<PAGE> 1
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, 1995
------------------------------------------------------
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
--------------------- -------------------------
Commission file number 0-15956
---------------------------------------------------------
Bank of Granite Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1550545
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 128, Granite Falls, N.C. 28630
- -------------------------------------- ------------------------------------
(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
-------------------------- -------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value
------------------------------------------------------
(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
--- ---
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 07, 1996 was $176,568,858.
As of March 11, 1996, the Registrant had outstanding 5,985,385 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, 1995 (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 14, 1996 as filed pursuant
to Section 14 of the Securities Exchange Act of 1934 in connection with the
1996 Annual Meeting of Shareholders.
<PAGE> 2
FORM 10-K CROSS-REFERENCE INDEX
<TABLE>
<CAPTION>
ANNUAL PROXY
REPORT REPORT
1995 1996
PART I PAGE PAGE
<S> <C> <C> <C>
Item 1 Business
Executive Officers of the Registrant None
Item 2 Properties None
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 2 & 18 I- 3
Item 6 Selected Financial Data 14
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operation II- 1 - II-11
Item 8 Financial Statements and Supplementary Data II-12 - II-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 I- 7
Item 11 Executive Compensation I- 8 - I-12
Item 12 Security Ownership of Certain Beneficial Owners and
Management I- 3 & I- 7
Item 13 Certain Relationships and Related Transactions I-15
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports
on Forms 8-K II-12 - II-34
</TABLE>
<PAGE> 3
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, 1995, the
Bank was the ninth 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 six other commercial banks located in the Bank's service area
in Caldwell County and one credit union. The most recent FDIC figures
available indicate that Bank of Granite has funds on deposit amounting to 23%
of the total commercial bank deposits in Caldwell County as of June 30, 1995.
There are seven other commercial banks and eight 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 13% of the total commercial bank
deposits in Catawba County as of June 30, 1995.
On July 10, 1989 Bank of Granite opened a full service office in Morganton.
Competing in the same service area are five other commercial banks, five credit
unions, and one savings and loan 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, 1995.
EMPLOYEES
As of December 31, 1995, Bank of Granite had 171 full-time equivalent
employees. The Registrant considers its relationship with its employees to be
excellent.
1
<PAGE> 4
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, 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.
2
<PAGE> 5
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, 1995, the Bank had
undivided profits of approximately $60.0 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, 1995 this ratio was 15.74%, leaving approximately $32.7 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 statements. The capital standards call
for minimum total capital of 8 percent of risk-adjusted assets. At December
31, 1995, the Company's tier 1 ratio and capital ratio to risk-adjusted assets
was 21.3% and 22.7% respectively. The Company's leverage ratio at December 31,
1995 was 16.9%. 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.
3
<PAGE> 6
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.
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.
4
<PAGE> 7
The following schedule should be read in conjunction with Provision and
Allowances for Loan Losses in the proxy statement on page II-9.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
December 31,
($ in thousands)
1995 1994 1993 1992 1991
--------------------- ---------------------- --------------------- --------------------- ---------------------
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 $2,717 39.9% $2,398 43.4% $1,667 45.6% $1,462 53.0% $1,157 58.3%
Real Estate 1,259 48.2% 1,106 44.3% 1,138 42.3% 983 35.6% 446 28.9%
Consumer 498 11.8% 400 12.3% 617 12.0% 455 11.3% 445 12.6%
All Other Loans 0 0% 0 .0% 1 .1% 1 .1% 2 .2%
Unallocated 171 .1% 92 N/A 180 N/A 490 N/A 941 N/A
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Total $4,645 100.0% $3,996 100.0% $3,603 100.0% $3,391 100.0% $2,991 100.0%
====== ======== ====== ======== ====== ======== ====== ======== ====== ========
</TABLE>
QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for the years ended December 31,
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1995 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $8,600,271 $9,161,235 $9,294,264 $9,511,200
Interest expense 2,893,625 3,304,989 3,461,676 3,541,248
Provision for loan losses 440,000 310,000 282,000 85,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 5,266,646 5,546,246 5,550,588 5,884,952
Other income 1,064,443 1,069,885 954,252 1,032,285
Other expenses 2,321,276 2,415,268 2,202,222 2,315,055
---------- ---------- ---------- ----------
Income before income taxes 4,009,813 4,200,863 4,302,618 4,602,182
Income taxes 1,404,000 1,369,000 1,379,000 1,446,532
---------- ---------- ---------- ----------
Net income $2,605,813 $2,831,863 $2,923,618 $3,155,650
========== ========== ========== ==========
Earnings per share $ .44 $ .47 $ .49 $ .52
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
1994 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $6,597,534 $7,176,148 $7,616,152 $8,183,568
Interest expense 2,148,447 2,238,467 2,462,704 2,664,678
Provision for loan losses 30,000 144,000 108,000 422,000
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 4,419,087 4,793,681 5,045,448 5,096,890
Other income 1,144,377 1,056,871 1,039,071 1,016,178
Other expenses 2,217,469 2,250,229 2,306,578 2,372,529
---------- ---------- ---------- ----------
Income before income taxes 3,345,995 3,600,323 3,777,941 3,740,539
Income taxes 1,101,000 1,161,000 1,316,000 1,044,525
---------- ---------- ---------- ----------
Net income $2,244,995 $2,439,323 $2,461,941 $2,696,014
========== ========== ========== ==========
Earnings per share $ .38 $ .40 $ .41 $ .45
========== ========== ========== ==========
</TABLE>
5
<PAGE> 8
ITEM 2-PROPERTIES
Bank of Granite owns all of its properties which are listed below.
GRANITE FALLS, NC
Granite Falls office (home office)- 8,735 square foot building located on a 1.2
acre lot.
A masonry and frame storage building containing 735 square feet with an
adjoining 100' x 221' lot.
Operations Center - 70' x 168' building containing 11,769 square foot which is
located on a 1.05 acre lot.
15' x 25' building which houses our print shop.
LENOIR, NC
Lenoir office - building is approximately 7,400 square feet.
Whitnel office - building is approximately 2,530 square feet located on a lot
containing 45,500 square feet.
Hibriten office - building is approximately 2,480 square feet situated on 2.10
acres of land.
HUDSON, NC
Hudson office - building is approximately 4,235 square feet located on a 4.10
acre lot.
HICKORY, NC
Hickory office - 54' x 81' structure containing 9,515 square feet situated on a
100' x 200' lot.
Bank of Granite Plaza - two story building with two sections. One section
contains approximately 7,520 square feet, the other section contains 7,572
square feet.
Newton office - 43' x 84' structure located on a 200' x 200' lot.
Springs Road office - 43' x 84' structure located on a 1.6 acre lot.
Viewmont office - approximately 4,200 square feet located on a two acre lot
leased by the Bank with an option to purchase at a later date.
MORGANTON, NC
Morganton office - contains approximately 5,400 square feet with a 25' x 120'
lot.
ITEM 3-LEGAL PROCEEDINGS
There were no significant legal proceedings outstanding at December 31, 1995.
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.
6
<PAGE> 9
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 Pages 2 and 18 on the
Company's 1995 ANNUAL REPORT TO SHAREHOLDERS under the headings "Market and
Dividend Summary" and "Shareholder Information", and respectively, on Page I-3
of the 1996 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 14 in the Company's
1995 ANNUAL REPORT TO SHAREHOLDERS under the heading "Selected Financial Data"
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 II-1 through II-11
in the Company's 1996 PROXY STATEMENT 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 II-12 through II- 34 of the 1996 PROXY STATEMENT for
the year ended December 31, 1995 are incorporated herein by reference.
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.
7
<PAGE> 10
PART III
ITEM 10-DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth on Page I-7 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 1996
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 I-8 through I-12 in
the definitive proxy materials of the Company filed in connection with its 1996
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 I-3 and I-7 in the
definitive proxy materials of the Company filed in connection with its 1996
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 I-15 under the
heading "Transactions with Officers and Directors" in the definitive proxy
materials of the Company filed in connection with its 1996 ANNUAL MEETING OF
SHAREHOLDERS, which information is incorporated herein by reference.
