
<TABLE>
<CAPTION>
DECEMBER 31, 1994
After One Year After Five Years
Within One but Within but Within After Ten
Year Five Years Ten Years Years
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury $ 5,499 4.66% $ 8,521 6.60%
U.S. Government agencies 8,001 5.45% 11,000 5.35% $ 3,000 7.74%
Others 3,272 8.49% 1,962 9.14% $2,507 5.87%
----------------------------------------------------------------------------------------------------------------------------------
Total $13,500 5.13% $22,793 6.27% $ 4,962 8.29% $2,507 5.87%
==================================================================================================================================
Investment Securities:
U.S. Treasury $ 1,000 5.60% $ 4,504 5.73%
U.S. Government agencies 4,000 4.81% 9,498 5.29% $ 1,000 6.65%
States and political subdivisions 3,339 10.00% 12,954 9.84% 26,070 8.89% $7,994 9.28%
----------------------------------------------------------------------------------------------------------------------------------
Total $ 8,339 6.98% $26,956 7.52% $27,070 8.82% $7,994 9.28%
==================================================================================================================================
</TABLE>
Yield data is presented on a federally tax equivalent basis.
================================================================================
INFLATION
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of a bank is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same.
While the effect of inflation is normally not as significant as is the
influence on those businesses which have large investments in plant and
inventories, it does have an effect. There are normally corresponding increases
in the money supply, and banks will normally experience above average growth in
assets, loans and deposits. Also, general increases in the prices of goods and
services will result in increased operating expenses.
19
<PAGE> 9
Board of Directors and Shareholders of Bank of Granite Corporation:
We have audited the accompanying consolidated balance sheets of Bank of
Granite Corporation and its subsidiary as of December 31, 1994 and 1993, and
the related consolidated statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its subsidiary
at December 31, 1994 and 1993, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investments in debt and equity securities to conform with Statement of
Financial Accounting Standards No. 115.
Deloitte & Touche LLP
Hickory, North Carolina
January 20, 1995
20
<PAGE> 10
FINANCIAL STATEMENTS BANK OF GRANITE CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note 1):
Cash and due from banks $ 18,490,835 $ 19,796,865
Federal funds sold 1,000,000 2,500,000
-----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 19,490,835 22,296,865
-----------------------------------------------------------------------------------------------------------------
Investment Securities (Notes 1 and 2):
Available for sale, at fair value (amortized cost of $43,761,624) 42,567,008
-----------------------------------------------------------------------------------------------------------------
Held to maturity, at amortized cost (fair value of $68,744,157) 70,358,672
-----------------------------------------------------------------------------------------------------------------
Held for sale, at amortized cost (fair value of $41,174,739) 40,395,327
-----------------------------------------------------------------------------------------------------------------
Held for investment, at amortized cost (fair value of $75,781,522) 72,902,335
-----------------------------------------------------------------------------------------------------------------
Loans (Note 3) 269,851,459 243,825,155
-----------------------------------------------------------------------------------------------------------------
Allowance for loan losses (Notes 1 and 4) (3,996,491) (3,603,430)
-----------------------------------------------------------------------------------------------------------------
Net loans 265,854,968 240,221,725
-----------------------------------------------------------------------------------------------------------------
Premises and equipment, net (Notes 1, 5 and 9) 8,232,541 6,797,921
-----------------------------------------------------------------------------------------------------------------
Accrued interest receivable 3,632,726 3,345,339
-----------------------------------------------------------------------------------------------------------------
Other assets 2,030,420 1,707,985
-----------------------------------------------------------------------------------------------------------------
TOTAL $412,167,170 $387,667,497
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 66,963,099 $ 62,842,733
NOW accounts 50,996,639 47,431,270
Money market accounts 34,556,005 36,714,956
Savings 20,676,076 18,649,678
Time deposits of $100,000 or more 71,898,484 64,693,092
Other time deposits 98,239,745 97,183,191
-----------------------------------------------------------------------------------------------------------------
Total deposits 343,330,048 327,514,920
Securities sold under agreements to repurchase (Note 10) 3,280,855 2,707,585
Accrued interest payable 1,242,753 1,007,713
Other liabilities 1,145,640 418,268
-----------------------------------------------------------------------------------------------------------------
Total liabilities 348,999,296 331,648,486
-----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 9 and 13)
SHAREHOLDERS' EQUITY (Notes 1, 7 and 11)
Common stock, $1.00 par value, authorized - 10,000,000
shares; issued and outstanding - 1994 - 5,958,209 shares;
1993 - 4,747,360 shares 5,958,209 4,747,360
Capital surplus 21,016,998 20,752,495
Net unrealized loss on securities available for sale, net of
deferred income taxes of $469,244 (Notes 1 and 6) (725,372)
Retained earnings 36,918,039 30,519,156
-----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 63,167,874 56,019,011
-----------------------------------------------------------------------------------------------------------------
TOTAL $412,167,170 $387,667,497
=================================================================================================================
</TABLE>
See notes to consolidated financial statements.
