<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [ ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
BANK OF GRANITE CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
BANK OF GRANITE CORPORATION
23 NORTH MAIN STREET
GRANITE FALLS NC 28630
(704)496-2000
Notice of Annual Meeting of Shareholders - April 28, 1997
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Bank of Granite Corporation will be held
on Monday April 28, 1997 at 10:30 a.m. The meeting will be held at the Holiday
Inn, 130 South Lenoir Rhyne Boulevard, S.E. (at Interstate 40, Exit #125),
Hickory, North Carolina for the following purposes:
1. To consider the adoption of an Incentive Stock Option Plan.
2. To consider the election of seven persons named as director nominees in the
Proxy Statement dated March 9, 1997, which accompanies the Notice.
3. To consider the ratification of the selection of Deloitte & Touche LLP as
Bank of Granite Corporation's independent Certified Public Accountants for
the fiscal year ending December 31, 1997, and
4. To transact such other business as may properly be brought before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on March 9, 1997 are entitled to
receive notice of the vote at this meeting.
Bank of Granite Corporation's 1997 Annual Shareholders Meeting proxy Ballot,
Proxy Statement and its 1996 Annual Report are enclosed with this Notice.
YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE
MARK, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY IN THE ENVELOPE PROVIDED FOR
THAT PURPOSE. IF YOU ATTEND THE MEETING, YOU MAY OF COURSE, WITHDRAW YOUR
PROXY AND VOTE IN PERSON.
By order of the Board of Directors
/s/ JOHN A. FORLINES, JR.
-------------------------------------
Granite Falls, NC JOHN A. FORLINES, JR.
March 19, 1997 Chairman and Chief Executive Officer
<PAGE> 3
- --------------------------------------------------------------------------------
BANK OF GRANITE CORPORATION
PROXY STATEMENT
- --------------------------------------------------------------------------------
SOLICITATION, VOTING AND REVOCABILITY OF PROXY
General
The accompanying Proxy is solicited by the Board of Directors of Bank of Granite
Corporation (the "Corporation") for use at the Annual Meeting of Shareholders to
be held on April 28, 1997, and any adjournment thereof. The time and place of
the meeting is set forth in the accompanying Notice of Meeting. The approximate
date on which this Proxy Statement and the accompanying Proxy are first being
sent or given to Shareholders of the Corporation is approximately March 19,
1997.
A copy of the Corporation's 1996 Annual Report including financial statements is
included with this Proxy Statement and has been sent to each person who was a
shareholder of record as of the close of business on March 9, 1997. The
Corporation will also provide to any shareholder without charge a copy of the
Annual Report for 1996 filed on Form 10-K with the Securities and Exchange
Commission upon written request to Randall C. Hall, Secretary, Bank of Granite
Corporation, P.O. Box 128, Granite Falls, North Carolina, 28630.
Solicitation
All expenses of preparing, printing, and mailing the Proxy and all material used
in the solicitation thereof will be borne by the Corporation. In addition to the
use of the mails, proxies may be solicited through personal interview and
telephone by directors, officers, and other employees of the Corporation, none
of whom will receive additional compensation for their services.
Revocability of Proxy
This proxy shall be revocable at any time prior to its exercise by filing a
written request with Randall C. Hall, Secretary of the Corporation, by voting in
person at the Shareholders' Meeting, or by presenting a duly executed proxy
bearing a later date.
Voting Securities and Vote Required for Approval
At the close of business on March 9, 1997, the record date, the Corporation had
issued and outstanding 9,032,382 shares of Common Stock, par value $1.00 per
share, which is the only class of stock outstanding. Only the holders of record
of Common Stock of the Corporation at the close of business on March 9, 1997 are
entitled to receive notice of the Annual Meeting of Shareholders and to vote on
such matters to come before the Annual Meeting or any adjournment thereof.
Presence, in person or by proxy, of the holders of a majority of the outstanding
shares of Common Stock of the Corporation entitled to vote at the Annual Meeting
is necessary to constitute a quorum at the Annual Meeting and any adjournment
thereof.
I-2
<PAGE> 4
The approval of Proposal 1 (The adoption of an Incentive Stock Option Plan),
Proposal 2 (the Election of Directors), and Proposal 3 (the Ratification of the
Selection of the Corporation's Independent Accountants), and approval of all
other items which may be submitted to the shareholders for their consideration
at the Annual Meeting requires the affirmative vote of a majority of shares
present and voting. Each shareholder is entitled to one (1) vote for each share
of Common Stock held by him or her at the close of business on the record date,
March 9, 1997. Cumulative voting is not permitted.
On all proposals, an abstention will have the same effect as a negative vote
but, because shares held by brokers will not be considered entitled to vote on
matters as to which the brokers withhold authority, a broker non-vote will have
no effect on the outcome of the vote on such proposals.
The Board of Directors unanimously recommends a vote in favor of Proposals 1, 2
and 3. Each Proxy, unless the shareholder otherwise specifies, will be voted in
favor of Proposals 1, 2 and 3. In each case where the shareholder has
appropriately specified how the Proxy is to be voted, it will be voted in
accordance with his or her specifications. Executed but unmarked Proxies that
are returned to the Corporation will be voted in favor of the proposed Incentive
Stock Option Plan, in favor of the proposed slate of directors and in favor of
the ratification of Deloitte & Touche LLP as the Corporation's independent
accountants. Shareholders may designate a person or persons other than those
named in the enclosed Proxy to vote their shares at the Annual Meeting or any
adjournment thereof. As to any other matter or business which may be brought
before the Annual Meeting or any adjournment thereof, a vote may be cast
pursuant to the accompanying Proxy in accordance with the judgment of the person
or persons voting the same, but the management and Board of the Corporation do
not know or any other matter or business to come before the Annual Meeting.
PRINCIPAL HOLDERS OF VOTING SECURITIES
To the knowledge of the Corporation, no individual shareholder owned
beneficially more than five percent (5%) of Bank of Granite Corporation's
outstanding Common Stock on the record date. Corporation Common Stock is held by
Cede & Co. as nominee of securities depositories for various segments of the
financial industry. As of the record date, Cede & Co. held shares registered in
street name for approximately 1,300 individuals and organizations.
On the record date, the Corporation's Common Stock was owned by approximately
3,500 individuals and entities, holding Stock either as record holder or as
beneficial owner.
I-3
<PAGE> 5
INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
Boards of Bank of Granite Corporation and its sole subsidiary, Bank of Granite
(the "Bank") are composed of the same persons.
During the fiscal year ended December 31, 1996, the Bank's Board of Directors
held 14 meetings, and the Corporation's Board of Directors held 6 meetings. All
members of both Boards of Directors attended more than 75% of the total number
of meetings of the Boards of Directors and the total number of meetings held by
committees of the Boards of which they are members. Overall attendance at both
Boards' meeting was approximately 92%.
Corporation and Bank directors were paid an annual retainer of $4,000 and fees
of $250 for attendance at each meeting of the Board. Directors received no
additional compensation for attending committee meetings. The Corporation's
Board has standing audit and nominating committees. The Bank's Board of
Directors supervises all compensation matters, and performs certain executive
committee functions for the Corporation's Board of Directors. The functions,
composition and frequency of meetings for the audit and nominating committees in
fiscal year 1996 were as follows:
AUDIT COMMITTEE - The Audit Committee was composed of directors Robert E. Cline,
Barbara F. Freiman and Myron L. Moore, Jr. The Committee, whose members are
neither officers nor employees of the Corporation or Bank, provides general
oversight of the internal audit function, reviews the findings of external
audits and examinations, evaluates the adequacy of the Bank's insurance
coverage, and reviews the activities of the Bank's regulatory compliance
efforts. During 1996, nine (9) meetings were held. All Committee members
attended more than 75% of the total number of Audit Committee meetings held
during the fiscal year 1996.
NOMINATING COMMITTEE - The Nominating Committee was composed of directors John
A. Forlines, Jr., Barbara F. Freiman, Myron L. Moore, Jr., and Charles M.
Snipes. The Committee makes recommendations to the Board of Directors with
respect to nominees for election as directors. The Committee would consider
shareholder nominees for Corporation and Bank Board membership. Any shareholder
wishing to nominate a candidate for director must follow the procedures set
forth in the section of this Proxy Statement entitled "Proposals for 1998 Annual
Shareholders Meeting". During 1996, nine (9) meetings were held. All Committee
members attended more than 75% of the total number of Audit Committee meetings
held during the fiscal year 1996.
I-4
<PAGE> 6
APPROVAL OF THE CORPORATION'S 1997 STOCK OPTION PLAN
(PROPOSAL 1)
The Board of Directors is submitting to the shareholders, for their approval,
the Corporation's 1997 Incentive stock Option Plan (the "1997 Plan"). The 1997
Plan was adopted by the Corporation's Board of Directors (the "Board") and
became effective on January 13, 1997, subject to shareholder approval. The 1997
Plan is similar in its terms and its purpose to the former Incentive Stock
Option Plan for the Corporation (the "Former Plan"), which was adopted by the
Board of Directors and approved by the shareholders in 1983. The 1997 Plan is
intended to replace the Former Plan. The Board believes that option plans have
proved to be an important means of attracting, holding and motivating key
employees.
REASON FOR SHAREHOLDER ADOPTION OF THE 1997 PLAN
The 1997 Plan is being submitted to the shareholders for their approval in order
to comply with NASDAQ rules and in order to qualify remuneration attributable to
option awards under the 1997 Plan to certain key executives as "performance
based" under Section 162(m), which generally limits to $1,000,000 the amount of
compensation a publicly held corporation may deduct for compensation in any year
to any chief executive officer and up to four of such corporation's other most
highly compensated officers. Because all option awards under the 1997 Plan are
intended to quality as incentive stock options under Section 422 of the Code,
for which the corporation generally is not entitled to a deduction, it is
anticipated that the deduction limitations of Section 162(m) would be relevant
to the Corporation with respect to awards under the 1997 Plan only in the event
that a key executive is deemed to have sold shares acquired upon the exercise of
options within two years of the grant of such options, such as in the event that
outstanding options are converted into the right to receive cash upon the
occurrence of certain change in control events, as described below.
SUMMARY OF THE 1997 PLAN
The 1997 Plan is summarized below. However, this summary is qualified in its
entirety by reference to the text of the 1997 Plan, a copy of which may be
obtained without charge by written request to Randall C. Hall, Secretary, Bank
of Granite Corporation, P.O. box 128, Granite Falls, North Carolina 28630-0128.
General. The 1997 Plan provides that the Corporation may grant options to
purchase common Stock ("Options") to key employees of the Corporation and its
subsidiaries. The purpose of the 1997 Plan is to promote the growth and
profitability of the Corporation by increasing personal participation of
officers and other key employees in the financial performance of the
Corporation, by enabling the Corporation to attract and retain officers and
employees of outstanding competence and by providing such officers and employees
with an equity opportunity in the Corporation.
The 1997 Plan provides that Options may be granted in such amounts and at such
time as the Compensation Committee of the Board of Directors shall determine.
100,000 shares of the Corporation's Common Stock have been reserved for the
grant of Options under the 1997 Plan. No employee may be granted Options under
the Plan to purchase more than 5,000 shares of
I-5
<PAGE> 7
Common Stock in any calendar year. The numbers of shares subject to Options that
may be granted under the 1997 Plan and the number of shares and exercise prices
of outstanding Options shall be adjusted to reflect any change in the
capitalization of the Corporation as contemplated in the 1997 Plan.
