<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
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
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
"PRELIMINARY"
BANK OF
GRANITE
CORPORATION
23 NORTH MAIN STREET
GRANITE FALLS, NORTH CAROLINA 28630
(704) 496-2000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - APRIL 27, 1998
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Bank of Granite Corporation will be held
on Monday, April 27, 1998 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 amendment of the Certificate of Incorporation
of Bank of Granite Corporation to increase the authorized
common stock from 15,000,000 to 25,000,000 shares.
2. To consider the election of seven persons named as director
nominees in the Proxy Statement dated March 23, 1998, 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, 1998; and
4. To transact such other business as may properly be brought
before the meeting or any adjournment thereof.
Only shareholders of record at the close of business on March 13, 1998 are
entitled to receive notice of, and to vote at, this meeting.
Bank of Granite Corporation's 1998 Annual Shareholders Meeting proxy Ballot,
Proxy Statement and its 1997 Annual Report are enclosed with this Notice.
YOUR VOTE AND PROMPT RESPONSE 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. YOUR PROMPT RESPONSE WILL SAVE YOUR
COMPANY THE EXPENSES AND EXTRA WORK OF ADDITIONAL SOLICITATION.
By order of the Board of Directors
BANK OF GRANITE CORPORATION
/s/ John A. Forlines, Jr.
Granite Falls, North Carolina JOHN A. FORLINES, JR.
March 23, 1998 Chairman and Chief Executive Officer
<PAGE> 3
"PRELIMINARY"
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 27, 1998, 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 March 23, 1998
A copy of the Corporation's 1997 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 13, 1998. The
Corporation will also provide to any shareholder without charge a copy of the
Annual Report for 1997 filed on Form 10-K with the Securities and Exchange
Commission (the "SEC") upon written request to Kirby A. Tyndall, Secretary, Bank
of Granite Corporation, P.O. Box 128, Granite Falls, North Carolina, 28630.
Shareholders and other interested parties may also obtain the Corporation's
recent filings with the SEC through the SEC's internet site at www.sec.gov and
search on the Corporation's Central Index Key of 0000810689.
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 Kirby A. Tyndall, 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 13, 1998, the record date, the Corporation had
issued and outstanding 9,170,074 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 13, 1998
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 (to Amend the Certificate of Incorporation to
Increase the Number of Authorized Common Shares), 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 13,
1998. 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 (1) in favor of the proposed
amendment to the Certificate of Incorporation to increase the authorized common
shares, (2) in favor of the proposed slate of directors and (3) 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 1,400 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
The Boards of Directors of both the Bank of Granite Corporation and its bank
subsidiary, Bank of Granite (the "Bank") are composed of the same persons. The
Board of Directors of the Corporation's mortgage bank subsidiary, GLL &
Associates, Inc. ("GLL") are composed of the Corporation's President, the
Corporation's Secretary/Treasurer and GLL's President.
During the fiscal year ended December 31, 1997, the Bank's Board of Directors
held 13 meetings, and the Corporation's Board of Directors held 8 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' meetings was approximately 95%.
Corporation and Bank directors were paid an annual retainer of $5,000 and fees
of $200 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 1997 were as follows:
AUDIT COMMITTEE - The Audit Committee was composed of directors Robert E. Cline,
Barbara F. Freiman and Boyd C. Wilson, 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 1997, 11 meetings were held. All Committee members attended more
than 75% of the total number of Audit Committee meetings held during the fiscal
year 1997.
NOMINATING COMMITTEE - The Nominating Committee was composed of directors John
A. Forlines, Jr., Barbara F. Freiman, Hugh R. Gaither 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 1999 Annual Shareholders
Meeting". During 1997, 2 meetings were held. All Committee members attended more
than 75% of the total number of Nominating Committee meetings held during the
fiscal year 1997.
I - 4
<PAGE> 6
PROPOSED AMENDMENT OF CORPORATION'S
CERTIFICATE OF INCORPORATION
(PROPOSAL 1)
The Corporation's Certificate of Incorporation ("Certificate") states that
number of shares of Corporation Common Stock ("Common Stock") the Corporation is
permitted to issue. The present Certificate provides that the Corporation may
issue up to 15,000,000 shares of Common Stock.
PROPOSAL: The Board of Directors has proposed that the Certificate be amended to
increase the authorized number of shares of Common Stock from 15,000,000 to
25,000,000. As of the Record Date, there were 9,170,074 issued and outstanding
shares of Corporation Common Stock, which left 5,829,926 shares of Common Stock
available for use by the Corporation in the form of authorized but unissued
shares. The amendment of the Certificate to increase the authorized number of
shares to 25,000,000 would result, as of the Record Date, in 15,829,926
authorized but unissued shares of Common Stock.
The proposed amendment of the Certificate requires the affirmative vote of a
majority of shares of Corporation Common Stock present and entitled to vote at
the Annual Meeting.
ADVANTAGES: In the opinion of the Board of Directors and Corporation Management,
increasing the number of authorized but unissued shares of Common Stock through
an amendment of the Certificate would be in the best interest of the Corporation
for the following reasons.
- First, in order to declare a stock dividend or a stock split,
there must be a sufficient number of authorized but unissued
shares of Common Stock available to be issued to existing
Corporation shareholders. Thus, additional authorized but
unissued shares of Corporation Common Stock might eventually
be necessary for the Corporation to declare stock dividends or
stock splits to existing shareholders. Note, however, that
there are no plans at this time by the Corporation to declare
a stock dividend or stock split. Nor does the existence of
authorized but unissued shares of Common Stock affect the
ability of the Corporation to declare cash dividends.
- Second, merger and acquisition transactions frequently require
the use of authorized but unissued shares of Common Stock. If
the Corporation determined it was in its best interest to
acquire or merge with another financial institution, the
acquisition or merger agreement might require the exchange of
shares of each corporation's stock and the issuance of new
authorize but unissued shares by the Corporation. Thus, a
sufficient number of Corporation authorized but unissued
shares of Common Stock must be available for issuance under
such circumstances. Note, however, that there are no plans at
this time by the Corporation to acquire or merge with another
financial institution.
- Third, certain executive and employee benefit programs
sponsored by the Corporation require the use of authorized but
unissued shares of stock. An example is the Corporation's
stock option plan. Under the terms of the stock option plan,
participants purchase authorized but unissued shares of Common
Stock. Other benefit plans, not yet sponsored by the
Corporation, could also require the availability and use of
authorized but unissued shares of Common Stock. Note, however,
that there are no plans at this time by the Corporation to
adopt another benefit plan which might require the use of
authorized but unissued shares of Common Stock.
I - 5
<PAGE> 7
- Fourth, the Corporation may desire to raise additional capital
through the sale on the primary market of authorized by
unissued shares of Common Stock. Such additional capital
could, for example, be used by the Corporation to improve its
equity capital position or to provide funds needed for
expansion. Note, however, there are no plans at this time by
the Corporation to raise additional capital through the sale
on the primary market of authorized by unissued shares of
Common Stock.
- Finally, the Corporation may become subject to a hostile
takeover attempt. One defensive tactic to an unwanted takeover
is to have available for sale to existing or new shareholders
a sufficient number of authorized but unissued shares of
Common Stock. The sale of new shares of Common Stock would
function to dilute any existing ownership interest of the
potential acquirer, thus making the hostile acquisition more
difficult to achieve. Note, however, that the Corporation is
not at this time subject to any hostile takeover attempt.
DISADVANTAGES: Although there are many advantages of the proposed amendment, the
amendment of the Certificate to increase the authorized number of shares of
Common Stock from 15,000,000 to 25,000,000 could dilute existing shareholders'
ownership interests in the Corporation at some point in the future. This could
occur, for example, where authorized but unissued shares of Common Stock are
sold on the primary market and existing shareholders are not given (or do not
take advantage of) the right to maintain their percentage ownership interests
through the purchase of a portion of the new issuance of stock. In such case,
the sale of new shares of Common Stock would dilute the existing shareholder's
ownership interest in the Corporation. However, there are no plans by the
Corporation at this time to issue authorized but unissued shares of Common Stock
except in connection with the Corporation's stock option plan or in the ordinary
course of its operations.