================================================================================
21
<PAGE> 11
FINANCIAL STATEMENTS BANK OF GRANITE CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1994 1993 1992
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $23,367,806 $19,852,778 $19,756,611
Federal funds sold 195,777 235,262 115,449
Investments:
U.S. Treasury 978,074 1,315,159 2,077,516
U.S. Government agencies 1,871,600 1,708,951 1,250,279
States and political subdivisions 2,719,179 2,561,907 2,368,446
Other 440,966 440,040 409,070
--------------------------------------------------------------------------------------------------------------------------
Total interest income 29,573,402 26,114,097 25,977,371
--------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Time deposits of $100,000 or more 3,004,682 2,682,321 3,077,218
Other time and savings deposits 6,378,081 6,496,493 7,448,081
Federal funds purchased and securities sold
under agreements to repurchase 127,175 66,302 108,234
Other borrowed funds 4,358 3,938 7,634
--------------------------------------------------------------------------------------------------------------------------
Total interest expense 9,514,296 9,249,054 10,641,167
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 20,059,106 16,865,043 15,336,204
PROVISION FOR LOAN LOSSES (Notes 1 and 4) 704,000 575,000 880,000
--------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,355,106 16,290,043 14,456,204
--------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 2,772,822 2,652,444 2,776,462
Other service fees and commissions 1,027,210 1,081,760 976,605
Other 456,465 476,971 305,573
--------------------------------------------------------------------------------------------------------------------------
Total other income 4,256,497 4,211,175 4,058,640
--------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and wages 3,903,589 3,338,860 3,244,867
Profit-sharing and employee benefits (Note 8) 1,066,418 803,248 686,924
Occupancy expense, net 439,883 396,326 377,050
Equipment rentals, depreciation and maintenance 736,484 677,167 607,399
Federal Deposit Insurance Corporation insurance premiums 727,874 674,423 643,709
Other 2,272,557 1,751,470 1,750,221
--------------------------------------------------------------------------------------------------------------------------
Total other expenses 9,146,805 7,641,494 7,310,170
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING FOR INCOME TAXES (Note 6) 14,464,798 12,859,724 11,204,674
INCOME TAXES (Notes 1 and 6) 4,622,525 3,984,532 3,397,389
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING FOR INCOME TAXES 9,842,273 8,875,192 7,807,285
CUMULATIVE EFFECT ON PRIOR YEARS OF A
CHANGE IN ACCOUNTING FOR INCOME TAXES (125,926)
--------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9,842,273 $ 8,749,266 $ 7,807,285
==========================================================================================================================
PER SHARE AMOUNTS (Note 1):
Earnings per share before cumulative effect of a
change in accounting for income taxes $ 1.64 $ 1.48 $ 1.32
Cumulative effect on prior years of a change in
accounting for income taxes (0.02)
--------------------------------------------------------------------------------------------------------------------------
Net income $ 1.64 $ 1.46 $ 1.32
==========================================================================================================================
Cash dividends $ 0.38 $ 0.34 $ 0.32
==========================================================================================================================
</TABLE>
See notes to consolidated financial statements.
================================================================================
22
<PAGE> 12
FINANCIAL STATEMENTS BANK OF GRANITE CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1994 1993 1992
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 29,440,507 $ 26,074,610 $ 26,490,235
Fees and commissions received 4,256,497 4,211,175 4,014,501
Interest paid (9,279,256) (9,411,893) (11,078,854)
Cash paid to suppliers and employees (7,729,308) (7,344,386) (7,321,070)
Income taxes paid (4,462,586) (4,221,634) (3,426,952)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,225,854 9,307,872 8,677,860
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities available for sale 9,000,000
Proceeds from maturities of securities held to maturity 11,975,000
Proceeds from maturities of securities held for investment 27,909,000 33,263,700
Proceeds from sales of securities held for investment 1,036,655
Purchases of securities available for sale (12,319,707)
Purchases of securities held to maturity (9,632,419)
Purchases of securities held for investment (43,324,187) (42,840,924)
Net increase in loans (26,337,243) (14,410,494) (10,180,093)
Capital expenditures (2,133,462) (955,185) (560,880)
Proceeds from sales of equipment 16,587 200 755
---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (29,431,244) (30,780,666) (19,280,787)
---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits,
NOW accounts and savings accounts 7,553,182 22,536,521 21,656,154
Net increase (decrease) in certificates of deposit 8,261,946 (2,805,559) (1,478,110)
Net increase (decrease) in federal funds purchased
and securities sold under agreements to repurchase 573,270 (494,041) 874,551
Net decrease in other borrowed funds (21,000) (21,000) (32,521)
Net proceeds from issuance of common stock 284,394 534,694 129,288
Dividends paid (2,237,479) (1,988,807) (1,771,702)
Cash paid for fractional shares (14,953) (11,572)
---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,399,360 17,761,808 19,366,088
---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,806,030) (3,710,986) 8,763,161
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,296,865 26,007,851 17,244,690
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 19,490,835 $ 22,296,865 $ 26,007,851
=================================================================================================================================
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net income $9,842,273 $8,749,266 $7,807,285
---------------------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 648,960 577,056 526,966
Provision for loan losses 704,000 575,000 880,000
Premium amortization and discount accretion, net 154,492 165,351 112,482
Deferred income taxes (77,608) 69,108 (203,315)
Gain on sale of securities held for investment (44,139)
Loss on disposal of equipment 33,295 609 4,135
Increase (decrease) in taxes payable 237,547 (180,284) (29,563)
(Increase) decrease in accrued interest receivable (287,387) (204,838) 326,176
Increase (decrease) in accrued interest payable 235,040 (162,839) (437,687)
(Increase) decrease in other assets 224,417 (276,317) 37,103
Increase (decrease) in other liabilities 510,825 (4,240) (301,583)
---------------------------------------------------------------------------------------------------------------------------------
Total adjustments 2,383,581 558,606 870,575
---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $12,225,854 $9,307,872 $8,677,860
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans to other real estate owned $ 281,108
Transfer from retained earnings to
common stock for stock split $ 1,190,958 941,620
Net unrealized loss on securities available for sale 1,194,616
</TABLE>
See notes to consolidated financial statements.