Administration. The 1997 Plan is administered by the Compensation Committee of
the Corporation's Board of Directors or any other committee of the Board
designated by the Board ("the Committee") composed solely of members who are
"non-employee directors" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act") and "outside directors" within the
meaning of regulations adopted pursuant to Section 162(m) of the Code. The
Committee has complete authority to control, operate, manage and administer the
1997 Plan, including, but not limited to, the right to: (a) determine the
employees who will receive Options, the timing of the grants of Options, and
other terms of such Options, subject to the terms of the 1997 Plan; (b) make and
amend rules governing the administration of the 1997 Plan; ( c) construe and
interpret the 1997 Plan; (d) take actions necessary to keep the 1997 Plan in
compliance with securities, tax and other laws; and (f) to make other necessary
determinations in connection with the administration of the 1997 Plan.
The Committee may designate selected Committee members or certain employees of
the Corporation to assist the Board or Committee in the administration of the
1997 Plan and may grant authority to such persons to execute documents,
including Options, on behalf of the Committee, subject to the requirements of
the Section 16 rules under the Exchange Act and Section 162(m) under the Code.
The 1997 Plan provides that no member of the Committee or employee of the
Corporation assisting the Board or Committee in connection with the 1997 Plan
shall be liable for any action taken or determination made in good faith.
Eligibility and Criteria for Grants. The 1997 Plan provides that Options may be
granted only to employees of the Corporation or its subsidiaries who are
designated as a "Key Employee," which means and employee who holds a position of
responsibility in a managerial, administrative, or professional capacity. As of
March 9, 1997, there were approximately 40 such employees eligible to receive
Options. In making the determination as to the key employees to whom Options
shall be granted under the 1997 Plan and as to the number of shares to be
subject thereto, the Committee will take into account the level and
responsibility of the person's position, the level of the person's performance,
the person's level of compensation, the assessed potential of the person and
such additional factors as the Committee may deem relevant to the accomplishment
of the purposes of the 1997 Plan.
Exercise Price. The price per share at which an Option may be exercised is
determined by the Committee at the time of grant, but the exercise price per
share may not be less than 100% of the fair market value of the Corporation's
Common Stock on the date of grant.
Method of Exercise. Payment of the exercise price must be in cash. Options
granted under the 1997 Plan may be exercised for any lesser number of shares
than the full amount for which it could be exercised. Such a partial exercise of
an Option does not affect the right to exercise the Option for the remaining
shares subject to the Option.
I-6
<PAGE> 8
Term of Options. The 1997 Plan generally provides that Options are exercisable
at such time and upon such conditions as may be determined by the Committee at
the time of the grant, except that the term of such Options may not exceed ten
years from the date of the grant. In no event may an Option be exercised after
the expiration of its fixed term. In addition, the aggregate fair market value
(determined at the time Options were granted) of the Common Stock with respect
to such stock options are exercisable for the first time for any holder of
Options during any calendar year (under the 1997 Plan or any other plan of the
Corporation) shall not exceed $100,000 (or such other limit as may be required
under the Code). The 1997 Plan prohibits repricing of outstanding Options.
Transferability of Options. In general, Options granted under the 1997 Plan may
not be transferred other than by will or the laws of descent and distribution
and during the optionee's lifetime may be exercised only by the optionee.
Termination of Employment. In general, outstanding Options terminate within one
year of the termination of an Employee's employment because of death or
disability and within 90 days of termination for any other reason, except that
Options terminate immediately upon termination for cause. If an Employee dies
without having exercised an Option, the Option may be exercised by the
Employee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, to the extent of the shares with respect to which the
option could have been exercised on the date of the Employee's death. The 1997
Plan also provides that Options granted thereunder will be forfeited if the
holder of such Options engages in competition with the Corporation without the
consent of the Corporation.
Change in Control Provisions. The 1997 Plan provides that, upon the occurrence
of certain Change in Control Events (as defined below), all outstanding options
become immediately vested and converted into the right to receive a cash lump
sum payment (the "Cash-Out Payment") equal to the number of options converted
times the highest closing price per share paid for the Common Stock during the
90 day period ending on the date of the Change in Control Event.
Such Cash-Out Payment will be triggered upon the earlier to occur of the
following: (1) a Change in Control Event which results, directly or indirectly,
in the Common Stock ceasing to be actively traded on the primary securities
exchange or quotation system on which the Common Stock was traded immediately
prior to such Change in Control Event; or (2) the termination of an optionee's
employment within two years following a Change in Control Event for reasons
other than death, disability, cause (as defined in the 1997 Plan) or retirement.
Any of the following constitutes a Change in Control Event: (1) the consummation
of any tender offer resulting in the transfer of ownership of 50% or more of the
voting power of the Corporation's then-outstanding voting securities; (2) the
merger or consolidation of the Corporation with another corporation that results
in less than 50% of the voting power of the surviving corporation being owned in
the aggregate by the Corporation's former shareholders other than affiliates of
any party to the merger or consolidation; (3) the Corporation transfers all or
substantially all its assets to another entity that is not a wholly-owned
subsidiary of the Corporation; (4) any party becomes the beneficial owner of 50%
or more of the combined voting power of the Corporation's then-outstanding
voting securities; and (5) any tender offer, merger, consolidation, sale of
assets, contested election, or combination of such transactions that results in
a turnover of a majority of the Corporation's Board of Directors. Any Cash-Out
Payment triggered by the foregoing provisions is payable no later than 90 days
after the triggering event.
I-7
<PAGE> 9
Amendment of Plan and Options. The 1997 Plan may be amended, altered or
discontinued by the Committee at any time, but no such termination or amendment
shall materially and adversely affect the rights and obligations of a holder of
an Option theretofore granted without such holder's consent. The Committee may
also amend the terms and conditions of any outstanding Option. However, no
action may be taken that would alter or impair any rights or obligations under
any outstanding Option without the consent of the holder of the Option.
Federal Income Tax Consequences. The options granted under the 1997 Plan are
intended to qualify as "incentive stock options" under Section 422 of the Code.
A participant who is granted an Option will not be subject to federal income tax
at the time of grant, and the Corporation will not be entitled to a tax
deduction by reason of such grant. Upon exercise of an Option, no taxable income
will be recognized by the participant, and the Corporation is not entitled to a
tax deduction by reason of such exercise. However, if shares purchased pursuant
to the exercise of an Option are sold within two years from the date of grant or
within one year after the transfer of such shares to the participant, then the
difference, with certain adjustments, between the fair market value of the
shares at the date of exercise and the exercise price will be considered
ordinary income ordinary income, and the Corporation will be entitled to a tax
deduction at the same time and in the same amount. In the event of a sale of
shares purchased upon exercise of an Option, any appreciation above or
depreciation below the fair market value at the date of exercise will generally
qualify as capital gain or loss.
Any Cash-Out Payment triggered by a Change in Control Event within two years of
the date of grant of the options converted to such Cash-Out Payment would
generally be considered ordinary income to the participant to the extent, with
certain adjustments, of the difference between Cash-Out Payment and the exercise
price of the converted options, and the Corporation generally would be entitled
to a tax deduction at the same time and in the same amount. The 1997 plan is
intended to provide that any such deduction available to the Corporation will
not be subject to the $1,000,000 deduction limitation imposed by Section 162(m)
of the Code.
Effective Date; Duration. As noted above, the 1997 Plan became effective on
January 13, 1997. Its continued existence is subject to the approval by holders
of a majority of the outstanding shares of Common Stock. If approved and unless
previously terminated by the Board or Committee, the 1997 Plan will terminate at
the close of business on January 13, 2007.
At March 19, 1997, options for 100,000 shares are available for grant under the
1997 Plan. On February 25, 1997, the closing price for the Corporation's Common
Stock as reported by NASDAQ, was $29.75 per share.
FOR THE REASONS SET FORTH ABOVE, THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A
VOTE FOR ADOPTION OF THE 1997 PLAN.
I-8
<PAGE> 10
ELECTION OF DIRECORS
(PROPOSAL 2)
Seven (7) directors are being considered for election at the Annual Meeting,
each to hold office for one year or until a successor is elected an qualified.
The Corporation Board's nominees are shown below along with biographical
summaries and beneficial ownership of Common Stock. The information is
presented, unless otherwise indicated, as of March 9, 1997.
All of the director nominees shown below have been elected previously a director
by the Corporation shareholders, with the exception of Hugh R. Gaither. All
director nominees are currently serving on the Board.
In the event a director nominee declines or is unable to serve as director,
which is not anticipated, the shares represented by proxy will be voted for the
Board's substitute nominee.
I-9
<PAGE> 11
THE BOARD OF DIRECTORS RECOMMENDS THAT THE DIRECTOR NOMINEES,
SHOWN IN THE FOLLOWING TABLE BE ELECTED AS DIRECTORS.
DIRECTORS AND EXECUTIVE OFFICERS OF
BANK OF GRANITE CORPORATION
The number of shares of Bank of Granite Corporation stock beneficially owned by
the nominees are those owned as of March 9, 1997. Unless otherwise indicated,
each director has sole voting power (or shares such power with his or her
spouse) with respect to the shares set forth in the table on the following page.
The source of information provided in the table is the Corporation's shareholder
records.
<TABLE>
<CAPTION>
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NAME PRINCIPAL OCCUPATION AGE ON DIRECTOR AMOUNT AND NATURE OWNERSHIP AS A
during the last five years DEC. 31, SINCE (1) OF BENEFICIAL PERCENTAGE OF
1996 OWNERSHIP COMMON STOCK
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JOHN N. BRAY President, Vanguard Furniture, Inc. 54 Bank (1992) 3,131 direct .05%
Hickory, NC Corp. (1992) 940 indirect (2)
- -----------------------------------------------------------------------------------------------------------------------------------
ROBERT E. CLINE President, Cline Realty Company, Inc. 71 Bank (1984) 10,711 direct .29%
Hickory, NC Corp. (1987) 15,815 indirect
- -----------------------------------------------------------------------------------------------------------------------------------
JOHN A. FORLINES, JR. Chairman and Chief Executive Officer, 78 Bank (1954) 416,693 direct 4.75%
Granite Falls, NC Bank of Granite Corporation, since June Corp. (1987) 12,554 indirect (3)
1987; Chairman, Bank of Granite, since
1972 (and Chief Executive Officer from
1954 through April, 1994)
- -----------------------------------------------------------------------------------------------------------------------------------
BARBARA F. FREIMAN Director of Institutional Effectiveness 62 Bank (1989) 5,033 direct .08%
Lenoir NC and Development, Caldwell Community Corp. (1989) 1,748 indirect (2)
College
- -----------------------------------------------------------------------------------------------------------------------------------
HUGH R. GAITHER President, Ridgeview, Inc. 46 Bank (1997) 7,165 direct .16%
Newton, NC Corp. (1997) 7,030 indirect
- -----------------------------------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES President, Bank of Granite Corporation; 63 Bank (1982) 100,776 direct 1.44%
Hickory NC President and Chief Executive Officer Corp. (1987) 29,554 indirect (2)
(beginning May, 1994), Bank of
Granite;
Director, Vanguard Furniture, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
BOYD C. WILSON, JR. Vice President and Controller, Kincaid 44 Bank (1996) 3,568 direct .08%
Hudson, NC Furniture Company Corp. (1996) 3,362 indirect (2)
- -----------------------------------------------------------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE 549,566 direct 6.91%
Officers as a Group 74,489 indirect
(8 persons)
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</TABLE>
Notes:
(1) Bank of Granite Corporation, the holding company for Bank of Granite,
was organized in June 1987.
(2) Shares of stock indirectly owned include those held in their spouse's
name or by corporations controlled by such individuals.
(3) The indirect stock ownership shown for John A. Forlines, Jr., and
Charles M. Snipes consists of those shares of Corporation Common Stock
obtainable by such individuals within 60 days of March 9, 1997.