8
<PAGE> 11
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 II-12 through
II-34 in the Company's 1996 PROXY STATEMENT 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.
9
<PAGE> 12
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.
-----------------------
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 11, 1996
- ----------------------- Executive Officer
John A. Forlines, Jr.
s/Randall C. Hall Vice President and March 11, 1996
- ----------------------- Chief Financial
Randall C. Hall Officer and Principal
Accounting Officer
s/John N. Bray Director March 11, 1996
- -----------------------
John N. Bray
s/Robert E. Cline Director March 11, 1996
- -----------------------
Robert E. Cline
s/John A. Forlines, Jr. Director March 11, 1996
- -----------------------
John A. Forlines, Jr.
s/Barbara F. Freiman Director March 11, 1996
- -----------------------
Barbara F. Freiman
s/Myron L. Moore, Jr. Director March 11, 1996
- -----------------------
Myron L. Moore, Jr.
s/Charles M. Snipes Director March 11, 1996
- -----------------------
Charles M. Snipes
s/Boyd C. Wilson, Jr. Director March 11, 1996
- -----------------------
Boyd C. Wilson, Jr.
</TABLE>
10
<PAGE> 1
EXHIBIT 13
MARKET AND DIVIDEND SUMMARY
<TABLE>
<CAPTION>
1995 Quarter 1 Quarter 2 Quarter 3 Quarter 4 1994 Quarter 1 Quarter 2 Quarter 3 Quarter 4
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price Range
High $25 $27 1/4 $27 $29 $24 7/8 $27 1/4 $29 $27 3/4
Low 24 24 25 1/2 26 23 1/4 22 7/8 26 3/4 23 1/2
Closing 25 27 27 29 23 5/8 27 3/4 27 1/2 25
Dividends .10 .10 .12 .12 .09 .09 .10 .10
</TABLE>
page 2
<PAGE> 2
MANAGEMENT'S DISCUSSION
AND ANALYSIS AND
AUDITED FINANCIAL
STATEMENTS
II-1
<PAGE> 3
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, 1995 compared to the year ended December 31, 1994, the year ended December
1994 compared to the year ended December 31, 1993, and the year ended December
31, 1993 compared to the year ended December 31, 1992.
1995 COMPARED TO 1994
Net income for 1995 was $11,516,944 or $1.92 per share compared to $9,842,273
or $1.64 per share in 1994. This 17% 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
$23,365,432 compared to $20,059,106 in 1994. The increase in interest income
was attributable to increases in interest rates and loan volume. Approximately
56% of the increase in interest income was attributable to increases in rate.
Gross loan increased $31,833,940 or 11.8%. Interest expense increased
$3,687,242 of which 74% was attributable to increases in rate, the remaining
26% was attributable to a growth in interest-bearing deposits of $27,990,100 or
10.1%. Other income remained relatively flat at $4,120,865 compared to
$4,256,497 in 1994. The increase in service charges on deposit accounts of
$70,263 reflects growth in deposits accounts. During 1995 the bank continued
to place emphasis on non-traditional banking services such as annuities,
leasing, originating mortgage loans and small business administration. In
focusing on these products the bank experienced volatility in earnings commonly
associated with such products. Other service fees and commissions decreased
$51,259 which was primarily due to decreases in the sales of annuities.
Annuity sales fluctuate with interest rates. For the most part interest rates
were on the rise during 1995, thus negatively impacting annuity sales. Fees
from the origination of mortgage loans began to reflect increases over the
previous year during the fourth quarter. For the year ended December 31, 1995
the bank earned $406,225 compared to $328,137 in 1994. Other income decreased
by $114,684 which was primarily attributable to decreases in the sales of the
guaranteed portion of small business administration loans. Net losses on
securities resulted from securities being called at a premium as well as the
sale of a mutual fund investment. The funds from these transactions were
reinvested at higher yields. Other expenses increased $107,016 or 1.2% over
the previous year. Salaries and benefits increased $257,807 or 5.2% as a
result of general salary increases and the cost of providing related benefits.
Equipment rentals, depreciation and maintenance increased $95,697 or 13.0%
primarily as a result of additional technology purchases and installation. The
Federal Deposit Insurance Corporation insurance premiums decreased to $395,372.
During 1995 the FDIC assessment rate was reduced from 23 cents per $100 of
deposit to 4 cents per $100 of deposit. The reduction in rate reflects the
bank's strength and the Bank Insurance Fund reaching its recapitalization
level of 1.25% of insured deposits held in commercial banks. Other operating
expenses reflect a non-recurring loss of $50,816 on the sale of other real
estate owned during 1995.
II-2
<PAGE> 4
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 coupled with efforts to increase
non-interest income over previous periods. 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
$4,256,497 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
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 8.76% as a result of purchases of additional computer software and
related peripherals. FDIC premiums increased by $53,451 or 7.93% 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. 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.
II-3
<PAGE> 5
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 $23,365,432, $20,059,106 and
16,865,043 for 1995, 1994 and 1993, respectively, representing and increase of
16.5% for 1995 over 1994, 18.9% for 1994 over 1993, and 10.0% for 1993 over
1992. Interest rate spreads have been at least 4.4% 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 following table 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.
<TABLE>
<CAPTION>
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
Dollars in thousands FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
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 $ 19,462 $ 18,744 $ 17,306
Net loans(1) 282,625 $ 29,848 10.6% 252,321 $ 23,368 9.3% 231,178 $ 19,853 8.6%
Taxable securities 62,128 3,623 5.8% 62,497 3,290 5.3% 60,300 3,464 5.7%
Non-taxable securities(2) 50,864 2,845 8.6% 49,087 2,719 8.5% 43,713 2,562 8.9%
Federal funds sold and securities
purchased under agreement to resell 4,163 251 6.0% 4,053 196 4.8% 7,513 235 3.1%
Bank premises and equipment, net 8,104 7,575 6,492
Other assets 5,731 4,897 4,683
Total assets $433,077 $399,174 $371,185
Total interest earning assets $403,907 $ 36,567 9.4% $371,707 $ 29,573 8.4% $345,328 $ 26,114 7.9%
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $291,056 $ 13,025 4.5% $271,408 $ 9,383 3.5% $258,162 $ 9,179 3.6%
Non-interest bearing deposits 67,223 62,169 55,637
Federal funds purchased and securities
sold under agreement to repurchase 3,323 176 5.3% 3,490 127 3.6% 2,711 66 2.4%
Other liabilities 3,314 1 2,455 4 .2% 2,519 4 .2%
Shareholders' equity 68,161 59,652 52,156
Total liabilities and shareholders'
equity $433,077 $399,174 $371,185
Total interest bearing liabilities $294,379 $ 13,202 4.5% $274,956 $ 9,514 3.5% $260,915 $ 9,249 3.5%
Net interest earned and net yield
on earning assets(3) $ 23,365 6.2% $ 20,059 5.4% $ 16,865 5.3%
Interest rate spread(4) 4.9% 4.9% 4.4%
</TABLE>
(1) Non-accrual loans have been included.
(2) Yields on tax-exempt investments have been adjusted to a tax
equivalent basis using 35% for 1995 and 1994, and 34% for 1993.
(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 changes in both
volume and rates. The following table sets for 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.