FOR THE REASONS SET FORTH ABOVE, THE BOARD OF DIRECTORS AND CORPORATION
MANAGEMENT UNANIMOUSLY RECOMMEND THAT PROPOSAL 1 TO AMEND OF THE CORPORATION'S
CERTIFICATE OF INCORPORATION TO INCREASE THE AUTHORIZED COMMON SHARES BE
APPROVED BY SHAREHOLDERS. SHARES REPRESENTED BY PROXIES ON THE ACCOMPANYING
PROXY FORM WILL BE VOTED FOR THE APPROVAL OF AMENDING THE CERTIFICATE OF
INCORPORATION AS SET FORTH IN THE PROXY STATEMENT UNLESS SPECIFIED OTHERWISE.
I - 6
<PAGE> 8
ELECTION OF DIRECTORS
(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 13, 1998.
All of the nominees shown below have been previously elected as directors by the
Corporation's shareholders and are currently serving on the Board of Directors,
with the exception of nominee Paul M. Fleetwood, III, CPA.
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.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS ELECT THE
DIRECTOR NOMINEES SHOWN IN THE FOLLOWING TABLE BY VOTING FOR PROPOSAL 2.
I-7
<PAGE> 9
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 13, 1998. 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>
- -------------------------------------------------------------------------------------------------------------------------------
Name Principle Occupation Age on Director Amount and Nature Ownership
during last five years Dec. 31, Since (1) of Beneficial as % of
1997 Ownership Common
Stock
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JOHN N. BRAY President, Vanguard 55 Bank (1992) 3,155 direct 0.04%
Hickory, N.C. Furniture, Inc. Corp (1992) 940 indirect(2)
- -------------------------------------------------------------------------------------------------------------------------------
PAUL M. FLEETWOOD, President, Corporate 50 90,000 direct 0.98%
III, CPA Management Services, Inc.
Hickory, N.C. and Catawba Valley
Building Supply, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
JOHN A. FORLINES, JR. Chairman and Chief 79 Bank (1954) 421,318 direct 4.71%
Granite Falls, N.C. Executive Officer, Corp (1987) 10,857 indirect(3)
Bank of Granite
Corporation, since
June 1987; Chairman,
Bank of Granite, since
1972 (Chief Executive
Officer, 1954-84)
- -------------------------------------------------------------------------------------------------------------------------------
BARBARA F. FREIMAN Executive Director of the 63 Bank (1989) 5,095 direct 0.07%
Lenoir, N.C. Foundation of Caldwell Corp (1989) 1,769 indirect(2)
Community College and
Technical Institute
- -------------------------------------------------------------------------------------------------------------------------------
HUGH R. GAITHER President and Chief 47 Bank (1997) 173 direct 0.00%
Executive Officer,
Newton, N.C. Ridgeview, Inc. Corp (1997)
- -------------------------------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES President, Bank of 64 Bank (1982) 102,714 direct 1.42%
Hickory, N.C. Granite Corporation; Corp (1987) 27,857 indirect(2,3)
President and Chief GLL (1998)
Executive Officer
Bank of Granite
(since 1994); GLL
Chairman; Director
Vanguard Furniture, Inc.
and Ridgeview, Inc.
- -------------------------------------------------------------------------------------------------------------------------------
BOYD C. WILSON, Vice President and 45 Bank (1996) 3,922 direct 0.09%
JR., CPA Controller, Kincaid Corp (1996) 4,034 indirect(2)
Hudson, N.C. Furniture Company
- -------------------------------------------------------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE 627,877 direct 7.35%
OFFICERS AS A GROUP (8 PERSONS) 45,957 indirect
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes: (1) Bank of Granite Corporation, the holding company for Bank of
Granite, was organized on January 30, 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 13, 1998.
I-8
<PAGE> 10
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 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Compensation
-------------------------------------
Annual Long-term
-------------------------------------
Securities
Name and Base Underlying All
Principal Position Year Salary Bonus(1) Options(2) Other(3)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
JOHN A. FORLINES, JR. 1997 $214,500 $46,020 3,500 $38,408
Corporation Chairman and Chief
Executive Officer; Bank Chairman 1996 $195,000 $34,380 2,700 $35,967
1995 $184,000 $38,768 3,500 $38,602
- ---------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES 1997 $171,600 $36,820 3,500 $32,867
Corporation President;
Bank President and Chief Executive 1996 $156,000 $25,713 2,700 $29,606
Officer; GLL Chairman
1995 $137,604 $27,184 3,500 $25,558
- ---------------------------------------------------------------------------------------------------------
</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: $22,400
(1997), $22,500 (1996), and $22,500 (1995). The following
amounts were contributed to Charles M. Snipes' Plan accounts:
$22,400 (1997), $22,500 (1996), and $22,500 (1995).
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:
$14,982 (1997), $12,470 (1996), and $11,447 (1995). The
following amounts were contributed to Charles M. Snipes'
accounts: $7,043 (1997), $4,757 (1996), and $2,218 (1995).
The remaining amounts include (i) the value of certain life
insurance premiums paid for the indicated executives, based on
the term insurance value of such payments as calculated under
the Internal Revenue Code P.S. 58 rates or those of the
insurer, if lower, and includable in the executive's taxable
income for the year and (ii) the value of the personal use
portion of the Corporation's vehicles provided to the
executive.
I - 9
<PAGE> 11
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
during 1997 to the named officers.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Individual Grants Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term
------------------------------------------------------------------------------------
Number of % of Total
Securities Options Appreciation
Underlying Granted to Exercise or Assumed at
Name and Options Employees Base Price Expiration 5% 10%
Principal Position Granted(1) in 1997(2) ($/share)(3) Date(4) (5) (6)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JOHN A. FORLINES, JR. 3,500 10.8% $27.00 04/28/02 $26,109 $57,693
Corporation Chairman and Chief
Executive Officer; Bank Chairman
- -----------------------------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES 3,500 10.8% $27.00 04/28/02 $26,109 $57,693
Corporation President;
Bank President and Chief Executive
Officer; GLL Chairman
- -----------------------------------------------------------------------------------------------------------------------------
</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 1997. 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 1997.
(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) - A] x C,
where A = $27.00, the exercise price per share (which equals
the market price at the time of the grant), B = 1.2763, the
assumed rate of stock price appreciation (5%) compounded
annually over the five-year term of the option; and C = 3,500,
the number of securities underlying the grant at year end
1997.
(6) The dollar values shown represent the potential realizable
value of the grant of options at an assumed 10% annualized
appreciate rate in the price of Corporation Common Stock. The
potential realizable value is calculated under the following
formula: [(A x B) - A] x C, where A = $27.00, the exercise
price per share (which equals the market price at the time of
the grant), B = 1.6105, the assumed rate of stock price
appreciation (10%) compounded annually over the five-year term
of the option; and C = 3,500, the number of securities
underlying the grant at year end 1997.
I - 10
<PAGE> 12
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
LAST FISCAL YEAR- END OPTION VALUES
The following table sets forth information with respect to the exercise of stock
options by the named officers during 1997 and unexercised options held as of
December 31, 1997.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Shares Number of Securities Value of Unexercised
Acquired Value Underlying In-the-Money
Name and on Exercise Realized Unexercised Options Options
Principal Position (#)(1) ($)(2) at Fiscal Year-end (#) at Fiscal Year-end ($)(3)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JOHN A. FORLINES, JR. 7,030 $133,043 Exercisable - 14,304 Exercisable - $199,561
Corporation Chairman and Chief Unexercisable - 7,458 Unexercisable - 69,099
Executive Officer; Bank Chairman
- -----------------------------------------------------------------------------------------------------------------------------
CHARLES M. SNIPES 7,030 $133,043 Exercisable - 14,304 Exercisable - $199,561
Corporation President; Unexercisable - 7,458 Unexercisable - 69,099
Bank President and Chief Executive
Officer; GLL Chairman
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes: (1) Indicates number of shares acquired by indicated executive
officer through the exercise of options during 1997.
(2) Dollar amounts represent the aggregate dollar value realized
by the indicated executive officer upon the exercise of
options during 1997. 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 1997. 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 1997.
For those options "in the money", value is computed based on
the difference between fair market value of Corporation Common
Stock at year end 1997 and the exercise or base price of the
shares subject to the options. The value of options
exercisable and unexercisable at year end 1997 is also shown.
I - 11
<PAGE> 13
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
"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 Committee
in helping to set appropriate levels of Corporation CEO and other executive
officer base salaries.
For 1997, the Committee increased the CEO's base salary by 10.0%. The Committee
determined that the 10.0% 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 Committee was that the Corporation's
2.76% return on assets placed the Corporation among the banking industry's top
performers during 1996.
I - 12
<PAGE> 14
For the Corporation's executives (and CEO), the annual cash incentive during
the years 1995, 1996, and 1997 ranged from 16.5% to 21.5% of base salary.