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<PAGE> 12
SUMMARY COMPENSATION TABLE
The following table summarizes current and long-term compensation and provides
separate columns for stock-related compensation for each executive officer of
the Corporation and its subsidiary, Bank of Granite ("Bank"), whose total salary
and bonus exceeded $100,000 during 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
SECURITIES ALL OTHER
UNDERLYING COMPENSATION
OPTIONS (2) (3)
- -------------------------------------------------------------------------------------------------------------------------------
NAME AND PRINCIPAL YEAR SALARY BONUS (1)
POSITION
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JOHN A. FORLINES, JR. 1996 $195,000 $34,380 2,700 $35,967
Corporation Chairman
and Chief Executive 1995 $184,000 $38,768 3,500 $38,602
Officer; Bank
Chairman 1994 $178,380 $38,768 2,500 $34,024
- -------------------------------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES
Corporation President; 1996 $156,000 $25,713 2,700 $29,606
Bank President and
Chief Executive Officer 1995 $137,604 $27,184 3,500 $25,558
1994 $125,100 $27,184 2,500 $26,234
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Figures shown represent actual incentive cash bonuses earned during the
year indicated.
(2) Figures shown represent number of shares of Corporation Common Stock
subject to options which were awarded to the named executive officers
shown during the years indicated.
(3) Figures shown include amounts contributed by the Bank to its
Profit-sharing Plan ("Plan") and allocated to the indicated executive
officer's accounts. The plan is a "tax qualified" plan under section
401 (a) of the Internal Revenue Code and covers all Bank employees. The
following amounts were contributed to John A. Forlines, Jr.s' Plan
accounts: $22,500 (1996), $22,500 (1995), and $22,500 (1994). The
following amounts were contributed to Charles M. Snipes' Plan accounts:
$22,500 (1996), $22,500 (1995), and $22,500 (1994).
Figures shown also indicate amounts contributed by the Bank to the
indicated executive officer's Supplemental Executive Retirement Plan
("SERP") accounts. Because of Internal Revenue Code limitations on
amounts which can be contributed to the named executive's
Profit-sharing Plan accounts, the SERP was implemented by the Bank
during 1994 to help replace those contributions "lost" by the named
executives due to these limitations. Participation in the SERP is
determined by the Board of Directors. The SERP is not a qualified plan
under the Internal Revenue Code. Contribution earnings are tied to the
30 year US Treasury bond. The following amounts were contributed by the
Bank to John A. Forlines, Jr.s' accounts: $12,470 (1996), $11,447
(1995), and $10,587 (1994). The following amounts were contributed to
Charles M. Snipes' accounts: $4,757 (1996), $2,218 (1995), and $343
(1994).
The remaining amounts shown represent the value of certain split dollar
insurance plan premiums paid for the indicated executives, based on
term insurance value of such payments as calculated under the Internal
Revenue Code P.S. 58 rates or those of the insurer, if lower.
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<PAGE> 13
The following table sets forth information with respect to options
granted during 1996 to the named officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION FOR
OPTION TERM
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN OR BASE EXPIRATION 5% 10%
NAME GRANTED (1) FISCAL YEAR (2) PRICE ($/SH) (3) DATE (4) APPRECIATION (5) APPRECIATION (6)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JOHN A. FORLINES, JR. 2,700 11.9 $20.67 04/22/01 $15,420 $34,071
Corporation Chairman
and Chief Executive
Officer; Bank
Chairman
- ---------------------------------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES 2,700 11.9 $20.67 04/22/01 $15,420 $34,071
Corporation President;
Bank President and
Chief Executive Officer
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Figures indicate number of shares of stock with respect to which
options were granted under the Plan to the indicated executive officer
during 1996. The price at which shares of Corporation Common Stock may
be purchased upon the exercise of options under the Plan is equal to
100% of the fair market value of the Corporation's Common Stock on the
date the options are granted. All options granted pursuant to the Plan
must be exercised within 5 years from the date of grant. Outstanding
options must also be exercised during employment or within 3 months
after a participating executive's termination of service. If
termination of service is by reason of death, an option my be exercised
by the executive's legal representative or beneficiary within one year
after the date of death. Options granted under the plan are subject to
applicable income tax withholding requirements and are not transferable
by the holder except by will or by the laws of descent and
distribution, and shall be exercisable, during the participating key
executive's lifetime, only by the key employee.
(2) Percent shown indicates options awarded to indicated executive officer
as a percentage of total options granted to all Plan participants
during 1996.
(3) The exercise or base price is the dollar amount at which each share of
stock subject to option may be acquired by the indicated executive
officer. The exercise or base price is the closing market price per
share of the Common Stock on the date of the award of the option.
(4) The date shown indicates the date upon which the options granted will
expire.
(5) The dollar values shown represent the potential realizable value of the
grant of options at an assumed 5% annualized appreciate rate in the
price of Corporation Common Stock. The potential realizable value is
calculated under the following formula: [(A x B - C] x D, where A =
$20.67, the per share market price at the time of the grant, B =
1.2763, the assumed rate of stock price appreciation (5%) compounded
annually over the 5-year term of the option; C = $20.67, the per share
exercise price of the option; and D = 2,700, the number of securities
underlying the grant at year end 1996.
(6) The dollar values shown represent the potential realizable value of the
grant of options at an assumed 10% annualized appreciation rate in the
price of Corporation Common Stock. The potential realizable value is
calculated under the following formula: [(A x B - C] x D, where A =
$20.67, the per share market price at the time of the grant, B =
1.6105, the assumed rate of stock price appreciation (10%) compounded
annually over the 5-year term of the option; C = $20.67, the per share
exercise price of the option; and D = 2,700, the number of securities
underlying the grant at year end 1996.
I-12
<PAGE> 14
The following table sets forth information with respect to the exercise of stock
options by the named officers during 1996 and unexercised options held as of
December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND LAST FISCAL YEAR-
END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING IN-THE-MONEY
ACQUIRED ON VALUE UNEXERCISED OPTIONS OPTIONS AT FISCAL
NAME EXERCISE (#) (1) REALIZED ($) (2) AT FISCAL YEAR-END (#) YEAR-END $ (3)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John A. Forlines, Jr.
Corporation Chairman 7,030 $82,181 Exercisable - 16,982 Exercisable - $233,651
and Chief Executive Unexercisable - 8,310 Unexercisable - $145,831
Officer; Bank
Chairman
- -----------------------------------------------------------------------------------------------------------------------------------
Charles M. Snipes
Corporation President; 7,030 $82,181 Exercisable - 16,982 Exercisable - $233,651
Bank President and Unexercisable - 8,310 Unexercisable - $145,831
Chief Executive Officer
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) Indicates number of shares acquired by indicated executive officer
through the exercise of options during 1996.
(2) Dollar amounts represent the aggregate dollar value realized by the
indicated executive officer upon the exercise of options during 1996.
The aggregate dollar value realized is calculated based on the
difference between the fair market value of Corporation Common Stock on
the date of exercise, less the underlying option's exercise or base
price.
(3) Dollar amounts shown represent the value of stock options held by the
indicated executive officers at year end 1996. Only those options which
are "in the money" are reported. An option is considered to be "in the
money" if the fair market value of the Corporations Common Stock
exceeds the exercise or base price of the shares subject to the options
at year end 1996. For those options "in the money", value is computed
based on the difference between fair market value of Corporation Common
Stock at year end 1996 and the exercise or base price of the shares
subject to the options. The value of options exercisable and
unexercisable at year end 1996 is also shown.
I-13
<PAGE> 15
BOARD REPORT ON EXECUTIVE OFFICER COMPENSATION
All compensation paid to the Corporation's executive officers is paid by the
Bank to such persons in their capacity as executive officers of the Bank.
Accordingly, the compensation of such executives is reviewed and approved
annually by the full Board of Directors of both the Bank and the Corporation,
which consist of the same persons. This report is furnished by the Corporation's
Board of Directors, which acts as the Corporation's Compensation Committee.
The fundamental philosophy of Bank of Granite Corporation's compensation program
is to offer competitive compensation opportunities for all executive officers
which are based both on the individual's contribution and on the Corporation's
performance. The compensation paid is designed to retain and reward executive
officers who are capable of leading the Corporation in achieving its business
objectives in an industry characterized by complexity, competitiveness, and
change. Annual compensation for the Corporation's CEO (and other executive
officers) consists of three elements:
- base salary;
- An annual cash incentive that is directly and indirectly
linked to Corporation and individual performance (with
Corporation performance measured on the basis of Return on
Assets); and
- Long-term equity participation, consisting of the issuance of
stock options, designed to better align the interests of
executive officers with those of the Corporation's
shareholders.
For the Corporation's executives (and CEO), base salary is targeted to
approximate average salaries for individuals in similar positions with similar
levels of responsibilities who are employed by other banking organizations of
similar size. The Corporation frequently participates in local, state, and other
salary / compensation surveys and has access to other published salary /
compensation data. The results of such surveys are used by the Corporation Board
of Directors in helping to set appropriate levels of Corporation CEO and other
executive officer base salaries.
During 1996, the Corporation increased the CEO's base salary by 6.0%. The
Corporation Board of Directors determined that the 6.0% increase in the CEO base
salary was appropriate in light of two primary factors. The first factor was a
desire by the Corporation to provide the CEO with a base salary comparable to
that paid by other banking organizations of similar size and financial
performance. The Corporation Board of Directors annually review national,
regional, statewide and local peer group salary data (to the extent available)
in its determination of a comparable base salary. A second factor considered by
the Corporation Board of Directors was the following 1995 Corporation
performance accomplishment: a 2.66% Return on Assets, which placed the
Corporation among the banking industry's top performers during 1995.
I-14
<PAGE> 16
For the Corporation's executives (and CEO), the annual cash incentive during the
years 1994, 1995, and 1996 ranged from 17.6% to 24.8% of base salary. This means
that up to approximately 24.8% of the executive's annual compensation was
variable, could fluctuate significantly from year to year, and was directly and
indirectly tied to business and individual performance. The percentage of annual
cash incentive for 1996 was 24.8% of the CEO's base salary. The annual cash
incentive is based on banking organization's return on assets (ROA). The
Corporation's Board of Directors, in its sole discretion, sets a threshold ROA
target, based in part on the Corporation's financial performance in prior years
and the performance of banking organizations of similar size in the Bank's
general geographic region. If the threshold ROA target is achieved, a stated
dollar amount will be paid into an incentive compensation pool. The incentive
compensation pool amounts are then distributed among incentive plan participants
based on such participants' base salaries as a percentage of all participants
base salaries. If the Corporation earns ROA above the threshold level, and
increasing dollar incentive pool is created up to a maximum dollar amount at a
predetermined ROA level.
For the Corporation's CEO, executives (and other key employees), stock options
may be granted each year in the sole discretion of the Board of Directors. While
no formal system is employed in determining the number of stock options granted,
both in the aggregate and to any one individual, the Board does take into
account the Corporation's current financial performance and the number of stock
options previously granted.
This report is provided as a summary of current Board practice with regard to
annual compensation review and authorization of executive officer compensation
and with respect to specific action taken for the CEO.
Because executive officer and CEO salaries are not expected currently or in the
near future to exceed those limitations provided under Section 162(m) of the
Internal Revenue Code, the Board currently has no specific policy which
addresses the income tax deductibility of "qualifying compensation" under this
specific code section. However, as noted in the description of the Corporation's
1997 Incentive Stock Option Plan contained in this Proxy Statement, that plan
has been designed to provide that compensation deductions, if any, available to
the Corporation with respect to remuneration under such plan are not subject to
the deduction limitations of Section 162(m).