II-4
<PAGE> 6
<TABLE>
<CAPTION>
INTEREST RATE/VOLUME ANALYSIS
Dollars in thousands FOR THE YEARS ENDED DECEMBER 31,
1995 Compared to 1994 1994 Compared to 1993
--------------------- ---------------------
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
---------- -------- ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Taxable investment securities $ (20) $ 353 $ 333 $ 120 $ (294) $ (174)
Non-taxable investment securities 99 27 126 307 (150) 157
Federal funds sold 5 50 55 (138) 99 (39)
Loans 3,015 3,465 6,480 1,878 1,637 3,515
------- ------- ------- ------- ------- -------
Total $ 3,099 $ 3,895 $ 6,994 $ 2,167 $ 1,292 $ 3,459
------- ------- ------- ------- ------- -------
Interest Bearing Liabilities:
Savings deposits $ 29 $ 34 $ 63 $ 73 $ (28) $ 45
Other time deposits 977 2,455 3,432 33 (26) 7
Other (46) 238 192 235 (22) 213
------- ------- ------- ------- ------- -------
Total $ 960 $ 2,727 $ 3,687 $ 341 $ (76) $ 265
------- ------- ------- ------- ------- -------
</TABLE>
(1) The rate/volume variance for each category has been allocated equally
on a consistent basis between rate and volume variances.
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 of the Bank. 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, 1995 core deposits totaled $292,898,093 or
77.7% of the Company's total deposits.
The other principal method of funding utilized by the Bank 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 Bank's deposit mix 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 the bank subsidiary's 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
BankAEs deposit base generally is not 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
II-5
<PAGE> 7
manage interest rate sensitivity is to measure, over various time periods, the
interest rate sensitivity positions, or gaps; however, this method addresses
only 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 CompanyAEs 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.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY
Dollars in thousand DECEMBER 31, 1995
Non-Sensitive
Interest Sensitivity in Days and Sensitive
1-90 91-180 181-365 Over One
Days Days Days Total Year Total
---- ---- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal funds sold $ 1,500 $ 1,500 $ 1,500
Securities:
U.S. Treasury 2,000 $ 6,004 8,004 $ 7,502 15,506
U.S. Government agencies 4,000 $ 1,999 11,000 16,999 26,288 43,287
States and political subdivisions 715 1,178 1,218 3,111 52,732 55,843
Other 100 100 8,793 8,893
Loans
Real estate:
Construction 22,950 303 565 23,818 3,290 27,108
Mortgage 105,879 835 1,591 108,305 10,393 118,698
Commercial, financial and
agricultural 112,743 1,547 1,932 116,222 4,315 120,537
Consumer 14,676 2,618 4,554 21,848 13,772 35,620
All other 241 241 241
-------- -------- -------- -------- -------- --------
Total interest earning assets $264,804 $ 8,480 $ 26,864 $300,148 $127,085 $427,233
-------- -------- -------- -------- -------- --------
Interest Bearing Liabilities
Interest bearing deposits:
Savings and NOW accounts $ 77,403 $ 77,403 $ 77,403
Money market accounts 27,341 27,341 27,341
Time deposits of $100,000 or more 47,196 $ 16,961 $ 13,149 77,306 $ 6,839 84,145
Other time deposits 43,083 20,170 22,280 85,533 29,921 115,454
Federal funds purchased and securities
sold under agreements to repurchase 2,983 2,983 2,983
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities $198,006 $ 37,131 $ 35,429 $270,566 $ 36,760 $307,326
-------- -------- -------- -------- -------- --------
Interest sensitivity gap $ 66,798 $(28,651) $ (8,565) $ 29,582
Cumulative gap $ 66,798 $ 38,147 $ 29,582 $ 29,582
Interest earning assets as a
percentage of interest
bearing liabilities 134% 23% 76% 111%
-------- -------- -------- --------
</TABLE>
* All securities as presented are at amortized cost.
* Loan are gross of net origination fees/costs.
II-6
<PAGE> 8
The following table presents the maturity and distribution of the BankAEs 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, 1995
One to Five Years
Loan Maturities One Year Five Years or More Total
- --------------- -------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Real estate:
Construction $ 9,103 $ 13,101 $ 4,904 $ 27,108
Mortgage 40,828 60,452 17,418 118,698
Commercial, financial and agricultural 75,146 39,775 5,616 120,537
Consumer 16,607 18,114 899 36,620
All other 193 45 3 241
-------- -------- ------- --------
Total $141,877 $131,487 $28,840 $302,204
-------- -------- ------- --------
Predetermined rate, maturity
greater than one year $ 26,292 $ 5,477 $ 31,769
Variable rate or maturing
within one year $141,877 105,195 23,363 270,435
-------- -------- ------- --------
Total $141,877 $131,487 $28,840 $302,204
-------- -------- ------- --------
</TABLE>
* Loans are gross of net origination fees/costs.
The Bank's yield on interest-bearing liabilities increased to 4.5% during
1995 compared to 3.5% in 1994. The bank's primary growth in deposits are
reflected in time deposits, which increased $29,474,887. Rate sensitive
consumers capitalized upon the higher yielding time deposits during the rising
rate environment in 1995. An increased customer awareness of interest rates
increases the importance of rate management by the Company. The CompanyAEs
management 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 the BankAEs 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
Bank are summarized below.
<TABLE>
<CAPTION>
AVERAGE DEPOSITS
Dollars in thousands FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Non-interest bearing deposits $ 67,223 $ 62,169 $ 55,637
Interest bearing deposits 291,056 271,408 258,162
-------- -------- --------
Total $358,279 $333,577 $313,799
-------- -------- --------
</TABLE>
The above table includes certificates of deposit $100,000 and over which at
December 31, 1995 totaled $84,145,000. Of this total $47,196,000 had scheduled
maturities or repriced within three months, $16,961,000 within six months,
$13,149,000 within six to twelve months and $6,839,000 within thirteen to sixty
months.
II-7
<PAGE> 9
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, 1995 the Company's ratio of total capital to
risk-adjusted assets was 22.7%. 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
Historically, the Bank 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, 1995
were $301,685,399. This compares with $269,851,459 at December 31, 1994, an
increase of $31,833,940 or 11.8%. The Company places emphasis on consumer
based installment loans and commercial loans to small and medium sized
business. The Bank 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.
<TABLE>
<CAPTION>
LOANS
Dollars in thousands DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Real estate:
Construction $ 27,108 $ 20,728 $ 18,020 $ 16,219 $ 15,548
Mortgage 118,697 98,953 85,456 65,688 48,119
Commercial, financial and agricultural 120,537 117,002 111,076 121,795 128,541
Consumer 35,620 33,156 29,233 26,010 27,837
All other loans 241 419 377 259 350
-------- -------- -------- -------- --------
Subtotal 302,203 270,258 244,162 229,971 220,395
Net deferred origination costs (fees) (518) (407) (337) (193) (37)
-------- -------- -------- -------- --------
Total $301,685 $269,851 $243,825 $229,778 $220,358
-------- -------- -------- -------- --------
Nonperforming assets at December 31
are as follows:
Restructured loans $ 253 $ 350
Foreclosed properties 273 $ 281 $ 12
Nonaccrual loans $ 231 744 86 174 267
Loans 90 days or more past due
and still accruing 441 1,231 685 649 1,090
-------- -------- -------- -------- --------
Total $ 672 $ 2,228 $ 1,394 $ 1,104 $ 1,369
-------- -------- -------- -------- --------
</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.
II-8
<PAGE> 10
The composition of the portfolio remained level with real estate loans
comprising 48% of the portfolio compared to 44% in 1994; commercial loans
comprising 40% of the portfolio compared to 43% in 1994; and consumer loans
comprising 12% compared to 12% in 1994. Commercial loans of $120,536,374,
consumer loans of $35,620,407 and real estate mortgage loans of $118,697,296
are loans for which the principal source of repayment is derived from the
ongoing cash flow of the business. Real estate construction loans of
$27,108,399 are loans for which the principal source of repayment comes from
the sale of real estate or from obtaining permanent financing.
PROVISION AND ALLOWANCES FOR LOANS 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 loans 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.