================================================================================
23
<PAGE> 13
FINANCIAL STATEMENTS BANK OF GRANITE CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Net Unrealized
Loss On
Securities Total
Common Stock Capital Retained Available Shareholders'
FOR THE YEARS ENDED Shares Amount Surplus Earnings For Sale Equity
(Notes 1, 7 and 12)
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1991 3,766,000 $3,766,000 $20,128,253 $18,676,306 $42,570,559
Net income 7,807,285 7,807,285
Cash dividends (1,771,702) (1,771,702)
Shares issued under stock option plan 8,356 8,356 120,932 129,288
Stock split-shares issued 941,620 941,620 (941,620)
Cash paid for fractional shares (11,572) (11,572)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1992 4,715,976 4,715,976 20,249,185 23,758,697 48,723,858
Net income 8,749,266 8,749,266
Cash dividends (1,988,807) (1,988,807)
Shares issued under stock option plan 31,384 31,384 503,310 534,694
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 4,747,360 4,747,360 20,752,495 30,519,156 56,019,011
Net income 9,842,273 9,842,273
Cash dividends (2,237,479) (2,237,479)
Shares issued under stock option plan 19,891 19,891 264,503 284,394
Stock split-shares issued 1,190,958 1,190,958 (1,190,958)
Cash paid for fractional shares (14,953) (14,953)
Net unrealized loss on securities
available for sale $(725,372) (725,372)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 5,958,209 $5,958,209 $21,016,998 $36,918,039 $(725,372) $63,167,874
===================================================================================================================================
</TABLE>
See notes to consolidated financial statements.
================================================================================
24
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE I - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bank of Granite Corporation is a bank holding company formed
under a plan of reorganization executed in June 1987. Under this plan, Bank of
Granite (the "Bank") became a wholly-owned subsidiary of the Company. The Bank
was organized as a state bank and incorporated in North Carolina on August 2,
1906.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Bank of Granite Corporation and its wholly-owned subsidiary, Bank
of Granite (referred to herein collectively as the "Company"). All significant
intercompany accounts and transactions have been eliminated.
INVESTMENT SECURITIES - The Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities (SFAS No. 115) effective January 1, 1994. SFAS No. 115 requires
investments to be classified in three categories. Debt securities that the
Company has the positive intent and ability to hold to maturity are classified
as held to maturity securities and reported at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of selling in
the near term are classified as trading securities and reported at fair value,
with unrealized gains and losses included in earnings. Debt securities not
classified as either held-to-maturity securities or trading securities and
equity securities not classified as trading securities are to be classified as
available for sale securities and reported at fair value, with unrealized gains
and losses excluded from earnings and reported as a separate component of
shareholders' equity.
Prior to 1994, the accounting for debt securities held as assets was
dependent upon their classification as held for investment, trading securities
or securities held for sale. Such securities classified as investment were
carried at cost, adjusted for the amortization of premiums and the accretion of
discounts. Trading securities were carried at current market values, and debt
securities available for sale were carried at the lower of amortized cost or
market value. In order to qualify as held for investment securities, the
Company must have had the ability to hold the securities to maturity and a
positive intention to hold them for the foreseeable future. Management utilized
these criteria in determining the accounting treatment accorded such
securities. Gains and losses on held for investment securities were recognized
at the time of sale based upon the specific identification method.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization,
computed by the straight-line method, are charged to operations over the
properties' estimated useful lives, which range from 5 to 50 years or, in the
case of leasehold improvements, the term of the lease if shorter. Maintenance
and repairs are charged to operations in the year incurred. Gains and losses on
dispositions are included in current operations.
ALLOWANCE FOR LOAN LOSSES - The provision for loan losses charged to
operations is an amount sufficient to bring the allowance for loan losses to an
estimated balance considered adequate to absorb potential losses in the
portfolio. Management's determination of the adequacy of the allowance is based
on an evaluation of the portfolio, current economic conditions, historical loan
loss experience and other risk factors. Recovery of the carrying value of loans
is dependent to some extent on future economic, operating and other conditions
that may be beyond the Company's control. Unanticipated future adverse changes
in such conditions could result in material adjustments to the allowance for
loan losses.
The Financial Accounting Standards Board recently issued Statement No. 114,
Accounting by Creditors for Impairment of a Loan (SFAS No. 114)(subsequently
amended by SFAS No. 118). The Statement requires that impaired loans be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate or, as a practical matter, at the loan's
observable market value or fair value of the collateral if the loan is
collateral dependent. SFAS No. 114 applies to financial statements for fiscal
years beginning after December 15, 1994. Implementation of the Statement is not
expected to have any material impact on financial position or results of
operations.