Board of Directors
Bank of Granite Corporation
John N. Bray
Robert E. Cline
John A. Forlines, Jr.
Barbara F. Freiman
Myron L. Moore, Jr.
Charles M. Snipes
Boyd C. Wilson, Jr.
I-15
<PAGE> 17
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Corporation Board of Directors serves as the Corporation's compensation
committee. John A. Forlines, Jr. and Charles M. Snipes both served as members of
the Corporation Board of Directors during 1996 and also served as Corporation
and Bank executive officers. Mr. Forlines is the Chairman and CEO of Bank of
Granite Corporation, and Chairman of the Bank of Granite. Mr. Snipes is the
President of Bank of Granite Corporation and President and CEO of the Bank of
Granite. While Mr. Forlines, and Mr. Snipes specifically excluded themselves
from any Corporation Board of Directors' discussions concerning their own
compensation, they did participate with other Corporation Board members in
discussions concerning other executive officers' compensation.
SHAREHOLDER PERFORMANCE GRAPH
The performance graph shown on the following pages compares the Corporation's
cumulative total return over the most recent 5-year period with both the NASDAQ
Index, and an Independent Bank Index (reflecting changes in certain peer group
bank stocks). The Independent Bank Index is the compilation of the total return
to shareholders of a group of 20 independent community banks located in the
southeastern states of Florida, Georgia, North Carolina, Tennessee and Virginia.
The banks range in asset size from $129 million to $1,016 million. Returns are
shown on a total return basis, assuming the reinvestment of dividends. Due to
the trend of mergers and consolidation in the banking industry, the Corporation
changes the composition of the Independent Bank Index from year to year to
replace community banks that have been acquired or otherwise changed their
structure in such a way as to make them unrepresentative of the community banks
represented in the Index.
I-16
<PAGE> 18
BANK OF GRANITE CORP.
Five Year Performance Index
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
BANK OF GRANITE CORP. 100 149 161 167 196 299
INDEPENDENT BANK INDEX 100 130 163 197 268 313
MASDAQ INDEX 100 116 134 131 185 227
</TABLE>
I-17
<PAGE> 19
TRANSACTIONS WITH OFFICERS AND DIRECTORS
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of its business with directors, officers and their
associates, on the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others;
and, in the opinion of Corporation management, these transactions do not and
will not involve more than the normal risk of collectibility or present other
unfavorable features.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's
directors and executive officers, and persons who own more than 10% of the
Corporation's Common Stock, to file with the Securities and Exchange Commission
initial reports of ownership of Corporation Common Stock and reports of changes
in ownership. Executive officer, directors and greater than 10% shareholders are
required by SEC regulations to furnish the Corporation with copies of all
Section 16(a) forms they file.
To the Corporation's knowledge, all Section 16(a) filings required of its
executive officers and directors for 1996 were made in a timely manner.
RATIFICATION OF SELECTION OF ACCOUNTANTS
(PROPOSAL 3)
The Board of Directors of the Corporation has selected the firm of Deloitte &
Touche, LLP as independent Certified Public Accountants to examine the financial
statements of the Corporation for the year ending December 31, 1997. The firm is
to report on the Corporation's consolidated balance sheets, and related
consolidated statements of income, consolidated statements of cash flow, and
consolidated changes in shareholders' equity, and to perform such other
appropriate accounting services as may be required by the Board of Directors. It
is expected that representatives of Deloitte & Touche LLP, who also served as
the Corporation's accounting firm for the past fiscal year, will be present at
the shareholders' meeting. They will be provided with any opportunity to make a
statement if they desire to do so and to answer appropriate questions which may
be raised at the meeting.
The fee arrangement between Deloitte & Touche LLP and Bank of Granite
Corporation is based on rates and terms customary for their practice.
The Board of Directors recommends that the firm of Deloitte & Touche LLP be
ratified as the Corporation's Independent Certified Public Accountants for the
year ended December 31, 1997.
I-18
<PAGE> 20
PROPOSALS FOR 1998 ANNUAL SHAREHOLDERS MEETING
From time to time, individual shareholders may wish to submit proposals which
they believe should be voted upon by the Corporation's shareholders. The
Securities and Exchange Commission has adopted regulations which govern the
inclusion of such proposals in the Corporation's annual proxy materials. No such
proposals were submitted for the 1997 Annual Meeting. Shareholder proposals
intended to be presented at the 1998 Annual Meeting of Shareholders must be
received by the Secretary of the Corporation at its executive office, 23 North
Main Street, P. O. Box 128, Granite Falls, North Carolina 28630 no later than
November 14, 1997 (which is 120 days prior to the expected date of the 1998
Proxy Statement) in order to be eligible for inclusion in the Corporation's
Proxy Ballot and Proxy Statement for the 1998 Annual Meeting.
While the Corporation's Nominating Committee normally recommends and nominates
individuals to serve as directors of the Corporation, shareholders may also
nominate candidates for director, provided that such nominations are made in
writing and a received by the Corporation at its executive offices not later
than December 14, 1997 (which is 90 days prior to the expected date of the 1998
Proxy Statement). The nomination should be sent to the attention of the
Corporation Secretary and must include, concerning the director nominee, the
following information: full name, age, date of birth, educational background and
business experience, including positions held for at least the preceding five
years. The nomination must also include home and business addresses and
telephone numbers and include a signed representation by the nominee to timely
provide all information requested by the Corporation as part of its disclosure
in regard to the solicitation of proxies for the election of directors. The name
of each such candidate for director must be placed in nomination at the Annual
Meeting by a shareholder present in person. The nominee must also be present in
person at the meeting. A vote for a person who has not been duly nominated
pursuant to these requirements is void.
OTHER BUSINESS
Management of the Corporation knows of no other business to be presented to the
meeting. If other matters should properly come before the Annual Meeting or any
adjournment thereof, a vote may be cast pursuant to the accompanying Proxy in
accordance with the judgment of the person or persons voting the same.
All shareholders are urged to attend the Annual Meeting of Shareholders of April
28, 1997 at 10:30 a.m., at Holiday Inn, 138 South Lenoir Boulevard, S.E. (at
Interstate 40, Exit #125), Hickory, North Carolina, and to vote your shares in
person. If you do not plan to attend, please sign and return your Proxy
promptly. A Proxy may be revoked at any time before it is voted, and the giving
of a Proxy will not affect the right of a shareholder to attend the meeting and
vote in person.
By Order of the Board of Directors
Bank of Granite Corporation
Granite Falls, North Carolina
/s/ Randall C. Hall
Granite Falls, North Carolina ----------------------------------
March 19, 1997 Randall C. Hall, Secretary
I-19
<PAGE> 21
(THIS PAGE INTENTIONALLY LEFT BLANK)
I-20
<PAGE> 22
MANAGEMENT'S DISCUSSION
AND ANALYSIS, AND
AUDITED FINANCIAL
STATEMENTS
II-1
<PAGE> 23
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. 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, 1996 compared to the year ended December 31, 1995, the year ended December
31, 1995 compared to the year ended December 31, 1994, and the year ended
December 31, 1994 compared to the year ended December 31, 1993.
1996 COMPARED TO 1995
Net income for 1996 was $12,700,834 or $1.41 per share compared to $11,516,944
or $1.28 per share in 1995. This 10.3% 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 $24,393,811
compared to $23,365,432 in 1995. The increase in interest income was
attributable to increases in loan volume. Approximately $3,137,000 of the
increase in interest income was attributable to increases in volume and
$(954,000) to decreases in interest rates. Gross loans increased $18,595,001 or
6.2%. Interest expense increased $1,154,512 of which approximately $1,290,000
was attributable to increases in growth offset by approximately $(136,000)
attributable to interest rate decreases. Other income increased 20.5% to
$4,965,456 compared to $4,120,865 in 1995. The increase in service charges on
deposit accounts of $264,293 results from growth in deposit accounts. During
1996 the bank continued to place emphasis on non-traditional banking services
such as annuities, leasing, originating mortgage loans and small business
administration loans. In focusing on these products the bank experienced
volatility in earnings commonly associated with such products. Other service
fees and commissions increased $44,898 which was primarily due to increases in
the sales of annuities. Annuity sales fluctuate with interest rates. For the
year ended December 31, 1996, the bank earned $380,984 from the origination of
mortgage loans compared to $406,225 in 1995. Other income increased by $320,362
which was primarily attributable to increases in the sales of the guaranteed
portions of small business administration loans. Such sales generated $437,363
in 1996 compared to $153,287 in 1995. Net gains on securities resulted from
securities being called at a premium as well as the sale of equity investments
at the holding company level. Other expenses increased $364,255 or 3.9% over the
previous year. Salaries and benefits increased $534,140 or 10.2% as a result of
general salary increases, the cost of providing related benefits, and the
employment of additional staff for a new office as well as additional staff to
effectively service loan and deposit growth. The Federal Deposit Insurance
Corporation insurance premiums decreased to $2,000. During 1996 the FDIC
assessment rate was reduced from $0.04 per $100 of deposits to $0.00 per $100 of
deposits. 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. The $2,000 fee reflects a minimum regulatory
assessment.
II-2
<PAGE> 24
1995 COMPARED TO 1994
Net income for 1995 was $11,516,944 or $1.28 per share compared to $9,842,273 or
$1.09 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 grow 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 $50,259 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. The
funds 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(cent) per $100 of
deposit to 4(cent) 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.
1994 COMPARED TO 1993
Net income for 1994 was $9,842,273 or $1.09 per share compared to $8,749,266 or
$.97 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 8.50% 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,
II-3
<PAGE> 25
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.
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 $24,393,811, $23,365,432, and $20,059,106
for 1996, 1995 and 1994 respectively, representing an increase of 4.4% for 1996
over 1995, 16.5% for 1995 over 1994, and 18.9% for 1994 over 1993. Interest rate
spreads have been at least 4.6% 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.
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
FOR THE YEARS ENDED DECEMBER 31,
Dollars in Thousands
<TABLE>
<CAPTION>
1996 1995 1994
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 $ 19,867 $ 19,462 $ 18,744
Net Loans (1) 304,009 $ 31,099 10.2% 282,625 $ 29,848 10.6% 252,321 $ 23,368 9.3%
Taxable securities 69,907 4,316 6.2% 62,128 3,623 5.8% 62,497 3,290 5.3%
Non-taxable securities (2) 57,063 3,022 8.1% 50,864 2,845 8.6% 49,087 2,719 8.5%
Federal funds sold and securities
purchased under agreement to
resell 5,735 313 5.5% 4,163 251 6.0% 4,053 196 4.8%
Bank premises and equipment, net 8,204 8,104 7,575
Other assets 7,185 5,731 4,897
Total assets $471,970 $433,077 $399,174
Total interest earning assets $441,620 $ 38,750 9.1% $403,907 $ 36,567 9.4% $371,707 $ 29,573 8.4%
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing deposits $315,869 $ 14,166 4.5% $291,056 $ 13,025 4.5% $271,408 $ 9,383 3.5%
Non-interest bearing deposits 70,014 67,223 62,169
Federal funds purchased and
securities sold under
agreement to repurchase 3,954 188 4.8% 3,323 176 5.3% 3,490 127 3.6%
Other liabilities 4,144 2 3,314 1 2,455 4 .2%
Shareholders' equity 77,989 68,161 59,652
Total liabilities and shareholders'
equity $471,970 $433,077 $399,174
Total interest bearing liabilities $319,823 $ 14,356 4.5% $294,379 $ 13,202 4.5% $274,956 $ 9,514 3.5%
Net interest earned and net yield
on earning assets (3) $ 24,394 5.5% $ 23,365 6.2% $ 20,059 5.4%
Interest rate spread (4) 4.6% 4.9% 4.9%
</TABLE>
(1) Non-accrual loans have been included
(2) Yields on tax-exempt investments have been adjusted to tax equivalent
basis using 35% for 1996, 1995 and 1994.