This means that up to approximately 21.5% 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 1997 was 21.5% 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, the Corporation's 1997 Incentive Stock
Option Plan was 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).
BANK OF GRANITE CORPORATION
Compensation Committee
of the Board 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., CPA
I - 13
<PAGE> 15
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 1997 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 five year period with both the
NASDAQ Index, and an Independent Bank Index (reflecting changes in certain
peer group bank stocks). The Independent Bank Index, purchased from an
investment banking firm, reflects the total return to shareholders of a group
of 23 independent publicly owned community banks located in the southeastern
states of Florida, Georgia, North Carolina, South Carolina, Tennessee and
Virginia. The banks range in asset size from $166 million to $992 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 investment banking firm 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 - 14
<PAGE> 16
BANK OF GRANITE CORPORATION
FIVE YEAR PERFORMANCE INDEX
[Five Year Performance Graph Presented Here]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Bank of Granite Corp. 100 108 112 132 201 215
Independent Bank Index 100 125 153 208 248 358
Nasdaq Index 100 115 112 159 195 240
</TABLE>
I - 15
<PAGE> 17
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 1997 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, 1998. The firm is
to report on the Corporation's consolidated balance sheets, and related
consolidated statements of income, comprehensive income, cash flows, and 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 UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS RATIFY THE
APPOINTMENT OF DELOITTE & TOUCHE AS THE CORPORATION'S INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS FOR THE YEAR ENDED DECEMBER 31, 1998 BY VOTING FOR PROPOSAL
3.
I - 16
<PAGE> 18
PROPOSALS FOR 1999 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 1998 Annual Meeting. Shareholder proposals
intended to be presented at the 1999 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 27, 1998 (which is 120 days prior to the expected date of the 1999
Proxy Statement) in order to be eligible for inclusion in the Corporation's
Proxy Ballot and Proxy Statement for the 1999 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 28, 1998 (which is 90 days prior to the expected date of the 1999
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, 1998 at 10:30 a.m., at Holiday Inn, 138 South Lenoir Rhyne Boulevard, S.E.
(at Interstate 40, Exit #125), Hickory, North Carolina, and to vote your shares
in person. Even if you 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
/s/ Kirby A. Tyndall
Granite Falls, North Carolina KIRBY A. TYNDALL
March 23, 1998 Secretary
I - 17
<PAGE> 19
MANAGEMENT'S DISCUSSION
AND ANALYSIS, AND
AUDITED FINANCIAL
STATEMENTS
II - 1
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis is provided to assist in understanding and
evaluating the Company's results of operations and financial condition. The
following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. In 1987, the
Bank of Granite Corporation (the Company") was formed under a plan whereby all
previously issued shares of Bank of Granite (the "Bank") stock were exchanged
for shares of the Company's stock. The Bank then became a wholly-owned
subsidiary of the Company. On November 5, 1997, the Company acquired GLL &
Associates, Inc. ("GLL"), a mortgage bank, through a merger in which the Company
exchanged its common stock for all of the shares of GLL. The merger was
accounted for as a pooling of interests. Therefore, amounts for all prior
periods have been restated to include GLL as if GLL had been merged with the
Company for all such prior periods. Prior to the merger, GLL had elected to be
taxed as a Subchapter S Corporation under the Federal Internal Revenue Code,
whereby GLL's earnings were taxable to its owners. Because of this election, GLL
did not provide for income taxes on earnings taxable to its owners. Therefore,
no income taxes have been provided on earnings prior to the merger date. Income
taxes have been provided on GLL's earnings subsequent to the merger date. All
information presented is consolidated data unless otherwise specified.
RESULTS OF OPERATIONS
The following discussion relates to the operations for the year ended December
31, 1997 compared to the year ended December 31, 1996, the year ended December
31, 1996 compared to the year ended December 31, 1995, and the year ended
December 31, 1995 compared to the year ended December 31, 1994.
1997 COMPARED TO 1996
Net income for 1997 was $14,431,187, or $1.57 per share, compared to
$13,365,872, or $1.46 per share, in 1996. This 8% increase in net income
resulted primarily from the Bank's continued successful efforts to increase net
interest income over the previous period. Net interest income increased to
$28,568,306 compared to $25,530,554 in 1996. The $3,363,791 increase in interest
income was attributable to increases in loan volume. Approximately $3,198,000 of
the increase in interest income was attributable to increases in volume and
$166,000 to increases in interest rates. Gross loans increased $28,101,441 or
8.5%. Interest expense increased $326,039 of which approximately $495,000 was
attributable to deposit growth partially offset by a decrease of approximately
$169,000 attributable to a lower cost of funds. Other income increased 12% to
$8,110,184 compared to $7,239,670 in 1996. The increase in service charges on
deposit accounts of $165,809 results from growth in deposit accounts. During
1997 the Company continued to place emphasis on nontraditional banking services
such as annuities, leasing, mortgage and small business administration loan
originations. In focusing on these products, the Company experienced volatility
in earnings commonly associated with such products. Other service fees and
commissions increased $393,984 which was primarily due to increases in fees from
annuity sales and mortgage originations, both of which tend to rise during
periods of falling interest rates. For the year ended December 31, 1997, the
Company earned $2,863,942 from the origination of mortgage loans compared to
$2,655,198 in 1996. Other income increased by $481,112 which was primarily
attributable to a $601,135 nonrecurring gain, before taxes, from the sale of
GLL's mortgage servicing portfolio. The gain was partially offset by a $194,465
decrease in fees from sales of the guaranteed portions of small business
administration ("SBA") loans. Such sales of SBA loans generated fees of $242,898
in 1997 compared to $437,363 in 1996. Other expenses, or overhead, increased
$1,755,055 or 14.2% over the previous year. Salaries increased $684,718 or 11%
as a result of general salary increases and the employment of additional staff
for a new office and to service a new loan product. Both the Bank and GLL each
plan to open two new offices in 1998. Equipment expenses increased $136,322
primarily because of depreciation of new digital imaging technology. The Company
plans to replace its ATM network and to install a teller automation system over
the next two years. Other noninterest expenses increased $869,700, or 27.2%,
including nonrecurring costs of $405,678, before taxes, in expenses related to
the merger of GLL.
1996 COMPARED TO 1995
Net income for 1996 was $13,365,872, or $1.46 per share, compared to
$12,044,972, or $1.32 per share, in 1995. This 11% increase in net income
resulted primarily from the Bank's continued successful efforts to increase net
interest income over the previous period. Net interest income increased to
$25,530,554 compared to $24,265,968 in 1995. The increase in interest income was
attributable to increases in loan volume. Approximately
II - 2
<PAGE> 21
$2,748,000 of the increase in interest income was attributable to increases in
volume, which was partially offset by a decrease in interest rates which
amounted to approximately $348,000. Gross loans increased $16,964,410 or 5.4%.
Interest expense increased $1,134,973 of which approximately $1,163,000 was
attributable to deposit growth slightly offset by a decrease in interest expense
of approximately $28,000 attributable to a minor decline in the cost of funds.
Other income increased 17.8% to $7,239,670 compared to $6,145,112 in 1995. The
increase in service charges on deposit accounts of $264,293 results from growth
in deposit accounts. During 1996 the Company 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 Company experienced volatility in earnings commonly associated with
such products. Other service fees and commissions increased $294,865 which was
primarily due to increases in annuity sales and fees from mortgage originations.
Annuity sales and mortgage originations fluctuate with interest rate changes.
For the year ended December 31, 1996, the Company earned $2,655,198 from the
origination of mortgage loans compared to $2,430,472 in 1995. Other noninterest
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 of $215,038 resulted from securities being called at a premium as
well as the sale of equity investments at the holding company level. Other
expenses increased $713,419 or 6.1% over the previous year. Salaries and
benefits increased $864,653 or 13% 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.