In 1995 the Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for the Impairment of a Loan" (SFAS No. 114)
(subsequently amended by SFAS No. 118). SFAS No. 114 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. At December 31, 1995, the recorded investment in
loans that are considered to be impaired under SFAS No. 114 was $516,887
($228,729 of which is on non-accrual basis). The average recorded balance of
impaired loans during 1995 was not significantly different from the balance at
December 31, 1995. The related allowance for loan losses determined in
accordance with SFAS No. 114 for these loans is $284,444 at December 31, 1995.
For the year ended December 31, 1995, the Bank recognized interest income on
those impaired loans of approximately $27,085.
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 1.56%, 1.50% and 1.50% of net loan outstanding at December 31, 1995,
1994 and 1993, respectively, which was consistent with both management's desire
for strong reserves, and credit quality ratings of the loan portfolio. The
ratio of net charge-offs during the year to average loans outstanding during
the period were .16%, .12% and .15% at December 31, 1995, 1994 and 1993,
respectively. These ratios reflect management's conservative lending, and
effective efforts to recover credit losses.
The following table presents the allocation of the allowance for loan losses by
category, and an analysis of the allowance for loan losses.
II-9
<PAGE> 11
<TABLE>
<CAPTION>
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $3,996 $3,603 $3,391 $2,991 $2,900
Loans charged off:
Commercial, financial and agricultural 297 136 331 330 634
Credit cards and related plans 8 10 3 17 19
Installment loans to individuals 288 246 63 203 152
------ ------ ------ ------ ------
Total charge-offs 593 392 397 550 805
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 40 57 5 24 53
Credit cards and related plans 5 1 3 8 2
Installment loans to individuals 80 23 26 38 22
------ ------ ------ ------ ------
Total recoveries 125 81 34 70 77
------ ------ ------ ------ ------
Net charge-offs 468 311 363 480 728
------ ------ ------ ------ ------
Additions charged to operations 1,117 704 575 880 819
------ ------ ------ ------ ------
Balance at end of year $4,645 $3,996 $3,603 $3,391 $2,991
------ ------ ------ ------ ------
Ratio of net charge-offs during the year
to average loans outstanding during the period .16% .12% .15% .21% .34%
</TABLE>
INVESTMENT SECURITIES
At December 31, 1995, the securities classified as available for sale, carried
at market value, totaled $50,129,581 with an amortized cost of $49,387,964.
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 4 months, U.S.
Government Agencies with an average life of 2 years 4 month, and other bonds,
notes and debentures with an average life in excess of 5 years. In December of
1995, the Financial Accounting Standards Board allowed for a one time
reclassification of investments between held available for sale and held to
maturity without the ramifications of tainting the portfolios. During that
window of opportunity, the Bank moved $8,482,462 from held to maturity to held
available for sale. There were no other transfers or sales of securities
classified as held to maturity. Investment securities totaled $74,141,480 with
a market value of $76,413,677 at December 31, 1995. Management determined that
it has both the ability and intent to hold those securities classified as
investment securities until maturity. Investment securities consist of U.S.
Treasury Notes with an average life of 1 year 3 months, U.S. Government
Agencies with an average life of 2 years 6 months, and municipal bonds with an
average life of 6 years 2 months. During the year $23,991,063 in securities
matured; $894,378 in proceeds were collected from securities sold. The
proceeds from maturities and sales were reinvested along with $9,573,241 of
funds in excess of consumer demand.
II-10
<PAGE> 12
<TABLE>
<CAPTION>
INVESTMENT SECURITIES MATURITIES AND YIELDS
Dollars in thousands DECEMBER 31, 1995
After One Year After Five Years
Within One but Within but Within After Ten
Year Five Years Ten Years Years
---- ---------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury $ 6,004 5.46% $ 6,000 7.13%
U.S. Government agencies 12,000 5.23% 14,491 6.62% $ 2,000 8.27%
Others 100 6.62% 5,342 7.73% 2,891 6.56% $ 560 5.61%
------- ---- ------- ---- ------- ---- ------- ----
Total $18,104 5.26% $25,833 7.02% $ 4,891 7.42% $ 560 5.61%
------- ------- ------- -------
Investment Securities:
U.S. Treasury $ 2,000 6.52% $ 1,502 6.13%
U.S. Government agencies 5,000 4.95% 9,796 7.01%
States and political subdivisions 3,111 9.44% 17,355 9.31% $27,282 8.68% $ 8,095 8.91%
------- ---- ------- ---- ------- ---- ------- ----
Total $10,111 6.64% $28,653 8.35% $27,282 8.68% $ 8,095 8.91%
------- ------- ------- -------
</TABLE>
Yield data is presented on a 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.
II-11
<PAGE> 13
INDEPENDENT AUDITORS' REPORT
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, 1995 and 1994, 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, 1995.
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, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, 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, and effective January 1, 1993, the
Company changed its method of accounting for income taxes to comply with the
provisions of Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 26, 1996
II-12
<PAGE> 14
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note 1):
Cash and due from banks $ 19,621,179 $ 18,490,835
Federal funds sold 1,500,000 1,000,000
------------ ------------
Total cash and cash equivalents 21,121,179 19,490,835
------------ ------------
Investment Securities (Notes 1 and 2):
Available for sale, at fair value (amortized cost of $49,387,963 and
$43,761,624 at December 31, 1995 and 1994, respectively) 50,129,581 42,567,008
------------ ------------
Held to maturity, at amortized cost (fair value of $76,413,677 and
$68,744,157 at December 31, 1995 and 1994, respectively) 74,141,480 70,358,672
------------ ------------
Loans (Note 3) 301,685,399 269,851,459
Allowance for loan losses (Notes 1 and 4) (4,644,725) (3,996,491)
------------ ------------
Net loans 297,040,674 265,854,968
------------ ------------
Premises and equipment, net (Notes 1, 5 and 9) 8,153,776 8,232,541
------------ ------------
Accrued interest receivable 4,201,673 3,632,726
------------ ------------
Other assets 1,663,969 2,030,420
------------ ------------
TOTAL $456,452,332 $412,167,170
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $72,686,095 $66,963,099
NOW accounts 56,047,252 50,996,639
Money market accounts 27,341,113 34,556,005
Savings 21,355,568 20,676,076
Time deposits of $100,000 or more 84,145,051 71,898,484
Other time deposits 115,468,065 98,239,745
------------ ------------
Total deposits 377,043,144 343,330,048
Securities sold under agreements to repurchase (Note 10) 2,982,870 3,280,855
Accrued interest payable 1,872,764 1,242,753
Other liabilities 933,303 1,145,640
------------ ------------
Total liabilities 382,832,081 348,999,296
------------ ------------
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 - 1995 - 5,984,604 shares;
1994 - 5,958,209 shares 5,984,604 5,958,209
Capital surplus 21,378,741 21,016,998
Net unrealized gain (loss) on securities available for sale, net
of deferred income tax (benefit) of $291,307 and ($469,244)
at December 31, 1995 and 1994, respectively (Notes 1 and 6) 450,311 (725,372)
Retained earnings 45,806,595 36,918,039
------------ ------------
Total shareholders' equity 73,620,251 63,167,874
------------ ------------
TOTAL $456,452,332 $412,167,170
============ ============
See notes to consolidated financial statements.