(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> 26
INTEREST RATE/VOLUME ANALYSIS
FOR THE YEAR ENDED DECEMBER 31,
Dollars in thousands
<TABLE>
<CAPTION>
1996 COMPARED TO 1995 1995 COMPARED TO 1994
VOLUME (1) RATE (1) TOTAL VOLUME (1) RATE (1) TOTAL
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Taxable investment securities $ 467 $ 226 $ 693 $ (20) $ 353 $ 333
Non-taxable investment securities 338 (161) 177 99 27 126
Federal funds sold 90 (28) 62 5 50 55
Loans 2,242 (991) 1,251 3,015 3,465 6,480
--------------------------------------------------------------------
Total $3,137 $(954) $2,183 $ 3,099 $3,895 $6,994
--------------------------------------------------------------------
INTEREST BEARING LIABILITIES
Savings deposits $ 108 $ (3) $ 105 $ 29 $ 34 $ 63
Other time deposits 1,141 (105) 1,036 977 2,455 3,432
Other 41 (28) 13 (46) 238 192
--------------------------------------------------------------------
Total $1,290 $(136) $1,154 $ 960 $2,727 $3,687
--------------------------------------------------------------------
</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. 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, 1996 core deposits totaled $309,430,947 or 77.8% of the
Company's total deposits.
The other principal method of funding utilized by the Company is through large
denomination certificates of deposit, federal funds purchased, repurchase
agreements and other short-term borrowings. The Company's policy is to emphasize
core deposit growth rather than growth of purchased liabilities as the cost of
purchased liabilities are greater.
The majority of the Company's 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 its interest margin (gap between interest earning assets compared to
interest-bearing liabilities) is to maximize net interest income while
maintaining a stable deposit base. The Company's deposit base is not generally
subject to volatility experienced in national financial markets in recent years;
however, the Company does realize the importance of minimizing such volatility
while at the same time maintaining and improving earnings. A common method used
to manage interest rate sensitivity is to measure, over various time periods,
the interest rate sensitivity positions, or gaps; however, this method addresses
on the magnitude of timing differences and does not address earnings or market
value. Therefore, management prepares on a regular basis earnings projections
based on a range of interest rate scenarios of rising, flat and declining rates
in order to more accurately measure interest rate risk.
Interest-bearing liabilities and the loan portfolio are generally repriced to
current market rates. The Bank's balance sheet is asset-sensitive, meaning that
in a given period there will be more assets than liabilities subject to
immediate repricing as the market rates change. Because a major portion of the
loan portfolio is repriced immediately as market rates change and exceed
immediately sensitive interest-bearing deposits, the earning position could
improve in a rising rate environment and could deteriorate in a declining rate
environment, depending on the correlation of rate changes in these two
categories.
II-5
<PAGE> 27
INTEREST RATE SENSITIVITY
DECEMBER 31, 1996
Dollars in thousands
<TABLE>
<CAPTION>
INTEREST SENSITIVITY IN DAYS
1-90 91-180 181-365 Total NON-SENSITIVE Total
Days Days Days AND SENSITIVE
OVER ONE YEAR
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Investable balance from Federal
Home Loan Bank $ 10 $ 10 $ 10
Federal funds sold 4,500 4,500 4,500
Securities:
U.S. Treasury 1,000 $ 4,504 $ 3,001 8,505 $ 10,984 19,489
U.S. Government agencies 2,000 1,497 1,498 4,995 32,210 37,205
States and political subdivisions 800 1,962 325 3,087 57,649 60,736
Other 455 998 1,453 9,466 10,919
Loans
Real estate:
Construction 28,585 777 737 30,099 2,136 32,235
Mortgage 111,930 1,034 3,248 116,212 17,567 133,779
Commercial, financial and agricultural 111,064 1,764 2,678 115,506 963 116,469
Consumer 17,080 3,349 4,620 25,049 13,165 38,214
All other 194 194 194
--------------------------------------------------------------------------
Total interest earning assets $277,163 $ 15,342 $ 17,105 $309,610 $144,140 $453,750
--------------------------------------------------------------------------
Interest Bearing Liabilities
Interest bearing deposits:
Savings and NOW accounts $ 60,575 $ 60,575 $ 60,575
Money market accounts 27,290 27,290 27,290
Time deposits of $100,000 or more 53,684 $ 16,058 $ 10,982 80,724 7,543 88,267
Other time deposits 50,380 33,400 14,058 97,838 22,976 120,814
Federal funds purchased and securities
sold under agreements to repurchase 2,955 2,955 2,955
--------------------------------------------------------------------------
Total interest bearing liabilities $194,884 $ 49,458 $ 25,040 $269,382 $ 30,519 $299,901
--------------------------------------------------------------------------
Interest sensitivity gap $ 82,279 $(34,116) $ (7,935) $ 40,228
Cumulative gap $ 82,279 $ 48,163 $ 40,228 $ 40,228
Interest earning assets as a percentage
of interest bearing liabilities 142% 31% 68% 114%
--------------------------------------------------
</TABLE>
*All securities as presented are at amortized cost
*Loans are gross of net origination fees/costs.
The following table presents the maturity and distribution of the Bank's loans
by type, including maturity and fixed rate loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Dollars in thousands
<TABLE>
<CAPTION>
DECEMBER 31, 1996
ONE TO FIVE FIVE YEARS OR
LOAN MATURITIES ONE YEAR YEARS MORE TOTAL
<S> <C> <C> <C> <C>
Real Estate:
Construction $ 12,499 $ 12,191 $ 7,545 $ 32,235
Mortgage 29,370 51,769 52,640 133,779
Commercial, financial and
agricultural 63,523 43,993 8,953 116,469
Consumer 8,933 28,085 1,197 38,214
All other 85 39 70 194
----------------------------------------------------------------------------------
Total $ 114,410 $ 136,077 $ 70,405 $ 320,891
----------------------------------------------------------------------------------
Predetermined rate, maturity
greater than one year $ 31,216 $ 4,386 $ 35,602
Variable rate or maturing within
one year $ 114,410 104,861 66,019 285,289
----------------------------------------------------------------------------------
Total $ 114,410 $ 136,077 $ 70,405 $ 320,891
----------------------------------------------------------------------------------
</TABLE>
*Loans are gross of net origination fees / costs.
II-6
<PAGE> 28
The Bank's yield on interest-bearing liabilities remained level at 4.5% during
1996 and in 1995. The Bank's primary growth in deposits are reflected in
non-time deposits, which increased $11,186,682. Rate sensitivity consumers chose
to place funds in lower yielding, yet highly liquid interest bearing demand
deposit accounts in anticipation of rising rates. An increased customer
awareness of interest rates increases the importance of rate management by the
Company. The Company's 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 Bank's 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.
AVERAGE DEPOSITS
FOR THE YEARS ENDED DECEMBER 31,
Dollars in thousands
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Non-interest bearing deposits $ 70,014 $ 67,223 $ 62,169
Interest bearing deposits 315,869 291,056 271,408
-----------------------------------------------------
Total $ 385,883 $ 358,279 $ 333,577
-----------------------------------------------------
</TABLE>
The above table includes certificates of deposits $100,000 and over which at
December 31, 1996 totaled $88,267,000. Of this total $53,683,000 had scheduled
maturities or repriced within three months, $16,058,000 within six months,
$10,982,000 within six to twelve months and $7,544,000 within thirteen to sixty
months.
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, 1996 the Company's ratio of total capital to
risk-adjusted assets was 24.6%. 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 Company has made both consumer and commercial loans within its
market area. The Company generally considers its market to be Caldwell, Catawba
and Burke counties of North Carolina. Total loans at December 31, 1996 were
$320,280,400. This compares with $301,685,399 at December 31, 1995, an increase
of $18,595,001 or 6.2%. The Company places emphasis on consumer based
installment loans and commercial loans to small and medium sized business. The
Company has a diversified loan portfolio with no concentrations to any one
borrower, industry or market region. The amounts and types of loans outstanding
for the past five years ended December 31 are shown on the following table.
II-7
<PAGE> 29
LOANS
DECEMBER 31,
Dollars in thousands
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Real Estate:
Construction $ 32,234 $ 27,108 $ 20,728 $ 18,020 $ 16,219
Mortgage 133,779 118,697 98,953 85,456 65,688
Commercial, financial and agricultural 116,469 120,537 117,002 111,076 121,795
Consumer 38,214 35,620 33,156 29,233 26,010
All other loans 194 241 419 377 259
-------------------------------------------------------------------------
Subtotal 320,890 302,203 270,258 244,162 229,971
Net deferred origination costs (fees) (610) (518) (407) (337) (193)
-------------------------------------------------------------------------
Total $ 320,280 $ 301,685 $ 269,851 $ 243,825 $ 229,778
-------------------------------------------------------------------------
Nonperforming assets at December 31 are as follows:
Restructured loans $ 253 $ 350
Foreclosed properties 273 $ 281
Nonaccrual loans $ 409 $ 231 744 86 174
Loans 90 days or more past due
and still accruing 649 441 1,231 685 649
-------------------------------------------------------------------------
Total $ 1,058 $ 672 $ 2,228 $ 1,394 $ 1,104
-------------------------------------------------------------------------
</TABLE>
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed hereunder, or under "Loans" or
"Asset Quality" narrative discussions do not (i) represent or result from trends
or uncertainties that management expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information that causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
The composition of the portfolio remained level with real estate loans
comprising 52% of the portfolio compared to 48% in 1995; commercial loans
comprising 36% of the portfolio compared to 40% in 1995; and consumer loans
comprising 12% compared to 12% in 1995. Commercial loans of $116,468,706,
consumer loans of $38,214,193 and real estate mortgage loans of $133,778,880 are
loans for which the principal source of repayment is derived from the ongoing
cash flow of the business. Real estate construction loans of $32,234,274 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. Most of the loans measured by fair value of the
underlying collateral are commercial loans others consists of small balance
II-8
<PAGE> 30
homogenous loans and are measured collectively. The Bank classifies a loan
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. At December 31, 1996 and December 31, 1995, the
recorded investment in loans that are considered to be impaired under SFAS No.
114 was $882,200 ($409,305 of which is on non-accrual basis) and $516,887
($228,729 of which was on non-accrual basis) respectively. The average recorded
balance of impaired loans during 1996 and 1995 was not significantly different
from the balance at December 31, 1996 and December 31, 1995. The related
allowance for loan losses determined in accordance with SFAS No. 114 for these
loans is $383,919 and $284,444 at December 31, 1996 and December 31, 1995
respectively. For the years ended December 31, 1996 and December 31, 1995, the
Bank recognized interest income on those impaired loans of approximately $26,102
and $27,085 respectively.