1995 COMPARED TO 1994
Net income for 1995 was $12,044,972 or $1.32 per share compared to $10,232,071
or $1.13 per share in 1994. This 17.7% increase in net income resulted primarily
from the Company's continued successful efforts to increase net interest income
over the previous period. Net interest income increased to $24,265,968 compared
to $21,558,132 in 1994. The increase in interest income was attributable to
increases in interest rates and loan volume. Approximately 53% of the increase
in interest income was attributable to increases in rate. Gross loans increased
$32,837,125 or 11.7%. Interest expense increased $3,772,904 of which 78% was
attributable to increases in rate, the remaining 22% was attributable to a grow
in interest-bearing deposits of $27,990,100 or 10.1%. Other income decreased to
$6,145,112 compared to $6,712,147 in 1994. The increase in service charges on
deposit accounts of $70,263 reflects growth in deposits accounts. During 1995
the Company continued to place emphasis on non-traditional banking services such
as annuities, leasing, originating mortgage 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
decreased $481,662, primarily due to decreases in annuity sales and fees from
mortgage originations. Annuity sales and mortgage originations fluctuate with
interest rates. For the most part interest rates rose in 1995 causing declines
in fees from both annuity sales and mortgage originations of $77,770 and
$353,315, respectively. Other noninterest 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 as well as the sale of a mutual fund position. The funds
were reinvested at higher yields. Other expenses, or overhead, decreased
$1,061,107 or 8.4% from the previous year. Salaries and benefits decreased
$400,199 or 0.6% as a result of variable mortgage origination compensation.
Equipment rentals, depreciation and maintenance increased $92,554 or 10.2%
primarily as a result of additional technology purchases and installation. The
Federal Deposit Insurance Corporation insurance premiums decreased to $395,372.
During 1995 the FDIC assessment rate was reduced from 23 cents per $100 of
deposit to 4 cents per $100 of deposit. The reduction in rate reflects the
bank's strength and the Bank Insurance Fund reaching its recapitalization level
of 1.25% of insured deposits held in commercial banks. Other operating expenses
reflect a non-recurring loss of $50,816 on the sale of other real estate owned
during 1995.
II - 3
<PAGE> 22
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 $28,568,306, $25,530,554, and $24,265,968
for 1997, 1996 and 1995 respectively, representing an increase of 11.9% for 1997
over 1996, 5.2% for 1996 over 1995, and 12.6% for 1995 over 1994. 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,
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ----------------------------
INTEREST Interest Interest
AVERAGE AVERAGE INCOME/ Average Average Income/ Average Average Income/
dollars in thousands BALANCE RATE EXPENSE Balance Rate Expense Balance Rate Expense
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) $347,435 10.43% $ 36,246 $316,139 10.44% $ 33,007 $298,515 10.56% $ 31,538
Taxable securities 66,986 6.47% 4,331 70,384 6.14% 4,322 62,378 5.82% 3,630
Nontaxable securities (2) 61,997 8.07% 3,253 57,063 8.15% 3,022 50,864 8.61% 2,845
Federal funds sold 3,516 5.63% 198 5,533 5.66% 313 4,163 6.03% 251
-------- -------- -------- -------- -------- --------
Total interest-earning assets 479,934 9.17% 44,028 449,119 9.05% 40,664 415,920 9.20% 38,264
-------- -------- --------
Cash and due from banks 25,152 25,083 19,115
All other assets 7,778 10,472 11,062
-------- -------- --------
Total assets $512,864 $484,674 $446,097
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits $328,528 4.44% 14,598 $315,869 4.49% 14,167 $291,056 4.48% 13,025
Federal funds purchased and
securities sold under
agreements to repurchase 4,298 5.07% 218 3,954 4.75% 188 3,323 5.30% 176
Other borrowings 10,289 6.26% 644 11,624 6.70% 779 11,354 7.03% 798
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 343,115 4.51% 15,460 331,447 4.57% 15,134 305,733 4.58% 13,999
-------- -------- --------
Noninterest-bearing deposits 77,240 70,014 67,223
Other liabilities 3,475 4,517 3,992
Shareholders' equity 89,034 78,696 69,149
-------- -------- --------
Total liabilities and
shareholders' equity $512,864 $484,674 $446,097
======== ======== ========
Net yield on earning assets and
net interest income (2)(3) 6.32% $ 28,568 6.05% $ 25,530 6.20% $ 24,265
======== ======== ========
Interest rate spread (4) 4.66% 4.48% 4.62%
</TABLE>
- -----------------------------------------
(1) Non-accrual loans have been included.
(2) Yields on tax-exempt investments have been adjusted to tax equivalent basis
using 35% for 1997, 1996 and 1995.
(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> 23
INTEREST RATE AND VOLUME VARIANCE ANALYSIS
for the years ended December 31,
<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 compared to 1995
CHANGE Change
ATTRIBUTABLE TO Attributable to
------------------------------------ -----------------------------------
dollars in thousands VOLUME(1) RATE(1) TOTAL Volume(1) Rate(1) Total
--------- ------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans $ 3,266 $ (27) $ 3,239 $ 1,851 $ (382) $ 1,469
Taxable securities (214) 223 9 479 213 692
Nontaxable securities 260 (29) 231 338 (161) 177
Federal funds sold (114) (1) (115) 80 (18) 62
------- ------- ------- ------- ------- -------
Total interest-earning assets $ 3,198 $ 166 $ 3,364 $ 2,748 $ (348) $ 2,400
======= ======= ======= ======= ======= =======
Interest-bearing deposits $ 565 $ (134) $ 431 $ 1,112 $ 30 $ 1,142
Federal funds purchased and
securities sold under
agreements to repurchase 17 13 30 32 (20) 12
Other borrowings (87) (48) (135) 19 (38) (19)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities $ 495 $ (169) $ 326 $ 1,163 $ (28) $ 1,135
======= ======= ======= ======= ======= =======
</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, 1997 core deposits totaled $321,987,715 or 77.7% 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 through purchased or brokered liabilities
as the cost of purchased or brokered 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 places great significance on monitoring and
managing the Company's asset/liability position. The Company's policy of
managing its interest margin (or net yield on interest-earning assets) 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 difference or gap between the
volume of interest-earning assets and interest-bearing liabilities repricing
over a specific time period. However, this method addresses on the magnitude of
funding mismatches and does not address the magnitude or relative timing of rate
changes. 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 Company'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 most of the Company's
loans are at variable rates, they reprice more rapidly than rate sensitive
interest-bearing deposits. During periods of rising rates, this results in
increased net interest income. The opposite occurs during periods of declining
rates.
II - 5
<PAGE> 24
INTEREST RATE SENSITIVITY
As of December 31, 1997
<TABLE>
<CAPTION>
Interest Sensitive Within Non-sensitive
--------------------------------------- Total or Sensitive
1 to 91 to 181 to Within Beyond
dollars in thousands 90 Days 180 Days 365 Days 1 Year 1 Year Total
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Interest-bearing due from banks $ 158 $ 158 $ 158
Securities (at amortized cost):
U.S. Treasury 2,500 $ 5,497 7,997 $ 13,034 21,031
U.S. Government agencies 2,000 4,000 6,000 27,087 33,087
States and political subdivisions 459 $ 4,548 853 5,860 58,683 64,543
Other (including equity securities) 440 -- 145 585 11,075 11,660
Loans (gross):
Real estate - Construction 32,313 418 1,071 33,802 3,425 37,227
Real estate - Mortgage 133,725 1,240 3,698 138,663 17,142 155,805
Commercial, financial and agricultural 112,316 1,486 4,631 118,433 8,091 126,524
Consumer 13,683 3,054 5,049 21,786 16,737 38,523
All other 457 -- -- 457 2 459
-------- -------- -------- -------- -------- --------
Total interest-earning assets $298,051 $ 10,746 $ 24,944 $333,741 $155,276 $489,017
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Savings and NOW accounts $ 86,641 $ 86,641 $ 86,641
Money market accounts 25,697 25,697 25,697
Time deposits of 100,000 or more 54,898 $ 17,126 $ 13,754 85,778 $ 6,810 92,588
Other time deposits 40,014 30,873 35,087 105,974 23,038 129,012
Federal funds purchased and securities
sold under agreements to repurchase 8,882 8,882 8,882
Other borrowings 6,288 6,288 6,288
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $222,420 $ 47,999 $ 48,841 $319,260 $ 29,848 $349,108
======== ======== ======== ======== ======== ========
Interest sensitivity gap $ 75,631 ($37,253) ($23,897) $ 14,481
Cumulative interest sensitivity gap $ 75,631 $ 38,378 $ 14,481 $ 14,481
Interest earning-assets as a percentage
of interest-bearing liabilities 134% 22% 51% 105%
======== ======== ======== ========
</TABLE>
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
As of December 31, 1997
<TABLE>
<CAPTION>
Within One to Five
One Five Years or
dollars in thousands Year Years More Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Real estate - Construction $ 12,792 $ 14,095 $10,340 $ 37,227
Real estate - Mortgage 54,681 42,433 58,691 155,805
Commercial, financial and agricultural 81,487 31,551 13,486 126,524
Consumer 9,192 27,865 1,466 38,523
All other 404 55 -- 459
-------- -------- ------- --------
Total $158,556 $115,999 $83,983 $358,538
======== ======== ======= ========
Predetermined rate, maturity
greater than one year $ 41,560 $ 5,592 $ 47,152
Variable rate or maturing within
one year $158,556 74,439 78,391 311,386
-------- -------- ------- --------
Total $158,556 $115,999 $83,983 $358,538
======== ======== ======= ========
</TABLE>
II - 6
<PAGE> 25
The Company's rate paid on interest-bearing deposits slightly declined to 4.44%
in 1997 compared to 4.49% 1996. The Company's primary growth in deposits is
reflected in time deposits, which increased $12,049,538. Rate sensitive
consumers chose to place funds in higher yielding time deposit accounts in
anticipation of stable to falling rates. Increased customer awareness of
interest rates increases the importance of rate management by the Company. The
Company's management continuously monitors market pricing, competitor rates, and
internal interest rate spreads to maintain the Company's growth and
profitability. Deposits continue to be the principal source of funds for
continued growth, so the Company attempts to structure its 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,
<TABLE>
<CAPTION>
dollars in thousands 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Non-interest-bearing deposits $ 77,240 $ 70,014 $ 67,223
Interest-bearing deposits 328,528 315,869 291,056
-------- -------- --------
Total $405,768 $385,883 $358,279
======== ======== ========
</TABLE>
The above table includes certificates of deposits $100,000 and over which at
December 31, 1997 totaled approximately $92,588,000. The table below presents
the maturities of these time deposits of $100,000 or more.