</TABLE>
II-13
<PAGE> 15
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $29,847,478 $23,367,806 $19,852,778
Federal funds sold 251,047 195,777 235,262
Investments:
U. S. Treasury 961,701 978,074 1,315,159
U. S. Government agencies 2,033,620 1,871,600 1,708,951
States and political subdivisions 2,845,134 2,719,179 2,561,907
Other 627,990 440,966 440,040
----------- ----------- -----------
Total interest income 36,566,970 29,573,402 26,114,097
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 4,748,413 3,004,682 2,682,321
Other time and savings deposits 8,276,096 6,378,081 6,496,493
Federal funds purchased and securities sold under
agreements to repurchase 175,549 127,175 66,302
Other borrowed funds 1,480 4,358 3,938
----------- ----------- -----------
Total interest expense 13,201,538 9,514,296 9,249,054
----------- ----------- -----------
NET INTEREST INCOME 23,365,432 20,059,106 16,865,043
PROVISION FOR LOAN LOSSES (Notes 1 and 4) 1,117,000 704,000 575,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 22,248,432 19,355,106 16,290,043
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 2,843,085 2,772,822 2,652,444
Other service fees and commissions 976,951 1,027,210 1,081,760
Loss on sale of securities, net (40,952)
Other 341,781 456,465 476,971
----------- ----------- -----------
Total other income 4,120,865 4,256,497 4,211,175
----------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 4,216,795 3,903,589 3,338,860
Profit-sharing and other employee benefits (Note 8) 1,011,019 1,066,418 803,248
Occupancy expense, net 463,655 439,883 396,326
Equipment rentals, depreciation and maintenance 832,181 736,484 677,167
Federal Deposit Insurance Corporation insurance
premiums 395,372 727,874 674,423
Other 2,334,799 2,272,557 1,751,470
----------- ----------- -----------
Total other expenses 9,253,821 9,146,805 7,641,494
----------- ----------- -----------
</TABLE>
II-14
<PAGE> 16
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING FOR INCOME TAXES (Note 6) $17,115,476 $14,464,798 $12,859,724
INCOME TAXES (Notes 1 and 6) 5,598,532 4,622,525 3,984,532
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING FOR INCOME TAXES 11,516,944 9,842,273 8,875,192
CUMULATIVE EFFECT ON PRIOR YEARS OF
A CHANGE IN ACCOUNTING FOR INCOME TAXES (125,926)
----------- ----------- -----------
NET INCOME $11,516,944 $ 9,842,273 $ 8,749,266
=========== =========== ===========
PER SHARE AMOUNTS (Note 1):
Earnings per share before cumulative effect of a
change in accounting for income taxes $ 1.92 $ 1.64 $ 1.48
Cumulative effect on prior years of a change in
accounting for income taxes (0.02)
----------- ----------- -----------
Net income $ 1.92 $ 1.64 $ 1.46
=========== =========== ===========
Cash dividends $ 0.44 $ 0.38 $ 0.34
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
II-15
<PAGE> 17
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
NET UNREALIZED TOTAL
GAIN (LOSS) SHAREHOLDERS'
COMMON STOCK ON SECURITIES EQUITY
----------------------- CAPITAL RETAINED AVAILABLE (NOTES 1, 7
SHARES AMOUNT SURPLUS EARNINGS FOR SALE AND 12)
<S> <C> <C> <C> <C> <C> <C>
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
--------- ---------- ----------- ----------- ---------- -----------
Net income 11,516,944 11,516,944
Cash dividends (2,628,388) (2,628,388)
Shares issued under stock option plan 26,395 26,395 361,743 388,138
Net unrealized gain on securities
available for sale 1,175,683 1,175,683
--------- ---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 5,984,604 $5,984,604 $21,378,741 $45,806,595 $ 450,311 $73,620,251
========= ========== =========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
II-16
<PAGE> 18
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest received $36,121,165 $29,440,507 $26,074,610
Fees and commissions received 4,161,817 4,256,497 4,211,175
Interest paid (12,571,527) (9,279,256) (9,411,893)
Cash paid to suppliers and employees (8,941,068) (7,729,308) (7,344,386)
Income taxes paid (5,744,696) (4,462,586) (4,221,634)
----------- ----------- -----------
Net cash provided by operating activities 13,025,691 12,225,854 9,307,872
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available for sale 14,586,063 9,000,000
Proceeds from maturities of securities held
to maturity 9,405,000 11,975,000
Proceeds from maturities of securities held for
investment 27,909,000
Purchases of securities available for sale (12,693,750) (12,319,707)
Purchases of securities held to maturity (21,764,932) (9,632,419)
Purchases of securities held for investment (43,324,187)
Proceeds from sales of securities available for sale 894,378
Net increase in loans (32,783,187) (26,337,243) (14,410,494)
Capital expenditures (622,914) (2,133,462) (955,185)
Proceeds from sales of equipment 469 16,587 200
Proceeds from sales of other real estate owned 429,665
----------- ----------- -----------
Net cash used in investing activities (42,549,208) (29,431,244) (30,780,666)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits,
NOW accounts and savings accounts 4,238,209 7,553,182 22,536,521
Net increase (decrease) in certificates of
deposit 29,474,887 8,261,946 (2,805,559)
Net increase (decrease) in federal
funds purchased and securities
sold under agreements to repurchase (297,985) 573,270 (494,041)
Net decrease in other borrowed funds (21,000) (21,000) (21,000)
Net proceeds from issuance of common stock 388,138 284,394 534,694
Dividends paid (2,628,388) (2,237,479) (1,988,807)
Cash paid for fractional shares (14,953)
----------- ----------- -----------
Net cash provided by financing activities 31,153,861 14,399,360 17,761,808
----------- ----------- -----------
</TABLE>
II-17
<PAGE> 19
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 1,630,344 $(2,806,030) $(3,710,986)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 19,490,835 22,296,865 26,007,851
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $21,121,179 $19,490,835 $22,296,865
=========== =========== ===========
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $11,516,944 $ 9,842,273 $ 8,749,266
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 700,477 648,960 577,056
Provision for loan losses 1,117,000 704,000 575,000
Premium amortization and discount accretion, net 123,142 154,492 165,351
Deferred income taxes (364,386) (77,608) 69,108
Net loss on sale of securities available for sale 40,952
Loss on disposal of equipment 733 33,295 609
Loss on sale of other real estate owned 50,816
Increase in accrued interest receivable (568,947) (287,387) (204,838)
Increase (decrease) in accrued interest payable 630,011 235,040 (162,839)
(Increase) decrease in other assets (29,714) 224,417 (276,317)
Increase (decrease) in other liabilities (191,337) 748,372 (184,524)
----------- ----------- -----------
Total adjustments 1,508,747 2,383,581 558,606
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $13,025,691 $12,225,854 $9,307,872
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH TRANSACTIONS:
Transfer of loans to other real estate owned $ 480,481
Transfer from retained earnings to common
stock for stock split $ 1,190,958
Unrealized (gain) loss on securities available
for sale (1,936,234) 1,194,616
Transfer of investments from held to maturity
to available for sale 8,482,462
Deferred income tax provision (benefit) on net
unrealized gain/loss securities available for sale
allocated to shareholders' equity 760,551 (469,244)
</TABLE>
See notes to consolidated financial statements.
II-18
<PAGE> 20
BANK OF GRANITE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bank of Granite Corporation is a bank holding company with
one subsidiary, Bank of Granite (the "Bank"), which is a state chartered,
commercial bank. The Bank is headquartered in Granite Falls, North
Carolina and provides consumer and commercial banking services in the Blue
Ridge foothills and Catawba River Valley areas of North Carolina through
ten banking offices. The Bank was organized 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.
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.
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 investment securities are recognized at the time of
sale (trade date) based upon the specific identification method.
In December 1995, the Company adopted the FASB Special Report: A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities (the "Guide"). With the adoption of the Guide,
management elected to transfer certain securities classified as "held to
maturity" into the "available for sale" category as permitted by the Guide.
There have been no other transfers or sales of securities classified as
held to maturity. The total amount of securities
II-19
<PAGE> 21
transferred is disclosed as a non-cash transaction in the Statement of
Cash Flows.
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 25 to 50 years for
buildings and 5 to 15 years for furniture and equipment 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 Bank adopted Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan (SFAS No. 114)
(subsequently amended by SFAS No. 118). SFAS 114 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. The Bank's policy for recognition of
interest income on impaired loans is the same as its interest income
recognition policy for non-impaired loans. The total of impaired loans,
impaired loans on a nonaccrual basis, the related allowance for loan losses
and interest income recognized on impaired loans is disclosed in Note 4.
REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate acquired by foreclosure
is stated 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 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. The method of accounting for income taxes conforms to
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which was adopted by the Company on January 1, 1993. In connection
with the adoption of SFAS 109, a cumulative effect of a change in
accounting principle of $125,926 was recognized.