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 sizable additions to the allowance, thus
necessitating similarly sizable charges to operations. The allowance for loan
losses was 1.52%, 1.56% and 1.50% of net loans outstanding at December 31, 1996,
1995 and 1994, 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 .21%, .16% and .12% at December 31, 1996, 1995 and 1994,
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.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
FOR THE YEARS ENDED DECEMBER 31,
Dollars in thousands
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $4,645 $3,996 $3,603 $3,391 $2,991
----------------------------------------------------------
Loans charged off:
Commercial, financial and agricultural 533 297 136 331 330
Credit cards and related plans 17 8 10 3 17
Installment loans to individuals 192 288 246 63 203
----------------------------------------------------------
Total charge-offs 742 593 392 397 550
----------------------------------------------------------
Recoveries of loans previously charge off:
Commercial, financial and agricultural 27 40 57 5 24
Credit cards and related plans 5 5 1 3 8
Installment loans to individuals 39 80 23 26 38
----------------------------------------------------------
Total recoveries 71 125 81 34 70
----------------------------------------------------------
Net charge-offs 671 468 311 363 480
----------------------------------------------------------
Additions charged to operations 820 1,117 704 575 880
----------------------------------------------------------
Balance at end of year $4,794 $4,645 $3,996 $3,603 $3,391
----------------------------------------------------------
Ratio of net charge-offs during the year to
average loans outstanding during the period .21% .16% .12% .15% .21%
</TABLE>
II-9
<PAGE> 31
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
FOR THE YEARS ENDED DECEMBER 31,
Dollars in thousands
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $2,718 36.3% $2,717 39.9% $2,398 43.4% $1,667 45.6% $1,462 53.0%
Real Estate 1,378 51.8% 1,259 48.2% 1,106 44.3% 1,138 42.3% 983 35.6%
Consumer 518 11.9% 498 11.8% 400 12.3% 617 12.0% 455 11.3%
All other Loans 0 0 0 0 0 0 1 .1% 1 .1%
Unallocated 180 N/A 171 .1% 92 N/A 180 N/A 490 N/A
--------------------------------------------------------------------------------------------------
Total $4,794 100.0% $4,645 100.0% $3,996 100.0% $3,603 100.0% $3,391 100.0%
--------------------------------------------------------------------------------------------------
</TABLE>
INVESTMENT SECURITIES
At December 31, 1996, the securities classified as available for sale, carried
at market value, totaled $51,195,230 with an amortized cost of $50,899,794.
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 12 months, U.S.
Government Agencies with an average life of 2 years 9 months, 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 movement
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 $77,449,108 with a market value of $78,728,117 at
December 31, 1996. 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 4 months, U.S. Government Agencies with an average life of 2 years 10
months, and municipal bonds with an average life of 5 years 3 months. During the
year $34,177,779 in securities matured; $311,205 in proceeds were collected from
securities sold. The proceeds from maturities were reinvested along with funds
in excess of loan consumer demand.
INVESTMENT SECURITIES MATURITIES AND YIELDS
DECEMBER 31, 1996
Dollars in thousands
<TABLE>
<CAPTION>
AFTER ONE YEAR BUT AFTER FIVE YEARS BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
<S> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury $ 7,004 6.67% $ 6,489 6.62%
U.S. Government Agencies 3,497 5.85% 21,991 6.90% $ 1,000 7.51%
Others 1,453 8.42% 6,635 7.98% 2,199 6.65% $ 632 6.31%
------------------------------------------------------------------------------
Total $11,954 6.64% $35,115 7.05% $ 3,199 6.92% $ 632 6.31%
------------------------------------------------------------------------------
Investment Securities:
U.S. Treasury $ 1,501 6.32% $ 4,495 6.25%
U.S. Government Agencies 1,498 6.42% 9,219 6.84%
States and political subdivisions 3,087 8.19% 26,442 7.95% $25,955 8.44% $5,252 9.00%
------------------------------------------------------------------------------
Total $ 6,086 7.29% $40,156 7.50% $25,955 8.44% $5,252 9.00%
------------------------------------------------------------------------------
</TABLE>
*Yield data is presented on a tax equivalent basis.
II-10
<PAGE> 32
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> 33
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 (the "Company") as of December 31, 1996 and 1995,
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, 1996. 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, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 26, 1997
II-12
<PAGE> 34
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note 1):
Cash and due from banks $ 24,336,258 $ 19,621,179
Interest-bearing deposits 10,025
Federal funds sold 4,500,000 1,500,000
------------ ------------
Total cash and cash equivalents 28,846,283 21,121,179
------------ ------------
Investment securities (Notes 1 and 2):
Available for sale, at fair value (amortized cost of $50,899,794 and
$49,387,963 at December 31, 1996 and 1995, respectively) 51,195,230 50,129,581
------------ ------------
Held to maturity, at amortized cost (fair value of $78,728,117 and
$76,413,677 at December 31, 1996 and 1995, respectively) 77,449,108 74,141,480
------------ ------------
Loans (Note 3) 320,280,400 301,685,399
Allowance for loan losses (Notes 1 and 4) (4,793,889) (4,644,725)
------------ ------------
Net loans 315,486,511 297,040,674
------------ ------------
Premises and equipment, net (Notes 1, 5 and 9) 8,103,713 8,153,776
------------ ------------
Accrued interest receivable 4,272,255 4,201,673
------------ ------------
Other assets 2,196,756 1,663,969
------------ ------------
TOTAL $487,549,856 $456,452,332
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 78,480,411 $ 72,686,095
NOW accounts 60,575,240 56,047,252
Money market accounts 27,290,026 27,341,113
Savings 22,271,033 21,355,568
Time deposits of $100,000 or more 88,267,044 84,145,051
Other time deposits 120,814,237 115,468,065
------------ ------------
Total deposits 397,697,991 377,043,144
Securities sold under agreements to repurchase (Note 10) 2,955,234 2,982,870
Accrued interest payable 1,978,712 1,872,764
Other liabilities 1,611,805 933,303
------------ ------------
Total liabilities 404,243,742 382,832,081
------------ ------------
COMMITMENTS AND CONTINGENCIES
(Notes 9 and 13)
SHAREHOLDERS' EQUITY (Notes 1, 7 and 11):
Common stock, $1.00 par value, authorized - 15,000,000
shares; issued and outstanding - 1996 - 9,008,570 shares;
1995 - 5,984,604 shares 9,008,570 5,984,604
Capital surplus 21,690,069 21,378,741
Net unrealized gain on securities available for sale, net
of deferred income taxes of $118,293 and $291,307
at December 31, 1996 and 1995, respectively (Notes 1 and 6) 177,143 450,311
Retained earnings 52,430,332 45,806,595
------------ ------------
Total shareholders' equity 83,306,114 73,620,251
------------ ------------
TOTAL $487,549,856 $456,452,332
============ ============
</TABLE>
See notes to consolidated financial statements.
II-13
<PAGE> 35
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $31,099,202 $29,847,478 $23,367,806
Interest-bearing deposits 25
Federal funds sold 312,516 251,047 195,777
Investments:
U. S. Treasury 1,144,098 961,701 978,074
U. S. Government agencies 2,442,745 2,033,620 1,871,600
States and political subdivisions 3,022,204 2,845,134 2,719,179
Other 729,071 627,990 440,966
----------- ----------- -----------
Total interest income 38,749,861 36,566,970 29,573,402
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 4,973,875 4,748,413 3,004,682
Other time and savings deposits 9,192,464 8,276,096 6,378,081
Federal funds purchased and securities sold under
agreements to repurchase 188,176 175,549 127,175
Other borrowed funds 1,535 1,480 4,358
----------- ----------- -----------
Total interest expense 14,356,050 13,201,538 9,514,296
----------- ----------- -----------
NET INTEREST INCOME 24,393,811 23,365,432 20,059,106
PROVISION FOR LOAN LOSSES (Notes 1 and 4) 820,000 1,117,000 704,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 23,573,811 22,248,432 19,355,106
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 3,107,378 2,843,085 2,772,822
Other service fees and commissions 1,021,849 976,951 1,027,210
Gain (loss) on sales of securities, net 174,086 (40,952)
Other 662,143 341,781 456,465
----------- ----------- -----------
Total other income 4,965,456 4,120,865 4,256,497
----------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 4,560,504 4,216,795 3,903,589
Profit-sharing and employee benefits (Note 8) 1,201,450 1,011,019 1,066,418
Occupancy expense, net 477,218 463,655 439,883
Equipment rentals, depreciation and maintenance 856,641 832,181 736,484
Federal Deposit Insurance Corporation insurance
premiums 2,000 395,372 727,874
Other 2,520,263 2,334,799 2,272,557
----------- ----------- -----------
Total other expenses 9,618,076 9,253,821 9,146,805
----------- ----------- -----------
</TABLE>
II-14
<PAGE> 36
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME -- Continued
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INCOME BEFORE INCOME TAXES $18,921,191 $17,115,476 $14,464,798
INCOME TAXES (Notes 1 and 6) 6,220,357 5,598,532 4,622,525
----------- ----------- -----------
NET INCOME $12,700,834 $11,516,944 $ 9,842,273
=========== =========== ===========
PER SHARE AMOUNTS (Note 1):
Net income $ 1.41 $ 1.28 $ 1.09
=========== =========== ===========
Cash dividends $ 0.35 $ 0.29 $ 0.25
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
II-15
<PAGE> 37
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<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, 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 change in 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
--------- ---------- ----------- ----------- ---------- -----------
Net income 12,700,834 12,700,834
Cash dividends (3,058,856) (3,058,856)
Shares issued under stock option plan 23,139 23,139 311,328 334,467
Net change in unrealized gain on
securities available for sale (273,168) (273,168)
Stock split shares issued 3,000,827 3,000,827 (3,000,827)
Cash paid for fractional shares (17,414) (17,414)
--------- ---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 9,008,570 $9,008,570 $21,690,069 $52,430,332 $ 177,143 $83,306,114
========= ========== =========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
II-16
<PAGE> 38
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest received $ 38,841,410 $ 36,121,165 $ 29,440,507
Fees and commissions received 4,412,877 4,161,817 4,256,497
Interest paid (14,250,102) (12,571,527) (9,279,256)
Cash paid to suppliers and employees (8,144,162) (8,941,068) (7,729,308)
Income taxes paid (6,241,649) (5,744,696) (4,462,586)
------------ ------------ ------------
Net cash provided by operating activities 14,618,374 13,025,691 12,225,854
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from maturities of securities
available for sale 19,300,000 14,586,063 9,000,000
Proceeds from maturities of securities held
to maturity 14,877,779 9,405,000 11,975,000
Purchases of securities available for sale (20,975,780) (12,693,750) (12,319,707)
Purchases of securities held to maturity (18,320,710) (21,764,932) (9,632,419)
Proceeds from sales of securities available for sale 311,205 894,378
Net increase in loans (19,265,837) (32,783,187) (26,337,243)
Capital expenditures (858,600) (622,914) (2,133,462)
Proceeds from sales of equipment 153,265 469 16,587
Proceeds from sales of other real estate owned 429,665
------------ ------------ ------------
Net cash used in investing activities (24,778,678) (42,549,208) (29,431,244)
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net increase in demand deposits,
NOW accounts and savings accounts 11,186,682 4,238,209 7,553,182
Net increase in certificates of deposit 9,468,165 29,474,887 8,261,946
Net increase (decrease) in federal
funds purchased and securities
sold under agreements to repurchase (27,636) (297,985) 573,270
Net decrease in other borrowed funds (21,000) (21,000)
Net proceeds from issuance of common
stock 334,467 388,138 284,394
Dividends paid (3,058,856) (2,628,388) (2,237,479)
Cash paid for fractional shares (17,414) (14,953)
------------ ------------ ------------
Net cash provided by financing activities 17,885,408 31,153,861 14,399,360
------------ ------------ ------------
</TABLE>
II-17
<PAGE> 39
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS -- Continued
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 7,725,104 $ 1,630,344 $(2,806,030)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 21,121,179 19,490,835 22,296,865
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $28,846,283 $21,121,179 $19,490,835
=========== =========== ===========
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $12,700,834 $11,516,944 $ 9,842,273
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 758,335 700,477 648,960
Provision for loan losses 820,000 1,117,000 704,000
Premium amortization and discount accretion, net 162,133 123,142 154,492
Deferred income taxes 18,723 (364,386) (77,608)
Net (gain) loss on sale of securities available for sale (159,049) 40,952
Gain on calls of securities held to maturity (15,039)
(Gain) loss on disposal of equipment (2,937) 733 33,295
Loss on sale of other real estate owned 50,816
Increase in accrued interest receivable (70,582) (568,947) (287,387)
Increase in accrued interest payable 105,948 630,011 235,040
(Increase) decrease in other assets (378,493) (29,714) 224,417
Increase (decrease) in other liabilities 678,501 (191,337) 748,372
----------- ----------- -----------
Total adjustments 1,917,540 1,508,747 2,383,581
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $14,618,374 $13,025,691 $12,225,854
=========== =========== ===========
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 $ 3,000,827 $ 1,190,958
Unrealized (gain) loss on securities available
for sale $ 446,182 $(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 $ (173,014) $ 760,551 $ (469,244)
</TABLE>
See notes to consolidated financial statements.