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
As of December 31, 1997
<TABLE>
<CAPTION>
Within Three to Six to Within One to
Three Six Twelve One Five
dollars in thousands Months Months Months Year Years Total
------- -------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Time deposits of $100,000 or more $54,898 $17,126 $13,754 $85,778 $6,810 $92,588
======= ======= ======= ======= ====== =======
</TABLE>
CAPITAL RESOURCES
Funding for the future growth and expansion of the Company is dependent upon
earnings of the subsidiary Bank. As of December 31, 1997, the Company's ratio of
total capital to risk-adjusted assets was 25.6%. 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 makes loans within its market area. It makes consumer
and commercial loans through the Bank and mortgage loans through GLL. The Bank
generally considers its market to be Caldwell, Catawba and Burke counties of
North Carolina. GLL considers its market area to be the central and southern
Piedmont and Catawba Valley regions of North Carolina. Total loans at December
31, 1997 were $357,845,513. This compares with $329,744,072 at December 31,
1996, an increase of $28,101,441 or 8.5%. 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> 26
LOANS AND NONPERFORMING ASSETS
As of December 31,
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------- -------------------
% OF % of % of % of % of
TOTAL Total Total Total Total
dollars in thousands AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS
Real estate -
Construction $ 37,227 10.4% $ 32,234 9.8% 27,108 8.7% $ 20,728 7.4% $ 18,020 6.8%
Mortgage 155,805 43.5% 143,243 43.3% 129,791 41.3% 109,044 38.9% 107,386 40.4%
Commercial,
financial and
agricultural 126,524 35.3% 116,469 35.2% 120,537 38.5% 117,002 41.8% 111,076 41.7%
Consumer 38,523 10.7% 38,214 11.6% 35,620 11.4% 33,156 11.8% 29,233 11.0%
All other 459 0.1% 194 0.1% 241 0.1% 419 0.1% 377 0.1%
-------- -------- -------- -------- --------
Total loans 358,538 100.0% 330,354 100.0% 313,297 100.0% 280,349 100.0% 266,092 100.0%
-------- -------- -------- -------- --------
Deferred origination
fees, net (693) (610) (518) (407) (337)
-------- -------- -------- -------- --------
Total loans, net of
deferred fees $357,845 $329,744 $312,779 $279,942 $265,755
======== ======== ======== ======== ========
NONPERFORMING ASSETS
Nonaccrual loans $ 728 $ 409 $ 231 $ 744 $ 86
Loans 90 days
or more and still
accruing interest 1,898 649 441 1,231 685
Restructured loans -- -- -- 253 350
Foreclosed
properties 79 -- -- -- 273
-------- -------- -------- -------- --------
Total $ 2,705 $ 1,058 $ 672 $ 2,228 $ 1,394
======== ======== ======== ======== ========
</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 54% of the portfolio compared to 53% in 1996; commercial loans
comprising 35% of the portfolio in both 1997 and 1996; and consumer loans
comprising 11% compared to 12% in 1996. Commercial loans of $126,524,467,
consumer loans of $38,522,537 and real estate mortgage loans of $155,805,410 are
loans for which the principal source of repayment is derived from the ongoing
cash flow of the business. Real estate construction loans of $37,227,380 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.
II - 8
<PAGE> 27
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 Financial Accounting Standard ("FAS") No. 114,
Accounting by Creditors for the Impairment of a Loan (FAS No. 114) (subsequently
amended by FAS No. 118). FAS 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 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, 1997 and 1996, the recorded investment in loans that
are considered to be impaired under FAS No. 114 was $866,837 ($728,308 of which
was on a nonaccrual basis) and $882,200 ($409,305 of which was on a nonaccrual
basis), respectively. The average recorded balance of impaired loans during 1997
and 1996 was not significantly different from the balance at December 31, 1997
and 1996. The related allowance for loan losses determined in accordance with
FAS No. 114 for these loans was $560,132 and $383,919 at December 31, 1997 and
1996, respectively. For the years ended December 31, 1997 and 1996, the Bank
recognized interest income on those impaired loans of approximately $19,012 and
$26,102, 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 1.48%, 1.48% and 1.51% of net loans outstanding at December 31, 1997,
1996 and 1995, respectively, which was consistent with both management's desire
for strong reserves and the credit quality ratings of the loan portfolio. The
ratio of net charge-offs during the year to average loans outstanding during the
period were 0.22%, 0.21% and 0.16% at December 31, 1997, 1996 and 1995,
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,
<TABLE>
<CAPTION>
dollars in thousands 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Balance at beginning of year $4,794 $4,645 $3,996 $3,603 $3,391
Loans charged off:
Real estate 70 -- -- -- --
Commercial, financial and agricultural 452 533 297 136 331
Credit cards and related plans 19 17 8 10 3
Installment loans to individuals 308 192 288 246 63
------ ------ ------ ------ ------
Total charge-offs 849 742 593 392 397
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Real estate 4 -- -- -- --
Commercial, financial and agricultural 3 27 40 57 5
Credit cards and related plans 3 5 5 1 3
Installment loans to individuals 73 39 80 23 26
------ ------ ------ ------ ------
Total recoveries 83 71 125 81 34
------ ------ ------ ------ ------
Net charge-offs 766 671 468 311 363
------ ------ ------ ------ ------
Additions charged to operations 1,175 820 1,117 704 575
------ ------ ------ ------ ------
Balance at end of year $5,203 $4,794 $4,645 $3,996 $3,603
====== ====== ====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.22% 0.21% 0.16% 0.12% 0.14%
</TABLE>
II - 9
<PAGE> 28
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------------- ---------------- ---------------- ---------------- ----------------
% OF % of % of % of % of
TOTAL Total Total Total Total
dollars in thousands AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate $1,115 53.9% $1,378 53.1% $1,259 50.0% $1,106 46.3% $1,138 47.2%
Commercial,
financial and
agricultural 3,241 35.3% 2,718 35.2% 2,717 38.5% 2,398 41.8% 1,667 41.7%
Consumer 615 10.7% 518 11.6% 498 11.4% 400 11.8% 617 11.0%
All other -- 0.1% -- 0.1% -- 0.1% -- 0.1% 1 0.1%
Unallocated 232 N/A 180 n/a 171 n/a 92 n/a 180 n/a
------ ------ ------ ------ ------
Total loans $5,203 100.0% $4,794 100.0% $4,645 100.0% $3,996 100.0% $3,603 100.0%
====== ====== ====== ====== ======
</TABLE>
INVESTMENT SECURITIES
At December 31, 1997, the securities classified as available for sale, carried
at market value, totaled $52,072,834 with an amortized cost of $51,285,077.
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 2.17 years, U.S.
Government Agencies with an average life of 2.92 years, 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.