25
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE I (continued)
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds are
purchased and sold for one-day periods.
REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate acquired by foreclosure is
carried at the lower of cost or fair value. Any initial losses at the time of
foreclosure are charged against the allowance for loan losses with any
subsequent losses or writedowns included in the income statement as a component
of other expenses.
INCOME TAXES - Provisions for income taxes are based on amounts reported in
the consolidated statements of income (after exclusion of non-taxable income
such as interest on state and municipal securities) and include changes in
deferred income taxes. Deferred income taxes are computed using the asset and
liability approach. The tax effects of differences between the tax and
financial accounting basis of assets and liabilities are reflected in the
balance sheets at the tax rates expected to be in effect when the differences
reverse.
PER SHARE AMOUNTS - Per share amounts have been computed using the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding during the years (1994 - 5,985,610; 1993 - 5,960,451 and 1992 -
5,925,644). The weighted average number of shares of common stock and dilutive
common stock equivalents outstanding and all per share amounts have been
adjusted to reflect the 5 for 4 stock split effected in the form of a 25% stock
dividend in 1994. Dividends per share represent amounts declared by the Board
of Directors.
INCOME AND EXPENSE - The Company utilizes the accrual method of accounting,
except for immaterial amounts of loan income and minor other fees which are
recorded as income when collected. Substantially all loans earn interest on the
level yield method based on the daily outstanding balance. The accrual of
interest is discontinued when, in management's judgment, the interest may not
be collected.
The Bank defers the recognition of the net amounts of loan origination fees
and certain loan origination costs and amortizes these deferred amounts over
the life of each related loan.
26
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1994 and 1993 are as follows (Dollars in
thousands):
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Type and Maturity Group Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale securities consist of the following:
AT DECEMBER 31, 1994:
U.S. Treasury due:
Within 1 year $ 5,499 $ 5,427
After 1 year but within 5 years 8,521 8,291
-----------------------------------------------------------------------------------------------------------------
Total U.S. Treasury 14,020 $ (302) 13,718
-----------------------------------------------------------------------------------------------------------------
U.S. Government agencies due:
Within 1 year 8,001 7,891
After 1 year but within 5 vears 11,000 10,558
After 5 years but within 10 years 3,000 2,835
-----------------------------------------------------------------------------------------------------------------
Total U.S. Government agencies 22,001 (717) 21,284
-----------------------------------------------------------------------------------------------------------------
Others due:
After 1 year but within 5 years 3,272 3,293
After 5 years but within 10 years 1,962 1,997
After 10 years 2,507 2,275
-----------------------------------------------------------------------------------------------------------------
Total others 7,741 $135 (311) 7,565
-----------------------------------------------------------------------------------------------------------------
TOTAL AT DECEMBER 31, 1994 $43,762 $135 $(1,330) $42,567
=================================================================================================================
Held to maturity securities consist of the following:
AT DECEMBER 31, 1994:
U.S. Treasury due:
Within 1 year $ 1,000 $ 983
After 1 year but within 5 years 4,504 4,334
-----------------------------------------------------------------------------------------------------------------
Total U.S. Treasury 5,504 $ (187) 5,317
-----------------------------------------------------------------------------------------------------------------
U.S. Government agencies due:
Within 1 year 4,000 3,942
After 1 year but within 5 years 9,498 9,077
After 5 years but within 10 years 1,000 915
-----------------------------------------------------------------------------------------------------------------
Total U.S. Government agencies 14,498 (564) 13,934
-----------------------------------------------------------------------------------------------------------------
State and political subdivisions due:
Within 1 year 3,339 3,345
After 1 year but within 5 years 12,954 13,051
After 5 years but within 10 years 26,070 25,431
After 10 years 7,994 7,666
-----------------------------------------------------------------------------------------------------------------
Total state and political subdivisions 50,357 $719 (1,583) 49,493
-----------------------------------------------------------------------------------------------------------------
TOTAL AT DECEMBER 31, 1994 $70,359 $719 $(2,334) $68,744
=================================================================================================================
Held for sale securities consist of the following:
AT DECEMBER 31, 1993:
U.S. Treasury due:
Within 1 year $ 4,999 $ 5,035
After 1 year but within 5 years 10,020 10,154
-----------------------------------------------------------------------------------------------------------------
Total U.S. Treasury 15,019 $183 $ (13) 15,189
-----------------------------------------------------------------------------------------------------------------
U.S. Government agencies due:
Within 1 year 4,000 4,051
After 1 year but within 5 years 14,002 14,112
After 5 years but within 10 years 2,000 2,032
-----------------------------------------------------------------------------------------------------------------
Total U.S. Government agencies 20,002 223 (30) 20,195
-----------------------------------------------------------------------------------------------------------------
Others due:
After 1 year but within 5 years 842 925
After 5 years but within 10 years 2,086 2,376
After 10 years 2,446 2,490
-----------------------------------------------------------------------------------------------------------------
Total others 5,374 417 5,791
-----------------------------------------------------------------------------------------------------------------
TOTAL AT DECEMBER 31, 1993 $40,395 $823 $ (43) $41,175
=================================================================================================================
</TABLE>
27
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 2 - (continued)
<TABLE>
<CAPTION>
Amortized Gross Unrealized Fair
Type and Maturity Group Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held for investment securities consist of the following:
AT DECEMBER 31, 1993:
U.S. Treasury due:
Within 1 year $ 1,999 $ 2,018
After 1 year but within 5 years 3,505 3,528
-----------------------------------------------------------------------------------------------------------------
Total U.S. Treasury 5,504 $ 53 $ (11) 5,546
-----------------------------------------------------------------------------------------------------------------
U.S. Government agencies due:
Within 1 year 4,000 4,041
After 1 year but within 5 years 11,998 12,004
After 5 years but within 10 years 1,499 1,536
-----------------------------------------------------------------------------------------------------------------
Total U.S. Government agencies 17,497 116 (32) 17,581
-----------------------------------------------------------------------------------------------------------------
State and political subdivisions due:
Within 1 year 4,886 4,925
After 1 year but within 5 years 11,976 12,711
After 5 years but within 10 years 23,360 24,760
After 10 years 9,679 10,259
-----------------------------------------------------------------------------------------------------------------
Total state and political subdivisions 49,901 2,869 (115) 52,655
-----------------------------------------------------------------------------------------------------------------
TOTAL AT DECEMBER 31, 1993 $72,902 3,038 $(158) $75,782
=================================================================================================================
</TABLE>
There were no sales of securities for the years ended December 31, 1994 and
1993.