II-18
<PAGE> 40
BANK OF GRANITE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
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, short-term interest bearing deposits, and
federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
Investment Securities - 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 consolidated 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 consolidated
shareholders' equity. Gains and losses on held for investment securities
are recognized at the time of sale based upon the specific identification
method. Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in consolidated earnings as
realized losses. Premiums and discounts are recognized in interest income
using the interest method over the period to maturity. Transfers of
securities between classifications are accounted for at fair value. No
securities have been classified as trading securities.
In December 1995, the Company adopted the Financial Accounting Standards
Board ("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 transferred is disclosed as a non-cash transaction in
the consolidated statements of cash flows.
II-19
<PAGE> 41
Premises and Equipment and Other Long-Lived Assets - 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.
On January 1, 1996, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, which requires that
long-lived assets and certain identifiable intangibles to be held and
used, be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows is less than the stated
amount of the asset, an impairment loss is recognized. The adoption of
SFAS No. 121 had no material effect on the Bank's financial statements.
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 SFAS No. 114, Accounting by Creditors for Impairment of a
Loan (subsequently amended by SFAS No. 118), on January 1, 1995. Loans
that are deemed to be impaired (i.e., probable that the Bank will be
unable to collect all amounts due according to the terms of the loan
agreement) are 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. A valuation reserve is
established to record the difference between the stated loan amount and
the present value or market value of the impaired loan. Impaired loans may
be valued on a loan-by-loan basis (e.g., loans with risk characteristics
unique to an individual borrower) or on an aggregate basis (e.g., loans
with similar risk characteristics). 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 consolidated
statements of income 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.
II-20
<PAGE> 42
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 (1996 - 9,039,921; 1995 -
8,994,557 and 1994 - 8,978,415). The weighted average number of shares of
common stock and dilutive common stock equivalents outstanding and all per
share amounts have been adjusted to reflect the three for two stock split
effected in the form of a 50% stock dividend in 1996. Dividends per share
represent amounts declared by the Board of Directors.
Income and Expense - The Company utilizes the accrual method of
accounting, except for immaterial amounts of loan income and 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 immediate recognition of certain loan origination fees
and certain loan origination costs when new loans are originated 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.
Stock-Based Compensation - The Company measures compensation costs related
to employee stock options using the intrinsic value of the equity
instrument granted (i.e., the excess of the market price of the stock to
be issued over the exercise price of the equity instrument) in accordance
with Accounting Principles Board Opinion No. 25 rather than the fair value
of the equity instrument granted in accordance with SFAS No. 123. See Note
7 for further information.
New Accounting Standards - The Financial Accounting Standards Board has
issued SFAS No. 125, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 125 will supersede SFAS No. 122,
Accounting for Mortgage Servicing Rights. SFAS No. 125 is effective
beginning January 1, 1997, and will apply to transactions in which a
transfer of a financial asset has occurred. When such a transfer has
occurred, the Bank would recognize the financial servicing assets it
controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered, and derecognize liabilities when
extinguished. Management believes that the effect on the financial
statements of implementing this standard will not be material.
II-21
<PAGE> 43
2. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1996 and 1995 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, 1996:
U. S. Treasury due:
Within 1 year $ 7,004 $ 7,031
After 1 year but within 5 years 6,489 6,483
------- -------
Total U.S. Treasury 13,493 $ 65 $ (44) 13,514
------- ------ ------- -------
U. S. Government agencies due:
Within 1 year 3,497 3,501
After 1 year but within 5 years 21,991 21,940
After 5 years but within 10 years 1,000 989
------- ------ ------- -------
Total U.S. Government agencies 26,488 74 (132) 26,430
------- ------ ------- -------
Others due:
Within 1 year 1,453 1,482
After 1 year but within 5 years 6,635 6,885
After 5 years but within 10 years 2,199 2,150
After 10 years 632 734
------- ------ ------- -------
Total others 10,919 451 (119) 11,251
------- ------ ------- -------
Total at December 31, 1996 $50,900 $ 590 $ (295) $51,195
======= ====== ======= =======
Held to maturity securities
consist of the following:
At December 31, 1996:
U. S. Treasury due:
Within 1 year $ 1,501 $ 1,504
After 1 year but within 5 years 4,495 4,486
------- -------
Total U.S. Treasury 5,996 $ 12 $ (18) 5,990
------- ------ ------- -------
U. S. Government agencies due:
Within 1 year 1,498 1,501
After 1 year but within 5 years 9,219 9,199
------- ------ ------- -------
Total U.S. Government agencies 10,717 32 (49) 10,700
------- ------ ------- -------
State and political subdivisions due:
Within 1 year 3,087 3,091
After 1 but within 5 years 26,442 26,995
After 5 years but within 10 years 25,955 26,596
After 10 years 5,252 5,356
------- ------ ------- -------
Total state and political
subdivisions 60,736 1,529 (227) 62,038
------- ------ ------- -------
Total at December 31, 1996 $77,449 $1,573 $ (294) $78,728
======= ====== ======= =======
</TABLE>
II-22
<PAGE> 44
Sales of securities available for sale for the year ended December 31,
1996 resulted in realized gross gains of $159,790 and calls of a security
at a discount resulted in a realized gross loss of $743. Calls of
securities held to maturity resulted in gross gains of $15,075 and gross
losses of $36. Cost of securities sold were determined on the specific
identification method.
<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-23
<PAGE> 45
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.
Securities with an amortized cost of $41,724,705 and $40,539,518 were
pledged as collateral for public deposits and for other purposes as
required by law at December 31, 1996 and 1995, respectively.
3. LOANS
Loans at December 31, 1996 and 1995, classified by type, are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Real estate:
Construction $ 32,234,274 $ 27,108,399
Mortgage 133,778,880 118,697,296
Commercial, financial and agricultural 116,468,706 120,536,374
Consumer 38,214,193 35,620,407
All other loans 194,228 241,127
------------ ------------
Subtotal 320,890,281 302,203,603
Net deferred origination fees (609,881) (518,204)
------------ ------------
Total $320,280,400 $301,685,399
============ ============
</TABLE>
Nonperforming assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Nonaccrual loans $ 409,305 $231,654
Loans 90 days or more past due and still accruing 648,480 440,686
---------- --------
Total $1,057,785 $672,340
========== ========
</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 1996, 1995 and 1994 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, 1996 and 1995, directors' and
principal officers' direct and indirect indebtedness to the Bank
aggregated $548,699 and $482,270, respectively. During 1996, 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> 46
4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $4,645 $3,996 $3,603
Loans charged off:
Commercial, financial and agricultural 533 297 136
Credit cards and related plans 17 8 10
Installment loans to individuals 192 288 246
------ ------ ------
Total charge-offs 742 593 392
------ ------ ------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 27 40 57
Credit cards and related plans 5 5 1
Installment loans to individuals 39 80 23
------ ------ ------
Total recoveries 71 125 81
------ ------ ------
Net charge-offs 671 468 311
------ ------ ------
Additions charged to operations 820 1,117 704
------ ------ ------
Balance at end of year $4,794 $4,645 $3,996
====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the period 0.21% 0.16% 0.12%
====== ====== ======
</TABLE>
At December 31, 1996 and 1995, the recorded investment in loans that are
considered to be impaired was $882,200 ($409,305 of which is on a
nonaccrual basis) and $516,887 ($228,729 of which is on a nonaccrual
basis), respectively. The average recorded balance of impaired loans
during 1996 and 1995 is not significantly different from the balance at
December 31, 1996 and 1995. The related allowance for loan losses
determined in accordance with SFAS No. 114 for these loans is $383,919 and
$284,444 at December 31, 1996 and 1995, respectively. For the years ended
December 31, 1996 and 1995, the Bank recognized interest income on those
impaired loans of approximately $26,102 and $27,085, respectively.
II-25
<PAGE> 47
5. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1996 and 1995 follow:
<TABLE>
<CAPTION>
Premises and
Accumulated Equipment,
Cost Depreciation Net
<S> <C> <C>
December 31, 1996:
Land $ 1,528,137 $1,528,137
Buildings 6,615,192 $1,733,859 4,881,333
Furniture and equipment 5,119,214 3,442,751 1,676,463
Construction in progress 17,780 17,780
----------- ---------- ----------
Total $13,280,323 $5,176,610 $8,103,713
=========== ========== ==========
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
=========== ========== ==========
</TABLE>
6. INCOME TAXES
The components of the income tax provision for the years ended December
31, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Current $6,239,080 $5,962,918 $4,700,133
Deferred (18,723) (364,386) (77,608)
---------- ---------- ----------
Total $6,220,357 $5,598,532 $4,622,525
========== ========== ==========
</TABLE>
The change in deferred taxes of ($173,014) and $760,551 related to
unrealized gains and losses on securities available for sale were
allocated to shareholders' equity in the years ended December 31, 1996 and
1995, respectively.
II-26
<PAGE> 48
A reconciliation of reported income tax expense for the years ended
December 31, 1996, 1995 and 1994 to the amount of tax expense computed by
multiplying income before income taxes by the statutory federal income tax
rate of 35% for 1996, 35% for 1995 and 34% for 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Tax provision at statutory rate $6,622,417 $5,990,417 $5,062,679
Increase (decrease) in income taxes resulting
from:
Tax-exempt interest income (984,222) (907,226) (902,044)
State income taxes net of federal tax benefit 645,091 592,397 518,154
Other (62,929) (77,056) (56,264)
---------- ---------- ----------
Income taxes reported $6,220,357 $5,598,532 $4,622,525
========== ========== ==========
</TABLE>
The tax effect of the cumulative temporary differences and carryforwards
that gave rise to the deferred tax assets and liabilities at December 31,
1996 and 1995 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
Assets Liabilities Total
<S> <C> <C> <C>
Excess book over tax bad debt expense $1,582,624 $1,582,624
Excess tax over book depreciation $(398,094) (398,094)
Unrealized gain on securities
available for sale (118,293) (118,293)
Other, net 260,939 (331,878) (70,939)
---------- --------- ----------
Total $1,843,563 $(848,265) $ 995,298
========== ========= ==========
</TABLE>
<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>
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> 49
7. STOCK OPTIONS
At December 31, 1996, 1995 and 1994, 118,288, 137,664 and 163,159 shares
of common stock were reserved for stock options granted under the
Company's employee stock option plan, respectively, and 0, 20,154 and
32,654 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, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
Option Price
Shares Per Share Total
<S> <C> <C> <C>
Outstanding at December 31, 1996 118,288 $10.45 - $20.67 $1,863,729
Outstanding at December 31, 1995 137,664 $8.64 - $18.67 $1,907,614
Granted:
1996 22,779 $20.67 $ 470,842
1995 28,474 $17.33 - $17.50 $ 493,797
1994 36,282 $15.73 - $18.67 $ 584,025
Exercised:
1996 32,106 $8.64 - $18.67 $ 334,453
1995 39,593 $7.25 - $15.73 $ 388,138
1994 36,903 $9.39 - $15.20 $ 284,394
Expired:
1996 10,049 $15.20 - $20.67 $ 180,274
1995 14,876 $8.64 - $15.73 $ 198,248
1994 1,482 $8.75 - $15.73 $ 20,430
</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, 1996 are exercisable as follows:
<TABLE>
<CAPTION>
Year Shares
<S> <C>
1997 91,617
1998 13,809
1999 8,605
2000 4,257
</TABLE>
II-28
<PAGE> 50
The Company accounts for compensation costs related to the Company's
employee stock option plan in accordance with Accounting Principles Board
Opinion No. 25; accordingly, no compensation cost has been recognized for
stock option awards as the fair value of the options granted do not exceed
the option price at the grant date. Had compensation cost for the
Company's employee stock option plan been determined consistent with SFAS
No. 123, the Company's pro forma net income and earnings per share for the
years ended December 31, 1996, 1995 and 1994 would have been as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Net income:
As reported $12,700,834 $11,516,944 $9,842,273
Pro forma $12,487,000 $11,414,281 $9,673,666
Net income per share:
As reported $1.41 $1.28 $1.09
Pro forma $1.38 $1.27 $1.08
</TABLE>
In estimating the compensation expense associated with SFAS No. 123, using
The Black Scholes Method, the following assumptions were used: a) risk
free rate of 6.11%, b) average expected life of 4.6407 years, c) expected
volatility of 33.4111%, and d) expected dividends of 1.2%.