Securities classified as held to maturity totaled $79,036,384 with a market
value of $80,733,959 at December 31, 1997. Management determined that it has
both the ability and intent to hold those securities classified as investment
securities until maturity. Securities held to maturity consist of U.S. Treasury
Notes with an average life of 1.42 years, U.S. Government Agencies with an
average life of 3.5 years, and municipal bonds with an average life of 4.5
years. During 1997, $30,401,261 in securities matured and $275,000 in proceeds
were collected from securities sold. The proceeds from maturities were
reinvested along with funds in excess of loan demand.
MATURITIES AND YIELDS OF DEBT SECURITIES
As of December 31, 1997
<TABLE>
<CAPTION>
After One Year but After Five Years but
Within One Year Within Five Years Within Ten Years After Ten Years
---------------- ----------------- -------------------- ---------------
dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- ------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale: (1)
U.S. Treasury $ 4,497 5.89% $10,521 6.28%
U.S. government agency 6,000 6.02% 15,496 6.18% $ 3,111 6.26%
Other 585 8.42% 7,820 6.81% 768 7.58% $ 749 7.47%
------- ------- ------- ------
Total $11,082 6.09% $33,837 6.36% $ 3,879 6.52% $ 749 7.47%
======= ======= ======= ======
Held to maturity:
U.S. Treasury $ 3,500 5.89% $ 2,513 5.73%
U.S. government agency 5,918 6.19% $ 2,562 6.36%
State and political subdivisions (2) 5,860 9.73% 29,505 8.86% 25,654 8.32% $3,524 8.50%
------- ------- ------- ------
Total $ 9,360 8.29% $37,936 8.24% $28,216 8.14% $3,524 8.50%
======= ======= ======= ======
</TABLE>
- --------------------------------------------
(1) Securities available for sale are stated at amortized cost.
(2) Yields on tax-exempt investments have been adjusted to tax equivalent
basis using 35% for 1997.
II - 10
<PAGE> 29
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.
YEAR 2000 COMPLIANCE ISSUES
All levels of the Company's management and its Board of Directors are aware of
the seriousness of the Year 2000 century change and the effects it may have on
the Company and its customers. The Company has a project team under the
leadership of an independent consultant to guide it through its action plan to
ensure compliance by the Company and its customers. Although the Company relies
entirely upon outside vendors for its computer software and hardware, all
systems must be thoroughly evaluated for Year 2000 compliance. In addition, the
Company's business customers must be certain their systems are in compliance.
Regarding the Company's systems, it is the stated goal of the Year 2000 action
plan to have all affected areas in compliance by the end of 1998. This will
allow all of 1999 to be devoted to testing and validation. Regarding the
Company's business customers, the Company is planning seminars in 1998 to
educate customers concerning Year 2000 compliance issues. In addition, the
Company is revising all loan underwriting standards to include requirements for
Year 2000 compliance. The Company cannot yet determine its costs of Year 2000
compliance, but will disclose such amounts in future communications with
shareholders when such amounts can be reasonably estimated.
FORWARD LOOKING STATEMENTS
The foregoing discussion may contain forward looking statements within the
meaning of the Private Securities Litigation Reform Act. The accuracy of such
forward looking statements could be affected by such factors as, including but
not limited to, the financial success or changing strategies of the Company's
customers, actions of government regulators, or general economic conditions.
II - 11
<PAGE> 30
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 subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 23, 1998
- --------------------------------------------------------------------------------
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of Bank of Granite Corporation and its subsidiaries has prepared the
consolidated financial statements and other information contained herein in
accordance with generally accepted accounting principles and is responsible for
its accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities and
programs of internal audits. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets, and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
corporate affairs are conducted with the highest ethical standards. Bank of
Granite Corporation's policies, furnished to each employee and director,
addresses the importance of open internal communications, potential conflicts of
interest, compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of Bank of Granite Corporation's Board of Directors consists
solely of outside directors. The Audit Committee meets periodically with
management and the independent auditors to discuss audit, financial reporting
and related matters. Deloitte & Touche LLP and Bank of Granite Corporation's
internal auditors have direct access to the Audit Committee.
JOHN A. FORLINES, JR. KIRBY A. TYNDALL
Chairman and Chief Executive Officer Chief Financial Officer
January 23, 1998 January 23, 1998
II - 12
<PAGE> 31
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
ASSETS:
Cash and cash equivalents (Note 1):
Cash and due from banks $ 27,707,850 $ 24,870,352
Interest-bearing deposits 157,507 274,825
Federal funds sold -- 4,500,000
------------- -------------
Total cash and cash equivalents 27,865,357 29,645,177
------------- -------------
Investment Securities (Notes 1 and 3):
Available for sale, at fair value (amortized cost of $51,285,077 and
$50,906,209 at December 31, 1997 and 1996, respectively) 52,072,834 51,211,956
------------- -------------
Held to maturity, at amortized cost (fair value of $80,733,959 and
$78,728,117 at December 31, 1997 and 1996, respectively) 79,036,384 77,449,108
------------- -------------
Loans (Note 4) 357,845,513 329,744,072
Allowance for loan losses (Notes 1 and 5) (5,202,578) (4,793,889)
------------- -------------
Net loans 352,642,935 324,950,183
------------- -------------
Premises and equipment, net (Notes 1, 6 and 10) 9,583,429 8,254,712
Accrued interest receivable 4,972,654 4,290,350
Other assets 2,806,140 2,390,893
------------- -------------
Total assets $ 528,979,733 $ 498,192,379
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 80,637,746 $ 78,010,962
NOW accounts 62,792,730 60,575,240
Money market accounts 25,697,397 27,290,026
Savings 23,848,043 22,271,033
Time deposits of $100,000 or more 92,588,469 88,267,044
Other time deposits 129,011,799 121,283,686
------------- -------------
Total deposits 414,576,184 397,697,991
------------- -------------
Federal funds sold and securities sold
under agreements to repurchase (Note 11) 8,882,016 2,955,234
Other borrowings (Note 12) 6,287,700 9,636,259
Accrued interest payable 2,138,430 1,978,712
Other liabilities 1,878,680 1,905,614
------------- -------------
Total liabilities 433,763,010 414,173,810
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 16)
SHAREHOLDERS' EQUITY (Notes 1, 7, 8 and 14):
Common stock, $1.00 par value, authorized - 15,000,000 shares
Issued and outstanding - 9,146,272 shares and 9,116,552 shares
at December 31, 1997 and 1996, respectively 9,146,272 9,116,552
Capital surplus 22,234,753 21,913,629
Retained earnings 63,362,060 52,800,932
Net unrealized gain on securities available
for sale, net of deferred income taxes of
$314,119 and $118,293 at December 31,
1997 and 1996, respectively 473,638 187,456
------------- -------------
Total shareholders' equity 95,216,723 84,018,569
------------- -------------
Total liabilities and shareholders' equity $ 528,979,733 $ 498,192,379
============= =============
</TABLE>
See notes to consolidated financial statements.
II - 13
<PAGE> 32
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $36,246,226 $33,006,697 $ 31,538,067
Federal funds sold 197,939 312,516 251,047
Interest-bearing deposits 10,766 6,732 6,945
Investments:
U.S. Treasury 1,208,692 1,144,098 961,701
U.S. Government agencies 2,200,475 2,442,745 2,033,620
States and political subdivisions 3,253,315 3,022,204 2,845,134
Other 910,441 729,071 627,990
----------- ----------- ------------
Total interest income 44,027,854 40,664,063 38,264,504
----------- ----------- ------------
INTEREST EXPENSE:
Time deposits of $100,000 or more 5,132,118 4,973,875 4,748,413
Other time and savings deposits 9,465,803 9,192,464 8,276,096
Federal funds purchased and securities
sold under agreements to repurchase 217,916 188,176 175,549
Other borrowed funds 643,711 778,994 798,478
----------- ----------- ------------
Total interest expense 15,459,548 15,133,509 13,998,536
----------- ----------- ------------
NET INTEREST INCOME 28,568,306 25,530,554 24,265,968
PROVISION FOR LOAN LOSSES (Notes 1 and 5) 1,175,000 820,000 1,117,000
----------- ----------- ------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 27,393,306 24,710,554 23,148,968
----------- ----------- ------------
OTHER INCOME:
Service charges on deposit accounts 3,273,187 3,107,378 2,843,085
Other service charges, fees and commissions 3,690,047 3,296,063 3,001,198
Securities gains (losses) 3,695 174,086 (40,952)
Other 1,143,255 662,143 341,781
----------- ----------- ------------
Total other income 8,110,184 7,239,670 6,145,112
----------- ----------- ------------
OTHER EXPENSES:
Salaries and wages 6,916,428 6,231,710 5,565,407
Employee benefits (Note 9) 1,344,946 1,273,246 1,074,896
Occupancy expense, net 603,298 610,683 607,987
Equipment rentals, depreciation and maintenance 1,187,293 1,050,971 1,000,887
Other 4,067,085 3,197,385 3,401,399
----------- ----------- ------------
Total other expenses 14,119,050 12,363,995 11,650,576
----------- ----------- ------------
INCOME BEFORE INCOME TAXES 21,384,440 19,586,229 17,643,504
INCOME TAXES (Note 1 and 7) 6,953,253 6,220,357 5,598,532
----------- ----------- ------------
NET INCOME $14,431,187 $13,365,872 $ 12,044,972
=========== =========== ============
PER SHARE AMOUNTS (Notes 1 and 13):
Net income - Basic $ 1.58 $ 1.47 $ 1.33
- Diluted 1.57 1.46 1.32
Cash dividends 0.37 0.35 0.29
Book value 10.41 9.22 8.19
</TABLE>
See notes to consolidated financial statements.