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 (1995 - 5,996,371; 1994 -
5,985,610 and 1993 - 5,960,451). The weighted average number of shares of
common stock and dilutive common stock equivalents outstanding and all per
share amounts for 1994 and periods prior have been adjusted to reflect the
five for four stock split effected in the form of a 25% stock dividend in
1994. Dividends per share represent amounts declared by the
II-20
<PAGE> 22
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 certain loan
origination fees and certain loan origination costs and amortizes these
deferred amounts over the life of each related loan.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NEW ACCOUNTING STANDARDS - In March 1995, the FASB issued Statement No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of. It requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and its eventual disposition,
and recognize an impairment loss if the expected future cash flows are less
than the carrying amount of the asset. It also requires that long-lived
assets and certain identifiable intangibles to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell. This
Statement is effective for financial statements for fiscal years beginning
after December 15, 1995. Management believes that implementation of the
statement will not have any material impact on the Bank's financial
condition or results of operations.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation cost would be shown as an expense on
the income statement.
Companies can choose not to apply the new accounting method and continue to
apply current accounting requirements, which generally result in no
compensation cost for most fixed stock option plans. Those that do so,
however, will be required to disclose in the notes to the financial
statements what net income and earnings per share would have been if they
had followed the accounting treatment preferred under FASB Statement No.
123.
FASB Statement No. 123 is effective for calendar-year 1996; however,
companies will be required to include, in that year's financial statements,
information about options granted in 1995. Management believes that
implementation of the Statement will not have any material impact on the
Company's financial condition or results of operations.
II-21
<PAGE> 23
2. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1995 and 1994 are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------------- 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, 1995:
U. S. Treasury due:
Within 1 year $ 6,004 $ 5,991
After 1 year but within 5 years 6,000 6,149
------- -------
Total U.S. Treasury 12,004 $ 163 $ (27) 12,140
------- ------ ------ -------
U. S. Government agencies due:
Within 1 year 12,000 11,970
After 1 year but within 5 years 14,491 14,556
After 5 years but within 10 years 2,000 2,047
------- ------ ------ -------
Total U.S. Government agencies 28,491 164 (82) 28,573
------- ------ ------ -------
Others due:
Within 1 year 100 101
After 1 year but within 5 years 5,342 5,569
After 5 years but within 10 years 2,891 3,094
After 10 years 560 653
------- ------ ------ -------
Total others 8,893 615 (91) 9,417
------- ------ ------ -------
Total at December 31, 1995 $49,388 $ 942 $ (200) $50,130
======= ====== ====== =======
HELD TO MATURITY SECURITIES CONSIST
OF THE FOLLOWING:
At December 31, 1995:
U. S. Treasury due:
Within 1 year $ 2,000 $ 2,011
After 1 year but within 5 years 1,502 1,510
------- -------
Total U.S. Treasury 3,502 $ 20 $ (1) 3,521
------- ------ ------ -------
U. S. Government agencies due:
Within 1 year 5,000 4,971
After 1 year but within 5 years 9,796 9,961
------- ------ ------ -------
Total U.S. Government agencies 14,796 165 (29) 14,932
------- ------ ------ -------
State and political subdivisions due:
Within 1 year 3,111 3,130
After 1 but within 5 years 17,355 17,957
After 5 years but within 10 years 27,282 28,460
After 10 years 8,095 8,414
------- ------ ------ -------
Total state and political
subdivisions 55,843 2,249 (131) 57,961
------- ------ ------ -------
Total at December 31, 1995 $74,141 $2,434 $ (161) $76,414
======= ====== ====== =======
</TABLE>
II-22
<PAGE> 24
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------------- 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 years 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 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
======= ===== ======== =======
</TABLE>
Sales of securities available for sale for the year ended December 31, 1995
resulted in realized gross losses of $56,190. Calls of securities available for
sale at a premium resulted in gross gains of $15,238 for the year ended December
31, 1995. Cost of securities sold were determined on the specific
identification method.
There were no sales of securities for the years ended December 31, 1994 and
1993.
II-23
<PAGE> 25
Securities with an amortized cost of approximately $40,539,518 and
$32,604,663 were pledged as collateral for public deposits and for other
purposes as required by law at December 31, 1995 and 1994, respectively.
3. LOANS
Loans at December 31, 1995 and 1994, classified by type, are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Real estate:
Construction $ 27,108,399 $ 20,727,600
Mortgage 118,697,296 98,953,041
Commercial, financial and agricultural 120,536,374 117,001,581
Consumer 35,620,407 33,156,501
All other loans 241,127 419,509
------------ ------------
Subtotal 302,203,603 270,258,232
Net deferred origination fees (518,204) (406,773)
------------ ------------
Total $301,685,399 $269,851,459
============ ============
</TABLE>
Nonperforming assets at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Restructed loans $ 253,369
Nonaccrual loans $231,654 743,515
Loans 90 days or more past due and still accruing 440,686 1,230,795
-------- ----------
Total $672,340 $2,227,679
======== ==========
</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 1995, 1994 and 1993 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, 1995 and 1994, directors' and
principal officers' direct and indirect indebtedness to the Bank aggregated
$548,699 and $482,270, respectively. During 1995, additions to such loans
were $79,820 and repayments totaled $13,391. In the opinion of management,
these loans do not involve more than normal risk of collectibility, nor do
they present other unfavorable features.
II-24
<PAGE> 26
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Balance at beginning of year $3,996 $3,603 $3,391
------ ------ ------
Loans charged off:
Commercial, financial and agricultural 297 136 331
Credit cards and related plans 8 10 3
Installment loans to individuals 288 246 63
------ ------ ------
Total charge-offs 593 392 397
------ ------ ------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 40 57 5
Credit cards and related plans 5 1 3
Installment loans to individuals 80 23 26
------ ------ ------
Total recoveries 125 81 34
------ ------ ------
Net charge-offs 468 311 363
------ ------ ------
Additions charged to operations 1,117 704 575
------ ------ ------
Balance at end of year $4,645 $3,996 $3,603
====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the period 0.16% 0.12% 0.15%
====== ====== ======
</TABLE>
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $516,887 ($228,729 of which is on a
nonaccrual basis). The average recorded balance of impaired loans during
1995 is not significantly different from the balance at December 31, 1995.
The related allowance for loan losses determined in accordance with SFAS
No. 114 for these loans is $284,444 at December 31, 1995. For the year
ended December 31, 1995, the Bank recognized interest income on those
impaired loans of approximately $27,085.
II-25
<PAGE> 27
5. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1995 and 1994 follow:
<TABLE>
<CAPTION>
PREMISES AND
ACCUMULATED EQUIPMENT,
COST DEPRECIATION NET
<S> <C> <C> <C>
December 31, 1995:
Land $ 1,312,029 $1,312,029
Buildings 6,222,995 $1,584,716 4,638,279
Furniture and equipment 4,909,605 3,048,902 1,860,703
Construction in progress 342,765 342,765
----------- ---------- ----------
Total $12,787,394 $4,633,618 $8,153,776
=========== ========== ==========
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
=========== ========== ==========
</TABLE>
6. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current $5,962,918 $4,700,133 $4,041,350
Deferred (364,386) (77,608) (56,818)
---------- ---------- ----------
Total $5,598,532 $4,622,525 $3,984,532
========== ========== ==========
</TABLE>
Deferred taxes of $760,551 and deferred tax benefits of ($469,244) related
to unrealized gains and losses on securities available for sale were
allocated to shareholders' equity in the years ended December 31, 1995 and
1994, respectively.