Sales of securities for the year ended December 31, 1992 resulted in only
realized gains totaling $44,139.
Securities with a par value of approximately $32,415,000 and $34,530,000 were
pledged as collateral for public deposits and for other purposes as required by
law at December 31, 1994 and 1993, respectively.
================================================================================
NOTE 3 - LOANS
Loans at December 31, 1994 and 1993, classified by type, are as follows:
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Real estate:
Construction $ 20,727,600 $ 18,019,654
Mortgage 98,953,041 85,455,817
Commercial, financial and agricultural 117,001,581 111,076,300
Consumer 33,156,501 29,232,656
All other loans 419,509 377,594
-----------------------------------------------------------------------------------------------------------------
Subtotal 270,258,232 244,162,021
Net deferred origination fees (406,773) (336,866)
-----------------------------------------------------------------------------------------------------------------
Total $269,851,459 $243,825,155
=================================================================================================================
</TABLE>
Nonperforming assets at December 31, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1994 1993
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Restructured loans $ 253,369 $ 45,906
Foreclosed properties 273,000
Nonaccrual loans 743,515 85,849
Loans 90 days or more past due and still accruing 1,230,795 1,034,860
-----------------------------------------------------------------------------------------------------------------
Total $2,227,679 $1,439,615
=================================================================================================================
</TABLE>
If interest from restructured loans, foreclosed properties and nonaccrual
loans had been recognized in accordance with the original terms of the loans,
net income for 1994, 1993 and 1992 would not have been materially different
from the amounts reported.
Directors and officers of the Company and companies with which they are
affiliated are customers of and borrowers from the Bank in the ordinary course
of business. At December 31, 1994 and 1993, directors' and principal officers'
direct and indirect indebtedness to the Bank aggregated $482,270 and $736,114,
respectively. During 1994, additions to such loans were $228 and repayments
totaled $254,072. In the opinion of management, these loans do not involve more
than normal risk of collectibility, nor do they present other unfavorable
features.
================================================================================
28
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1994,
1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Dollars in thousands 1994 1993 1992
--------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE AT BEGINNING OF YEAR $3,603 $3,391 $2,991
--------------------------------------------------------------------------------
Loans charged off:
Commercial, financial and agricultural 136 331 330
Credit cards and related plans 10 3 17
Installment loans to individuals 246 63 203
--------------------------------------------------------------------------------
Total charge-offs 392 397 550
--------------------------------------------------------------------------------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 57 5 24
Credit cards and related plans 1 3 8
Installment loans to individuals 23 26 38
--------------------------------------------------------------------------------
Total recoveries 81 34 70
--------------------------------------------------------------------------------
Net charge-offs 311 363 480
--------------------------------------------------------------------------------
Additions charged to operations 704 575 880
--------------------------------------------------------------------------------
BALANCE AT END OF YEAR $3,996 $3,603 $3,391
================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.12% 0.15% 0.21%
================================================================================
</TABLE>
================================================================================
NOTE 5 - PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1994 and 1993 follow:
<TABLE>
<CAPTION>
Premises and
Accumulated Equipment,
Cost Depreciation Net
--------------------------------------------------------------------------------
<S> <C> <C> <C>
DECEMBER 31, 1994:
Land $ 1,310,414 $1,310,414
Buildings 6,179,272 $1,389,884 4,789,388
Furniture and equipment 4,270,438 2,556,399 1,714,039
Construction in progress 418,700 418,700
--------------------------------------------------------------------------------
Total $12,178,824 $3,946,283 $8,232,541
================================================================================
DECEMBER 31, 1993:
Land $ 1,018,366 $1,018,366
Buildings 5,206,950 $1,257,736 3,949,214
Furniture and equipment 4,281,200 2,457,482 1,823,718
Construction in progress 6,623 6,623
--------------------------------------------------------------------------------
Total $10,513,139 $3,715,218 $6,797,921
================================================================================
</TABLE>
The estimated useful lives used for computing depreciation are 25 to 50 years
for buildings and 5 to 15 years for furniture and equipment.