II - 14
<PAGE> 33
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
COMMON STOCK, $1.00 par value
At beginning of year $ 9,116,552 $ 6,092,586 $ 6,066,191
Shares issued under stock option plan 29,720 23,139 26,395
Stock split shares issued -- 3,000,827 --
------------ ------------ ------------
At end of year 9,146,272 9,116,552 6,092,586
------------ ------------ ------------
CAPITAL SURPLUS
At beginning of year 21,913,629 21,602,301 21,240,558
Shares issued under stock option plan 321,124 311,328 361,743
------------ ------------ ------------
At end of year 22,234,753 21,913,629 21,602,301
------------ ------------ ------------
RETAINED EARNINGS
At beginning of year 52,800,932 46,220,157 37,203,573
Net income 14,431,187 13,365,872 12,044,972
Cash dividends (3,340,932) (3,058,856) (2,628,388)
Subsidiary's premerger distributions of income
as a Subchapter S corporation (529,127) (708,000) (400,000)
Stock split shares issued -- (3,000,827) --
Cash paid for fractional shares -- (17,414) --
------------ ------------ ------------
At end of year 63,362,060 52,800,932 46,220,157
------------ ------------ ------------
NET UNREALIZED GAIN (LOSS) ON
SECURITIES AVAILABLE FOR SALE
At beginning of year 187,456 456,286 (725,372)
Net change in unrealized gains or losses
on securities available for sale,
net of deferred income taxes 286,182 (268,830) 1,181,658
------------ ------------ ------------
At end of year 473,638 187,456 456,286
------------ ------------ ------------
Total shareholders' equity (Notes 1, 7 and 14) $ 95,216,723 $ 84,018,569 $ 74,371,330
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
II - 15
<PAGE> 34
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Interest received $ 43,502,445 $ 40,767,433 $ 37,810,397
Fees and commissions received 7,726,266 6,706,543 6,221,225
Interest paid (15,299,830) (15,027,561) (13,368,525)
Cash paid to suppliers and employees (13,484,841) (10,959,232) (11,037,327)
Income taxes paid (6,886,932) (6,241,649) (5,744,696)
------------ ------------ ------------
Net cash provided by operating activities 15,557,108 15,245,534 13,881,074
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 20,952,023 19,300,000 14,586,063
Proceeds from maturities and/or calls of
securities held to maturity 9,449,238 14,877,779 9,405,000
Proceeds from sales of securities
available for sale 275,000 311,205 894,378
Purchase of securities available for sale (21,613,206) (20,975,780) (12,693,750)
Purchase of securities held to maturity (11,182,401) (18,320,710) (21,764,932)
Net increase in loans (28,867,752) (17,635,246) (33,786,372)
Capital expenditures (2,307,031) (889,605) (659,236)
Proceeds from sale of fixed assets 20,000 154,840 6,045
Proceeds from sale of other real estate -- -- 429,665
------------ ------------ ------------
Net cash used by investing activities (33,274,129) (23,177,517) (43,583,139)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and savings accounts 4,828,655 10,717,233 4,238,209
Net increase in certificates of deposit 12,049,538 9,937,614 29,474,887
Net increase (decrease) in federal
funds purchased and securities sold
under agreements to repurchase 5,926,782 (27,636) (297,985)
Net decrease (increase) in other borrowings (3,348,559) (845,920) 407,796
Net proceeds from issuance of common stock 350,844 334,467 388,138
Cash paid for fractional shares -- (17,414) --
Dividend paid (3,340,932) (3,058,856) (2,628,388)
Subsidiary's premerger distributions of income
as a Subchapter S corporation (529,127) (708,000) (400,000)
------------ ------------ ------------
Net cash provided by financing activities 15,937,201 16,331,488 31,182,657
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH EQUIVALENTS (1,779,820) 8,399,505 1,480,592
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 29,645,177 21,245,672 19,765,080
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 27,865,357 $ 29,645,177 $ 21,245,672
============ ============ ============
</TABLE>
See notes to consolidated financial statements. (continued on next page)
II - 16
<PAGE> 35
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded from previous page)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 14,431,187 $ 13,365,872 $ 12,044,972
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 958,413 841,464 776,213
Provision for loan loss 1,175,000 820,000 1,117,000
Premium amortization, net 156,895 162,133 123,142
Deferred income taxes (230,850) (18,722) (364,386)
Losses (gains) on sales or calls of
securities available for sale (2,933) (159,049) 40,952
Gains on calls of securities
held to maturity (762) (15,039) --
Loss (gain) on disposal or sale
of equipment (99) (3,597) 2,528
Loss on sale of other real estate -- -- 50,816
Increase (decrease) in taxes payable 66,321 (21,292) (146,164)
Increase in interest receivable (682,304) (58,761) (577,249)
Increase in interest payable 159,718 105,948 630,011
Decrease (increase) in other assets (380,223) (313,241) 35,161
Increase (decrease) in other liabilities (93,255) 539,818 148,078
------------ ------------ ------------
Net adjustments to reconcile net
income to net cash provided by
operating activities 1,125,921 1,879,662 1,836,102
------------ ------------ ------------
Net cash provided by
operating activities $ 15,557,108 $ 15,245,534 $ 13,881,074
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS:
Increase (decrease) in unrealized
gains or losses on securities
available for sale $ 482,008 $ 450,520 $ (1,930,259)
Increase (decrease) in deferred income
taxes on unrealized gains or losses
on securities available for sale 195,826 (173,014) 760,551
Transfer from retained earnings to
common stock for stock split -- 3,000,827 --
Transfer from loans to other real
estate owned 79,063 -- 480,481
Transfer of investments from held to
maturity to available for sale -- -- 8,482,462
</TABLE>
See notes to consolidated financial statements.
II - 17
<PAGE> 36
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bank of Granite Corporation (the "Company") is a bank holding
company with two subsidiaries, Bank of Granite (the "Bank"), a state chartered
commercial bank incorporated in North Carolina on August 2, 1906 and GLL &
Associates, Inc. ("GLL"), a mortgage banking company incorporated in North
Carolina on June 24, 1985. 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 twelve
banking offices. GLL is headquartered in Winston-Salem, North Carolina and
provides mortgage origination services in the Central and Southern Piedmont
areas of North Carolina. GLL merged with the Company on November 5, 1997.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Bank of Granite Corporation and its wholly owned subsidiaries, Bank
of Granite and GLL & Associates, Inc. (referred to herein collectively as the
"Company"). All significant intercompany accounts and transactions have been
eliminated. All amounts for prior periods have been restated to include the
November 5, 1997 merger of GLL, which was accounted for as a pooling of
interests and is discussed in Note 2 below.
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.
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.
II - 18
<PAGE> 37
On January 1, 1996, the Company adopted Financial Accounting Standard ("FAS")
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 FAS No. 121 had no material effect on the Company'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 Company adopted FAS No. 114, "Accounting by Creditors for Impairment of a
Loan" (subsequently amended by FAS No. 118), on January 1, 1995. Loans that are
deemed to be impaired (i.e., probable that the Company 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 Company'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 write-downs 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.
PER SHARE AMOUNTS - Per share amounts have been computed using both the weighted
average number of shares outstanding of common stock for the purposes of
computing basic earnings per share and the weighted average number of shares
outstanding of common stock plus dilutive common stock equivalents for the
purposes of computing diluted earnings per share. See Note 13 for further
information regarding the computation of earnings per share. Dividends per share
represent amounts declared by the Board of Directors.