II-26
<PAGE> 28
A reconciliation of reported income tax expense for the years ended
December 31, 1995, 1994 and 1993 to the amount of tax expense computed by
multiplying income before income taxes by the statutory federal income tax
rate of 35% for 1995, 35% for 1994 and 34% for 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Tax provision at statutory rate $5,990,417 $5,062,679 $4,372,306
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (907,226) (902,044) (841,789)
State income taxes net of federal tax benefit 592,397 518,154 401,712
Other (77,056) (56,264) 52,303
---------- ---------- ----------
Income taxes reported $5,598,532 $4,622,525 $3,984,532
========== ========== ==========
</TABLE>
The tax effect of the cumulative temporary differences and carryforwards
that gave rise to the deferred tax assets and liabilities at December 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
ASSETS LIABILITIES TOTAL
<S> <C> <C> <C>
Excess book over tax bad debt expense $1,493,993 $1,493,993
Excess tax over book depreciation $ (373,600) (373,600)
Unrealized gain on securities
available for sale (291,307) (291,307)
Other, net 213,211 (238,735) (25,524)
---------- ---------- ----------
Total $1,707,204 $ (903,642) $ 803,562
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------
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
========== ========== ==========
</TABLE>
The net deferred tax asset is included in "Other assets" on the balance
sheet. Although realization of the deferred tax assets is not assured,
management believes it is more likely than not that all of the deferred tax
assets will be realized.
II-27
<PAGE> 29
7. STOCK OPTIONS
At December 31, 1995, 1994 and 1993, 91,044, 109,106 and 110,508 shares of
common stock were reserved for stock options granted under the Company's
employee stock option plan, respectively, and 13,436, 21,769 and 69,838
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, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
OPTION PRICE
SHARES PER SHARE TOTAL
<S> <C> <C> <C>
Outstanding at December 31, 1995 91,044 $12.96 - $28.00 $1,888,505
Outstanding at December 31, 1994 109,106 $10.88 - $28.00 $2,000,203
Granted:
1995 18,250 $26.00 - $26.25 $ 474,688
1994 24,188 $23.60 - $28.00 $ 584,025
1993 26,687 $22.80 $ 608,464
Exercised:
1995 26,395 $10.88 - $23.60 $ 388,138
1994 24,602 $14.08 - $22.80 $ 284,394
1993 39,230 $11.26 - $22.80 $ 543,695
Expired:
1995 9,917 $12.96 - $23.60 $ 198,248
1994 988 $13.12 - $23.60 $ 20,430
1993 1,818 $11.26 - $22.80 $ 36,024
</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, 1995 are exercisable as follows:
<TABLE>
<CAPTION>
YEAR SHARES
<S> <C>
1995 65,181
1996 13,600
1997 8,613
1998 3,650
</TABLE>
II-28
<PAGE> 30
8. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan covering substantially all employees.
Contributions to the plan are made at the discretion of the Board of
Directors but may not exceed the maximum amount allowable for federal
income tax purposes. Contributions totaled $515,718, $501,955 and $462,179
for the years ended December 31, 1995, 1994 and 1993, 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
totaled $13,665 and $10,929 for the years ended December 31, 1995 and 1994,
respectively.
9. LEASES
LESSEE - OPERATING - The Company leases certain premises and equipment
under operating lease agreements. As of December 31, 1995, there are no
operating leases having noncancelable lease terms in excess of one year.
Rental expense charged to operations under all operating lease agreements
was $32,496, $47,775 and $47,509 for the years ended December 31, 1995,
1994 and 1993, 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, 1995 are $169,956 (1996 - $56,652, 1997 - $56,652 and 1998
- $56,652).
Rental income received under all operating lease agreements was $75,652,
$77,500 and $76,905 for the years ended December 31, 1995, 1994 and 1993,
respectively.
II-29
<PAGE> 31
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>
1995 1994 1993
<S> <C> <C> <C>
Federal funds purchased:
Maximum amount outstanding at any month-end
during the year $3,500,000 $5,000,000
Average daily balance outstanding during the year 389,372 492,204
Average annual interest rate paid during the year 5.9% 3.8%
Securities sold under agreements to repurchase:
Balance at December 31 $2,982,870 $3,280,855 $2,707,585
Weighted average interest rate at December 31 4.8% 4.9% 2.3%
Maximum amount outstanding at any month-end
during the year $3,196,222 $3,395,055 $3,250,765
Average daily balance outstanding during the year $2,933,733 $2,998,020 $2,667,334
Average annual interest rate paid during the year 5.2% 3.6% 2.5%
</TABLE>
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, 1995, the Bank had undivided
profits, as defined, of $59,972,554.
II-30
<PAGE> 32
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, 1995, 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 21.3%, 16.9% and 22.7%,
respectively.
The average reserve balance required to be maintained under the
requirements of the Federal Reserve was approximately $7,884,000 for the
year ended December 31, 1995. The bank maintained average reserve balances
in excess of the requirements.
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 1995 1994
<S> <C> <C>
Assets:
Cash on deposit with bank subsidiary $ 190,357 $ 466,647
Investment in subsidiary bank at equity 71,930,488 62,083,296
Other investments 1,487,552 559,695
Other 97,118 80,900
----------- -----------
Total $73,705,515 $63,190,538
=========== ===========
Liabilities and Shareholders' Equity:
Other liabilities $ 85,264 $ 22,664
Shareholders' equity 73,620,251 63,167,874
----------- -----------
Total $73,705,515 $63,190,538
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------
CONDENSED RESULTS OF OPERATIONS 1995 1994 1993
<S> <C> <C> <C>
Equity in earnings of subsidiary bank:
Dividends $ 2,672,759 $2,286,694 $2,019,418
Undistributed 8,766,424 7,536,874 6,765,134
Income (expenses), net 77,761 18,705 (35,286)
----------- ---------- ----------
Net income $11,516,944 $9,842,273 $8,749,266
=========== ========== ==========
</TABLE>
II-31
<PAGE> 33
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
CONDENSED CASH FLOW 1995 1994 1993
<S> <C> <C> <C>
Increase (decrease) in cash
Cash flows from operating activities:
Interest received $ 40,107 $ 27,839 $ 9,322
Dividends received from subsidiary bank 2,672,759 2,286,694 2,019,418
Net cash provided by (used in) other
operating activities 6,687 (57,744) (80,234)
----------- ----------- -----------
Net cash provided by operating activities 2,719,553 2,256,789 1,948,506
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 86,063
Purchases of securities available for sale (841,656) (223,357)
Purchases of securities held for sale (158,058)
----------- ----------- -----------
Net cash used in investing activities (755,593) (223,357) (158,058)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 388,138 284,394 534,694
Net dividends paid (2,628,388) (2,237,479) (1,988,807)
Cash paid for fractional shares (14,953)
----------- ----------- -----------
Net cash used in financing activities (2,240,250) (1,968,038) (1,454,113)
----------- ----------- -----------
Net increase (decrease) in cash (276,290) 65,394 336,335
Cash at beginning of year 466,647 401,253 64,918
----------- ----------- -----------
Cash at end of year $ 190,357 $ 466,647 $ 401,253
=========== =========== ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income $11,516,944 $ 9,842,273 $ 8,749,266
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (8,766,424) (7,536,874) (6,765,134)
Premium amortization and discount accretion, net (711)
Gain on sale of securities available for sale (15,238)
Increase in accrued interest receivable (17,118)
(Increase) decrease in other assets 900 (55,450) (24,586)
Increase (decrease) in other liabilities 1,200 6,840 (11,040)
----------- ----------- -----------
Total adjustments (8,797,391) (7,585,484) (6,800,760)
----------- ----------- -----------
Net cash provided by operating activities $ 2,719,553 $ 2,256,789 $ 1,948,506
=========== =========== ===========
Supplemental disclosure of non-cash transactions:
Transfer from capital surplus to common stock $ 1,190,958
Unrealized (gain) loss on investment
in bank at equity $(1,080,768) 743,711
Unrealized gain on other investments available for sale (156,315) (30,203)
Deferred income tax provision on net unrealized
gain on securities available for sale 61,400 11,864
</TABLE>
II-32
<PAGE> 34
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, 1995 and 1994 was $50,275,525
and $50,229,879, respectively. Additionally, standby letters of credit of
$3,567,898 and $2,938,253 were outstanding at December 31, 1995 and 1994,
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.