================================================================================
29
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 6 - INCOME TAXES
The components of the income tax provision for the years ended December 31,
1994, 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $4,700,133 $4,041,350 $3,600,704
Deferred (77,608) (56,818) (203,315)
---------------------------------------------------------------------------------------------
Total $4,622,525 $3,984,532 $3,397,389
=============================================================================================
</TABLE>
A reconciliation of reported income tax expense for the years ended December
31, 1994, 1993 and 1992 to the amount of tax expense computed by multiplying
income before income taxes by the statutory federal income tax rate of 34.31%
for 1994 and 34% for 1993 and 1992 follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at statutory rate $4,962,679 $4,372,306 $3,809,589
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (902,044) (841,789) (757,364)
State income taxes net of federal tax benefit 518,154 401,712 312,781
Other 43,736 52,303 32,383
---------------------------------------------------------------------------------------------
Income taxes reported $4,622,525 $3,984,532 $3,397,389
=============================================================================================
</TABLE>
The tax effect of the cumulative temporary differences and carryforwards that
gave rise to the deferred tax assets and liabilities at December 31, 1994 and
1993 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 Assets Liabilities Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Excess book over tax bad debt expense $1,239,367 $1,239,367
Excess tax over book depreciation $(372,219) (372,219)
Unrealized loss on securities available for sale 469,244 469,244
Other, net 164,073 (300,738) (136,665)
---------------------------------------------------------------------------------------------
Total $1,872,684 $(672,957) $1,199,727
=============================================================================================
<CAPTION>
DECEMBER 31, 1993 Assets Liabilities Total
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Excess book over tax bad debt expense $1,084,973 $1,084,973
Excess tax over book depreciation $(366,349) (366,349)
Other, net 137,277 (203,026) (65,749)
---------------------------------------------------------------------------------------------
Total $1,222,250 $(569,375) $ 652,875
=============================================================================================
</TABLE>
No valuation allowance has been provided for the deferred tax asset since no
conditions exist which would require such an allowance.
Deferred income tax benefits for the year ended December 31, 1992 consist of
the following:
<TABLE>
<CAPTION>
1992
---------------------------------------------------------------------------------------------
<S> <C>
Excess tax over book depreciation $ 17,676
Provision for loan losses for tax purposes
less than the amount charged to operations (157,350)
Bond discount accretion deferred 4,426
Other (68,067)
---------------------------------------------------------------------------------------------
Total $(203,315)
=============================================================================================
</TABLE>
================================================================================
30
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - STOCK OPTIONS
At December 31, 1994, 1993 and 1992, 109,106, 110,508 and 124,869 shares of
common stock were reserved for stock options granted under the Company's
employee stock option plan, respectively, and 21,769, 69,838 and 55,870 shares
of common stock were reserved for stock options not granted, respectively.
Option prices are established at market value on the dates granted by the Board
of Directors. Certain option information for the years ended December 31, 1994,
1993 and 1992 follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share Total
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1994 109,106 $10.88 - $28.00 $2,000,203
Outstanding at December 31, 1993 110,508 $10.88 - $22.80 $1,721,002
Granted:
1994 24,188 $23.60 - $28.00 $ 584,025
1993 26,687 $22.80 $ 608,464
1992 22,535 $15.68 $ 353,349
Exercised:
1994 24,602 $14.08 - $22.80 $ 284,394
1993 39,230 $11.26 - $22.80 $ 543,695
1992 11,218 $ 9.09 - $15.68 $ 129,288
Expired:
1994 988 $13.12 - $23.60 $ 20,430
1993 1,818 $11.26 - $22.80 $ 36,024
1992 2,073 $11.21 - $14.40 $ 27,585
</TABLE>
Options granted become exercisable as to one-fifth of the grant per year over
a five-year period commencing one year from the date of grant. No option may be
exercisable more than five years after the date of grant. Options outstanding
at December 31, 1994 are exercisable as follows:
<TABLE>
<CAPTION>
Year Shares
--------------------------------------------------------------------------------
<S> <C>
1995 80,429
1996 14,014
1997 9,775
1998 4,888
</TABLE>
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Company has a trustee profit-sharing plan covering substantially all
employees. Contributions are at the discretion of the Board of Directors but
may not exceed the maximum amount allowable for federal income tax purposes.
Contributions totaled $501,955, $462,179 and $428,263 for the years ended
December 31, 1994, 1993 and 1992, respectively.
In 1994, the Company adopted a Supplemental Executive Retirement Plan
("SERP"). The SERP allows the Company to supplement the level of certain
executives' retirement income over that which is obtainable through the
tax-qualified retirement plan sponsored by the Company. Contributions to the
SERP totaled $10,929 for the year ended December 31, 1994.
NOTE 9 - LEASES
LESSEE - OPERATING - The Company leases certain premises and equipment under
operating lease agreements. As of December 31, 1994, future minimum rental
payments under operating leases having noncancelable lease terms in excess of
one year are: 1995, $22,500; 1996, $22,500; 1997, $13,125.