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 $564,016, $515,718 and
$501,955 for the years ended December 31, 1996, 1995 and 1994,
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 $17,226, $13,665 and $10,929 for the years ended December 31,
1996, 1995 and 1994, respectively.
9. LEASES
Lessee - Operating - The Company leases certain premises and equipment
under operating lease agreements. As of December 31, 1996, 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 $16,457, $32,496 and $47,775 for the years ended December 31, 1996,
1995 and 1994, 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, 1996 are $61,452 (1997 - $61,452).
Rental income received under all operating lease agreements was $67,252,
$75,652 and $77,500 for the years ended December 31, 1996, 1995 and 1994,
respectively.
II-29
<PAGE> 51
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>
1996 1995 1994
<S> <C> <C> <C>
Federal funds purchased:
Maximum amount outstanding at any month-end
during the year $2,000,000 $3,500,000 $5,000,000
Average daily balance outstanding during the
year 121,813 389,372 492,204
Average annual interest rate paid during the
year 5.8% 5.9% 3.8%
Securities sold under agreements to repurchase:
Balance at December 31 $2,955,234 $2,982,870 $3,280,855
Weighted average interest rate at December 31 4.7% 4.8% 4.9%
Maximum amount outstanding at any month-end
during the year $4,803,891 $3,196,222 $3,395,055
Average daily balance outstanding during the
year $3,832,580 $2,933,733 $2,998,020
Average annual interest rate paid during the
year 4.7% 5.2% 3.6%
</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, 1996, the Bank
had undivided profits, as defined, of $69,544,855.
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory - and possibly
additional discretionary - actions by regulators that, if undertaken,
could have a direct material effect on the Bank's assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
II-30
<PAGE> 52
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in
the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1996, that the Company meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, the most recent notification from the FDIC and
FRB categorized the Company as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since that notification that management
believes have changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table (dollars in thousands):
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- ------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital (to Risk Weighted Assets) $87,613 24.6 % $28,463 8.0 % $35,579 10.0 %
Tier I Capital (to Risk Weighted Assets) $83,129 23.4 % $14,232 4.0 % $21,347 6.0 %
Tier I Capital (to Average Assets) $83,129 17.6 % $18,879 4.0 % $23,599 5.0 %
As of December 31, 1995:
Total Capital (to Risk Weighted Assets) $77,409 22.9 % $27,094 6.0 % $33,868 10.0 %
Tier I Capital (to Risk Weighted Assets) $73,170 21.6 % $13,547 4.0 % $20,321 6.0 %
Tier I Capital (to Average Assets) $73,170 16.9 % $17,323 4.0 % $21,654 5.0 %
</TABLE>
The average reserve balance required to be maintained under the
requirements of the Federal Reserve was approximately $10,713,000 for the
year ended December 31, 1996. 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 1996 1995
<S> <C> <C>
Assets:
Cash on deposit with bank subsidiary $ 554,879 $ 190,357
Investment in subsidiary bank at equity 81,274,287 71,930,488
Other investments 1,686,437 1,487,552
Other 48,507 97,118
----------- -----------
Total $83,564,110 $73,705,515
=========== ===========
Liabilities and Shareholders' Equity:
Other liabilities $ 257,996 $ 85,264
Shareholders' equity 83,306,114 73,620,251
----------- -----------
Total $83,564,110 $73,705,515
=========== ===========
</TABLE>
II-31
<PAGE> 53
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------------------
Condensed Results of Operations 1996 1995 1994
<S> <C> <C> <C>
Equity in earnings of subsidiary bank:
Dividends $ 3,073,673 $ 2,672,759 $ 2,286,694
Undistributed 9,572,301 8,766,424 7,536,874
Income (expenses), net 54,860 77,761 18,705
----------- ------------ -----------
Net income $12,700,834 $ 11,516,944 $ 9,842,273
=========== ============ ===========
Condensed Cash Flow
Increase (decrease) in cash
Cash flows from operating activities:
Interest received $ 107,219 $ 40,107 $ 27,839
Dividends received from subsidiary bank 3,073,673 2,672,759 2,286,694
Net cash provided by (used in) other
operating activities 36,677 6,687 (57,744)
----------- ----------- -----------
Net cash provided by operating
activities 3,217,569 2,719,553 2,256,789
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities
available for sale 200,000 86,063
Proceeds from sales of securities available
for sale 311,205
Purchases of securities available for sale (622,449) (841,656) (223,357)
----------- ----------- -----------
Net cash used in investing activities (111,244) (755,593) (223,357)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 334,467 388,138 284,394
Net dividends paid (3,058,856) (2,628,388) (2,237,479)
Cash paid for fractional shares (17,414) (14,953)
----------- ----------- -----------
Net cash used in financing activities (2,741,803) (2,240,250) (1,968,038)
----------- ----------- -----------
Net increase (decrease) in cash 364,522 (276,290) 65,394
Cash at beginning of year 190,357 466,647 401,253
----------- ----------- -----------
Cash at end of year $ 554,879 $ 190,357 $ 466,647
=========== =========== ===========
</TABLE>
II-32
<PAGE> 54
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
CONDENSED CASH FLOW (CONTINUED) 1996 1995 1994
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 12,700,834 $ 11,516,944 $ 9,842,273
------------ ------------ -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiary (9,572,301) (8,766,424) (7,536,874)
Premium amortization and discount
accretion, net (722) (711)
Gain on sale of securities available for sale (159,047) (15,238)
Increase (decrease) in accrued interest
receivable 4,169 (17,118)
(Increase) decrease in other assets 44,442 900 (55,450)
Increase (decrease) in other liabilities 200,194 1,200 6,840
------------ ------------ -----------
Total adjustments (9,483,265) (8,797,391) (7,585,484)
------------ ------------ -----------
Net cash provided by operating activities $ 3,217,569 $ 2,719,553 $ 2,256,789
============ ============ ===========
Supplemental disclosure of non-cash transactions:
Transfer from capital surplus to common stock $ 3,000,827 $ 1,190,958
Unrealized (gain) loss on investment
in bank at equity 228,502 $ (1,080,768) 743,711
Unrealized gain on other investments available
for sale 72,130 (156,315) (30,203)
Deferred income tax provision on net unrealized
gain on securities available for sale (27,464) 61,400 11,864
</TABLE>
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, 1996 and 1995 was $56,138,188
and $50,275,525, respectively. Additionally, standby letters of credit of
$2,251,294 and $3,567,898 were outstanding at December 31, 1996 and 1995,
respectively.
II-33
<PAGE> 55
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):
<TABLE>
<CAPTION>
December 31, 1996
----------------------
Estimated
Carrying Fair
Amount Value
<S> <C> <C>
Assets:
Cash and cash equivalents $ 28,846 $ 28,846
Marketable securities 128,349 129,923
Loans 315,487 316,549
Liabilities:
Demand deposits 188,617 188,617
Time deposits 209,081 206,776
Off-balance-sheet unrealized gains (losses) -
Commitments 90
</TABLE>
<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>
II-34
<PAGE> 56
The fair value of marketable securities is based on quoted market prices,
dealer quotes and prices obtained from independent pricing services. The
fair value of loans, time deposits, commitments and guarantees is
estimated based on present values using applicable risk-adjusted spreads
to the U.S. Treasury curve to approximate current entry-value interest
rates applicable to each category of such financial instruments.
No adjustment was made to the entry-value interest rates for changes in
credit of loans for which there are no known credit concerns. Management
segregates loans in appropriate risk categories. Management believes that
the risk factor embedded in the entry-value interest rates, along with the
general reserves applicable to the loan portfolio for which there are no
known credit concerns, result in a fair valuation of such loans on an
entry-value basis.
As required by the Statement, demand deposits are shown at their face
value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1996. 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-35
<PAGE> 57
APPENDIX A
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
REVOCABLE PROXY
BANK OF GRANITE
This Proxy is Solicited on Behalf of the Board of Directors. The
undersigned hereby appoints John A. Forlines, Jr., Myron L. Moore, Jr., and
Robert E. Cline, or each of them, as Proxies, each with the power to appoint
his or her substitute and hereby authorizes each of them to represent and to
vote as designated below all the shares of Common Stock held on record by the
undersigned on March 9, 1997, at the Annual Meeting of Shareholders to be held
on April 28, 1997, or any adjournment thereof.
1. APPROVING THE CORPORATION'S STOCK OPTION PLAN.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. ELECTION OF DIRECTORS:
John N. Bray, Robert E. Cline, John A. Forlines, Jr.,
Barbara F. Freiman, Hugh R. Gaither, Charles M. Snipes, Boyd C. Wilson, Jr.
FOR [ ] WITHHOLD [ ] FOR ALL EXCEPT [ ]
INSTRUCTION: To withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space provided below.
_________________________________________________________________________
3. THE RATIFICATION OF THE ACCOUNTING FIRM DELOITTE & TOUCHE LLP as the
Corporation's independent Certified Public Accountants for the year
ending December 31, 1997.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
4. In their discretion, the Proxies are authorized to vote upon other such
business as may properly come before the meeting.
Please be sure to sign and date
this Proxy in the box below.
_______________________________
Date
_______________________________
Stockholder sign above
_______________________________
Co-holder (if any) sign above
- -------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
BANK OF GRANITE CORPORATION
_______________________________________________________________________________
Shares of Common Stock of the Company will be voted as specified. If no
specification is made, shares will be voted FOR Proposal 1, the Corporation's
Stock Option Plan, FOR Proposal 2, the Board of Directors' nominees to the
Board of Directors, FOR Proposal 3, the ratification of the accounting firm
Deloitte & Touche LLP, and otherwise at the discretion of the proxies.
The above signed hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders of the Company called for April 28, 1997, a Proxy Statement for the
Annual Meeting and the 1996 Annual Report to Shareholders.
Please sign exactly as your name(s) appear(s) on this proxy card. When shares
are held jointly, each holder should sign. When signing in a representative
capacity, please give title.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
_______________________________________________________________________________