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 value. 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 (dollars in thousands).
II-33
<PAGE> 35
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Assets:
Cash and cash equivalents $ 21,121 $ 21,121
Marketable securities 124,271 126,544
Loans 297,040 297,658
Liabilities:
Demand deposits 177,430 177,430
Time deposits 199,613 196,437
Off-balance-sheet unrealized gains (losses) -
Commitments 77
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------
ESTIMATED
CARRYING FAIR
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>
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 face value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995. 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.
II-34
<PAGE> 36
SELECTED FINANCIAL DATA
Bank of Granite Corporation and Subsidiary
For the years ended December 31
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 36,566,970 $ 29,573,402 $ 26,114,097 $ 25,977,371 $ 28,766,621
Total interest expense 13,201,538 9,514,296 9,249,054 10,641,167 14,826,945
--------------------------------------------------------------------------------
Net interest income 23,365,432 20,059,106 16,865,043 15,336,204 13,939,676
Provision for loan losses 1,117,000 704,000 575,000 880,000 819,485
--------------------------------------------------------------------------------
Net interest income after
provision for loan losses 22,248,432 19,355,106 16,290,043 14,456,204 13,120,191
Other income 4,120,865 4,256,497 4,211,175 4,058,640 3,457,955
Other expenses 9,253,821 9,146,805 7,641,494 7,310,170 7,004,332
--------------------------------------------------------------------------------
Income before income taxes and
cumulative effect of a change in
accounting for income taxes 17,115,476 14,464,798 12,859,724 11,204,674 9,573,814
Income taxes 5,598,532 4,622,525 3,984,532 3,397,389 2,680,515
--------------------------------------------------------------------------------
Income before cumulative effect of a
change in accounting for income taxes 11,516,944 9,842,273 8,875,192 7,807,285 6,893,299
Cumulative effect on prior years of a
change in accounting for income taxes [125,926]
--------------------------------------------------------------------------------
Net Income $ 11,516,944 $ 9,842,273 $ 8,749,266 $ 7,807,285 $ 6,893,299
--------------------------------------------------------------------------------
Per share
Net income $ 1.92 $ 1.64 $ 1.46 $ 1.32 $ 1.17
--------------------------------------------------------------------------------
Cash dividends $ .44 $ .38 $ .34 $ .30 $ .28
--------------------------------------------------------------------------------
Book value $ 12.30 $ 10.60 $ 9.44 $ 8.26 $ 7.23
--------------------------------------------------------------------------------
Weighted average shares outstanding 5,996,371 5,985,610 5,960,451 5,925,644 5,886,050
--------------------------------------------------------------------------------
Performance ratios:
Return on average assets 2.66% 2.47% 2.36% 2.29% 2.11%
Return on average equity 16.90% 16.50% 16.76% 17.21% 17.40%
Average equity to average assets 15.74% 14.94% 14.05% 13.48% 12.70%
Dividend payout 22.82% 22.73% 22.73% 22.69% 24.01%
--------------------------------------------------------------------------------
BALANCE AT YEAR END
Assets $456,452,332 $412,167,170 $387,667,497 $361,503,786 $335,099,246
Liabilities 382,832,081 348,999,296 331,648,486 312,779,928 292,528,687
Deposits 377,043,144 343,330,048 327,514,920 307,783,958 287,605,914
Loans (net) 297,040,674 265,854,968 240,221,725 226,386,231 217,367,246
Allowance for loan losses 4,644,725 3,996,491 3,603,430 3,391,390 2,990,804
Securities 124,271,061 112,925,680 113,297,662 98,047,826 89,575,600
Shareholders' equity 73,620,251 63,167,874 56,019,011 48,723,858 42,570,559
</TABLE>
page 14
<PAGE> 37
SHAREHOLDER INFORMATION
COMMON STOCK
Bank of Granite Corporation's common stock is traded on the over-the-counter
(OTC) market and quoted in the NASDAQ (National Association of Securities
Dealers Automated Quotations) National Market System, where our symbol is GRAN.
Price and volume information is contained in the Wall Street Journal and most
major daily newspapers in the "Over-the Counter Markets" section under the
National Market System listing.
ANNUAL MEETING
The Annual Meeting of shareholders of the Bank of Granite Corporation will be
held at 10:30 am, Monday, April 22, 1996, at the Holiday Inn, 1385 Lenoir Rhyne
Boulevard Southeast, Hickory, North Carolina (located off Interstate 40 at Exit
125).
EQUAL OPPORTUNITY EMPLOYER
It is the policy of Bank of Granite Corporation to treat all employees and
applicants for employment without regard to race, creed, color, national origin,
sex or age.
COPIES OF FORM 10-K
Copies of the Bank of Granite Corporation's Annual Report to the Securities and
Exchange Commission on Form 10-K may be obtained by shareholders at no charge by
writing: Randall C. Hall, Vice President and Secretary/Treasurer, Bank of
Granite Corporation, Post Office Box 128, Granite Falls, North Carolina 28630.
STOCK TRANSFER AGENT AND REGISTRAR
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
908/272-8511 or 800/368-5948
DIVIDEND REINVESTMENT
Registered holders of Bank of Granite Corporation stock are eligible to
participate in the Corporation's Dividend Reinvestment Plan, a convenient and
economical way to purchase additional shares of Bank of Granite Corporation
common stock. For an informational folder and authorization form or to receive
additional information on this plan, contact: Registrar and Transfer Company, 10
Commerce Drive, Cranford, New Jersey 07016, 908/272-8511 or 800/368-5948.
SHAREHOLDER INFORMATION
For additional information, contact Melodie R. Mathes, Shareholder Relations,
Bank of Granite Corporation, Post Office Box 128, Granite Falls, North Carolina
28630, 704/496-2022.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Post Office Box 9197
Hickory, North Carolina 28603
MARKET INFORMATION
Bank of Granite serves the people and businesses of the Blue Ridge Foothills and
Catawba Valley of North Carolina, which is located approximately 70 miles
northwest of Charlotte. This region offers a remarkable quality of life, with
both scenic and cultural treasures, to over 200,000 citizens. The area is also
known as a manufacturing capital for furniture, hosiery and fiber optic
telecommunications.
page 18
<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 ENDED
DECEMBER 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 19,621,179
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,129,581
<INVESTMENTS-CARRYING> 74,141,480
<INVESTMENTS-MARKET> 0
<LOANS> 301,685,399
<ALLOWANCE> 4,644,725
<TOTAL-ASSETS> 456,452,332
<DEPOSITS> 377,043,144
<SHORT-TERM> 2,982,870
<LIABILITIES-OTHER> 2,806,067
<LONG-TERM> 0
0
0
<COMMON> 5,984,604
<OTHER-SE> 67,635,647
<TOTAL-LIABILITIES-AND-EQUITY> 456,452,332
<INTEREST-LOAN> 29,847,478
<INTEREST-INVEST> 6,719,492
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 36,566,970
<INTEREST-DEPOSIT> 13,024,509
<INTEREST-EXPENSE> 13,201,538
<INTEREST-INCOME-NET> 23,365,432
<LOAN-LOSSES> 1,117,000
<SECURITIES-GAINS> (40,952)
<EXPENSE-OTHER> 9,253,821
<INCOME-PRETAX> 17,115,476
<INCOME-PRE-EXTRAORDINARY> 11,516,476
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,516,944
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
<YIELD-ACTUAL> 6.2
<LOANS-NON> 231,654
<LOANS-PAST> 440,686
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,996,000
<CHARGE-OFFS> 593,000
<RECOVERIES> 125,000
<ALLOWANCE-CLOSE> 4,645,000
<ALLOWANCE-DOMESTIC> 4,474,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 171,000
</TABLE>