Rental expense charged to operations under all operating lease agreements was
$47,775, $47,509 and $48,317 for the years ended December 31, 1994, 1993 and
1992, respectively.
LESSOR - OPERATING - The Company leases certain office space to others under
operating lease agreements. Future minimum rental receipts under operating
leases having noncancelable lease terms in excess of one year as of December
31, 1994 are $169,992 (1995 - $56,664, 1996 - $56,664 and 1997 - $56,664).
Rental income received under all operating lease agreements was $77,500,
$76,905 and $66,536 for the years ended December 31, 1994, 1993 and 1992,
respectively.
31
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Federal funds purchased generally represent overnight borrowings by the Bank
for temporary funding requirements. Securities sold under agreements to
repurchase represent short-term borrowings by the Bank collateralized by U.S.
Treasury and U.S. Government agency securities. Following is a summary of these
borrowings:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal funds purchased:
Maximum amount outstanding at any month-end during the year $5,000,000 $6,000,000
Average daily balance outstanding during the year 492,204 676,071
Average annual interest rate paid during the year 3.8% 3.9%
Securities sold under agreements to repurchase:
Balance at December 31 $3,280,855 $2,707,585 $3,201,626
Weighted average interest rate at December 31 4.9% 2.3% 2.4%
Maximum amount outstanding at any month-end during the year $3,395,055 $3,250,765 $3,257,496
Average daily balance outstanding during the year $2,998,020 $2,667,334 $2,811,586
Average annual interest rate paid during the year 3.6% 2.5% 2.9%
==================================================================================================================
</TABLE>
NOTE 11 - REGULATION AND REGULATORY RESTRICTIONS
The holding company is regulated by the Board of Governors of the Federal
Reserve System (FRB) and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank is
regulated by the Federal Deposit Insurance Corporation (FDIC), the North
Carolina State Banking Commission and the FRB.
The primary source of funds for the payment of dividends by Bank of Granite
Corporation is dividends received from its subsidiary, Bank of Granite. The
Bank, as a North Carolina banking corporation, may pay dividends only out of
undivided profits as determined pursuant to North Carolina General Statutes
Section 53 - 87. As of December 31, 1994, the Bank had undivided profits of
$51,206,130.
In an effort to achieve a measurement of capital adequacy that is sensitive
to the individual risk profiles of financial institutions, the various
financial institution regulators mandate minimum capital regulations and
guidelines that categorize various components of capital and types of assets
and measure capital adequacy in relation to a particular institution's relative
levels of those capital components and the level of risk associated with
various types of assets of that financial institution. The FDIC and the FRB
statements of policy on "risk-based capital" require the Company to maintain a
level of capital commensurate with the risk profile assigned to its assets in
accordance with the policy statement.
At December 31, 1994, the Company is required to have minimum Tier 1 and
leverage capital ratios of 4% and a total capital ratio of 8%. The Company's
actual ratios at that date were 20.8%, 16.0% and 22.1% respectively.
The average reserve balance required to be maintained under the requirements
of the Federal Reserve was approximately $7,188,000 for the year ended December
31, 1994. The bank maintained average reserve balances in excess of the
requirements.
32
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial data for Bank of Granite Corporation (parent company only)
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
CONDENSED BALANCE SHEETS 1994 1993
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash on deposit with bank subsidiary $ 466,647 $ 401,253
Investment in subsidiary bank at equity 62,083,296 55,290,133
Other investments 559,695 306,135
Other 80,900 25,450
--------------------------------------------------------------------------------------------------------------------
Total $63,190,538 $56,022,971
====================================================================================================================
Liabilities and Shareholders' Equity:
Other liabilities $ 22,664 $ 3,960
Shareholders' equity 63,167,874 56,019,011
--------------------------------------------------------------------------------------------------------------------
Total $63,190,538 $56,022,971
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
CONDENSED RESULTS OF OPERATIONS 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity in earnings of subsidiary bank:
Dividends $2,286,694 $2,019,418 $1,781,839
Undistributed 7,536,874 6,765,134 6,132,481
Income (expenses), net 18,705 (35,286) (107,035)
--------------------------------------------------------------------------------------------------------------------
Net income $9,842,273 $8,749,266 $7,807,285
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
CONDENSED CASH FLOW 1994 1993 1992
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Interest received $ 27,839 $ 9,322 $ 6,621
Dividends received from subsidiary bank 2,286,694 2,019,418 1,781,839
Net cash paid to suppliers (57,744) (80,234) (98,868)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,256,789 1,948,506 1,689,592
--------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities -
Purchases of securities held to maturity (223,357)
--------------------------------------------------------------------------------------------------------------------
Purchases of securities held for investment (158,058) (50,000)
--------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 284,394 534,694 129,288
Net dividends paid (2,237,479) (1,988,807) (1,771,702)
Cash paid for fractional shares (14,953) (11,572)
--------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (1,968,038) (1,454,113) (1,653,986)
--------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 65,394 336,335 (14,394)
Cash at beginning of year 401,253 64,918 79,312
--------------------------------------------------------------------------------------------------------------------
Cash at end of year $ 466,647 $ 401,253 $ 64,918
====================================================================================================================
Reconciliation of net income to net cash provided by operating activities:
Net income $ 9,842,273 $ 8,749,266 $ 7,807,285
--------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of organization costs
Equity in undistributed earnings of subsidiary (7,536,874) (6,765,134) (6,132,481)
Increase in other assets (55,450) (24,586) (212)
Increase (decrease) in other liabilities 6,840 (11,040) 15,000
--------------------------------------------------------------------------------------------------------------------
Total adjustments (7,585,484) (6,800,760) (6,117,693)
--------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 2,256,789 $ 1,948,506 $ 1,689,592
====================================================================================================================
Supplemental disclosure of non-cash transactions - Transfer from capital
Surplus to common stock: $ 1,190,958 $ 941,620
Unrealized loss on investment in bank at equity 743,711
Unrealized gain on other investments 30,203
====================================================================================================================
</TABLE>
33
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Bank has various financial instruments (outstanding commitments) with
off-balance sheet risk that are issued in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Commitments to
extend credit are legally binding agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts outstanding do not necessarily represent future cash
requirements. Standby letters of credit represent conditional commitments
issued by the Bank to assure the performance of a customer to a third party.
The unused portion of commitments to extend credit at December 31, 1994 and
1993 was $50,229,879 and $40,409,753, respectively. Additionally, standby
letters of credit of $2,938,253 and $4,369,602 were outstanding at December 31,
1994 and 1993, respectively.
The Bank's exposure to credit loss for commitments to extend credit and
standby letters of credit is the contractual amount of those financial
instruments. The Bank uses the same credit policies for making commitments and
issuing standby letters of credit as it does for on-balance sheet financial
instruments. Each customer's creditworthiness is evaluated on an individual
case-by-case basis. The amount and type of collateral if deemed necessary by
management, is based upon this evaluation of creditworthiness. Collateral held
varies, but may include marketable securities, deposits, property, plant and
equipment, investment assets, inventories and accounts receivable. Management
does not anticipate any significant losses as a result of these financial
instruments.
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments
is made in accordance with the requirements of SFAS No. 107, Disclosures about
Fair Value of Financial Instruments. The estimated fair value amounts have been
determined by the Bank, using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair values. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
the Bank could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
Estimated
Carrying Fair
DECEMBER 31, 1994 Amount Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets: Cash and cash equivalents $ 19,491 $ 19,491
Marketable securities 112,926 111,312
Loans 265,855 266,290
Liabilities: Demand deposits 173,192 173,192
Time deposits 170,138 165,846
Off-balance-sheet unrealized gains (losses) -
Commitments 71
</TABLE>
<TABLE>
<CAPTION>
Estimated
Carrying Fair
DECEMBER 31, 1993 Amount Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets: Cash and cash equivalents $ 22,297 $ 22,297
Marketable securities 113,298 116,956
Loans 240,222 241,515
Liabilities: Demand deposits 165,639 165,639
Time deposits 161,876 159,979
Off-balance-sheet unrealized gains (losses) -
Commitments 69
</TABLE>
The fair value of marketable securities is based on quoted market prices,
dealer quotes and prices obtained from independent pricing services. The fair
value of loans, time deposits, commitments and guarantees is estimated based on
present values using applicable risk-adjusted spreads to the U.S. Treasury
curve to approximate current entry-value interest rates applicable to each
category of such financial instruments.
No adjustment was made to the entry-value interest rates for changes in
credit of loans for which there are no known credit concerns. Management
segregates loans in appropriate risk categories. Management believes that the
risk factor embedded in the entry-value interest rates, along with the general
reserves applicable to the loan portfolio for which there are no known credit
concerns, result in a fair valuation of such loans on an entry-value basis.
As required by the Statement, demand deposits are shown at their face value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1994. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
34
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF BANK OF GRANITE CORPORATION FOR THE YEAR DECEMBER 31,
1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 18,490,835
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,567,008
<INVESTMENTS-CARRYING> 70,358,672
<INVESTMENTS-MARKET> 68,744,157
<LOANS> 269,851,459
<ALLOWANCE> 3,996,491
<TOTAL-ASSETS> 412,167,170
<DEPOSITS> 343,330,048
<SHORT-TERM> 3,280,855
<LIABILITIES-OTHER> 2,388,393
<LONG-TERM> 0
<COMMON> 5,958,209
0
0
<OTHER-SE> 57,209,665
<TOTAL-LIABILITIES-AND-EQUITY> 412,167,170
<INTEREST-LOAN> 23,367,806
<INTEREST-INVEST> 6,205,596
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 29,573,402
<INTEREST-DEPOSIT> 9,382,763
<INTEREST-EXPENSE> 9,514,296
<INTEREST-INCOME-NET> 20,059,106
<LOAN-LOSSES> 704,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,146,805
<INCOME-PRETAX> 14,464,798
<INCOME-PRE-EXTRAORDINARY> 9,842,273
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,842,273
<EPS-PRIMARY> 1.64
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 5.4
<LOANS-NON> 744,000
<LOANS-PAST> 1,231,000
<LOANS-TROUBLED> 253,000
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,603,000
<CHARGE-OFFS> 392,000
<RECOVERIES> 81,000
<ALLOWANCE-CLOSE> 704,000
<ALLOWANCE-DOMESTIC> 3,904,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 92,000
</TABLE>