In December 1997, the Company adopted FAS No. 128, "Earnings Per Share." FAS 128
is effective for financial statements for both interim and annual periods ending
after December 15, 1997.
II - 19
<PAGE> 38
INCOME AND EXPENSES - The Company uses 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 FAS No. 123. See Note 8 for further
information regarding FAS 123 disclosures.
NEW ACCOUNTING STANDARDS - In June 1997, the Financial Accounting Standards
Board has issued FAS No. 130, "Reporting Comprehensive Income," was issued. FAS
No. 130 will require disclosure of comprehensive income (which is defined as
"the change in equity during a period excluding changes resulting from
investments by shareholders and distributions to shareholders") and its
components. FAS No. 130 is effective for fiscal years beginning after December
15, 1997, with reclassification of comparative years. The Company will adopt FAS
No. 130 in the year ending December 31, 1998. Had the new standard been applied
in 1997, there would be no material difference between comprehensive and
reported income.
FAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" also was issued in June 1997. FAS No. 131 is effective for the
Company in the fiscal year ending December 31, 1998. FAS No. 131 redefines how
operating segments are determined and requires disclosure of certain financial
and descriptive information about a company's operating segments. Management
does not believe that the adoption of FAS No. 131 will have a material impact on
the Company's financial statements.
2. COMPLETED ACQUISITION
On November 5, 1997, the Company acquired all of the common stock of GLL &
Associated, Inc. in a merger accounted for as a pooling of interests. As a
result, all amounts for prior periods have been restated to include amounts for
GLL as if GLL had been a part of the Company for such periods. Prior to the
merger, GLL had elected to be taxed as a Subchapter S corporation for income tax
purposes. Therefore, no income taxes were provided on premerger taxable income
that was taxable to the former owners. Income taxes have been provided on income
earned after the date of merger. In the fourth quarter of 1997, the Company and
GLL incurred nonrecurring merger related expenses of $405,678, before tax, which
were included in other expenses in the 1997 income statement. In December 1997,
GLL sold mortgage servicing rights resulting in a nonrecurring gain of $601,135,
before tax. On an after-tax basis, the aggregate net effect of both nonrecurring
transactions was $102,519.
II - 20
<PAGE> 39
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1997 and 1996 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
AT DECEMBER 31, 1997:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 4,497 $ 4,504
AFTER 1 YEAR BUT WITHIN 5 YEARS 10,521 10,663
------- -------
TOTAL U.S. TREASURY 15,018 $ 149 $ -- 15,167
------- ------ ------ -------
U. S. GOVERNMENT AGENCIES DUE:
WITHIN 1 YEAR 6,000 5,996
AFTER 1 YEAR BUT WITHIN 5 YEARS 15,496 15,560
AFTER 5 YEARS BUT WITHIN 10 YEARS 3,111 3,158
------- -------
TOTAL U.S. GOVERNMENT AGENCIES 24,607 133 26 24,714
------- ------ ------ -------
OTHERS DUE:
WITHIN 1 YEAR 585 594
AFTER 1 YEAR BUT WITHIN 5 YEARS 7,820 8,069
AFTER 5 YEARS BUT WITHIN 10 YEARS 768 804
AFTER 10 YEARS 749 760
EQUITY SECURITIES 1,738 1,965
------- -------
TOTAL OTHERS 11,660 621 89 12,192
------- ------ ------ -------
TOTAL AVAILABLE FOR SALE $51,285 $ 903 $ 115 $52,073
======= ====== ====== =======
HELD TO MATURITY
AT DECEMBER 31, 1997:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 3,500 $ 3,502
AFTER 1 YEAR BUT WITHIN 5 YEARS 2,513 2,523
------- -------
TOTAL U.S. TREASURY 6,013 $ 17 $ 5 6,025
------- ------ ------ -------
U. S. GOVERNMENT AGENCIES DUE:
AFTER 1 YEAR BUT WITHIN 5 YEARS 5,918 5,925
AFTER 5 YEARS BUT WITHIN 10 YEARS 2,562 2,613
------- -------
TOTAL U.S. GOVERNMENT AGENCIES 8,480 71 13 8,538
------- ------ ------ -------
STATE AND POLITICAL SUBDIVISIONS DUE:
WITHIN 1 YEAR 5,860 5,904
AFTER 1 YEAR BUT WITHIN 5 YEARS 29,505 30,054
AFTER 5 YEARS BUT WITHIN 10 YEARS 25,654 26,560
AFTER 10 YEARS 3,524 3,653
------- -------
TOTAL STATE AND POLITICAL SUBDIVISIONS 64,543 1,675 47 66,171
------- ------ ------ -------
TOTAL HELD TO MATURITY $79,036 $1,763 $ 65 $80,734
======= ====== ====== =======
</TABLE>
Sales of securities available for sale for the year ended December 31, 1997
resulted in realized gross gains of $2,933. Calls of securities held to maturity
resulted in gross gains of $3,012 and gross losses of $2,250. Cost of securities
sold were determined on the specific identification method.
II - 21
<PAGE> 40
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Fair
Type and Maturity Group Cost Gains Losses Value
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE
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 and equity securities 638 751
------- -------
Total others 10,925 462 119 11,268
------- ------ ------ -------
Total available for sale $50,906 $ 601 $ 295 $51,212
======= ====== ====== =======
HELD TO MATURITY 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
------- ------ ------ -------
Others due:
Within 1 year 3,087 3,091
After 1 year 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 others 60,736 1,529 227 62,038
------- ------ ------ -------
Total held to maturity $77,449 $1,573 $ 294 $78,728
======= ====== ====== =======
</TABLE>
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.
Securities with an amortized cost of $34,215,209 and $41,724,705 were pledged as
collateral for public deposits and for other purposes as required by law at
December 31, 1997 and 1996, respectively.
II - 22
<PAGE> 41
4. LOANS
Loans at December 31, 1997 and 1996, classified by type, are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Real estate:
Construction $ 37,227,380 $ 32,234,274
Mortgage 155,805,410 143,242,552
Commercial, financial and agricultural 126,524,467 116,468,706
Consumer 38,522,537 38,214,193
All other loans 458,883 194,228
------------- -------------
358,538,677 330,353,953
Deferred origination fees, net (693,164) (609,881)
------------- -------------
Total $ 357,845,513 $ 329,744,072
============= =============
</TABLE>
Nonperforming assets at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Nonaccrual loans $ 728,308 $ 409,305
Loans 90 days or more and still
accruing interest 1,898,362 648,480
Foreclosed properties 79,063 --
---------- ----------
Total $2,705,733 $1,057,785
========== ==========
</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 1997, 1996 and 1995 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, 1997 and 1996, directors' and principal officers'
direct and indirect indebtedness to the Bank aggregated $370,775 and $548,699,
respectively. During 1997, additions to such loans were $57,649 and repayments
totaled $235,574. In the opinion of management, these loans do not involve more
than normal risk of collectibility, nor do they present other unfavorable
features.
II - 23
<PAGE> 42
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1997,
1996 and 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $4,794 $4,645 $3,996
Loans charged off:
Real estate 70 -- --
Commercial, financial and agricultural 452 533 297
Credit cards and related plans 19 17 8
Installment loans to individuals 308 192 288
------ ------ ------
Total charge-offs 849 742 593
------ ------ ------
Recoveries of loans previously charged off:
Real estate 4 -- --
Commercial, financial and agricultural 3 27 40
Credit cards and related plans 3 5 5
Installment loans to individuals 73 39 80
------ ------ ------
Total recoveries 83 71 125
------ ------ ------
Net charge-offs 766 671 468
Additions charged to operations 1,175 820 1,117
------ ------ ------
Balance at end of year $5,203 $4,794 $4,645
====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.22% 0.21% 0.16%
</TABLE>
At December 31, 1997 and 1996, the recorded investment in loans that are
considered to be impaired was $866,837 ($728,308 of which is on a nonaccrual
basis) and $882,200 ($409,305 of which is on a nonaccrual basis), respectively.
The average recorded balance of impaired loans during 1997 and 1996 is not
significantly different from the balance at December 31, 1997 and 1996. The
related allowance for loan losses determined in accordance with FAS No. 114 for
these loans is $560,132 and $383,919 at December 31, 1997 and 1996,
respectively. For the years ended December 31, 1997 and 1996, the Bank
recognized interest income on those impaired loans of approximately $19,012 and
$26,102, respectively.
II - 24
<PAGE> 43
6. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1997 and 1996 follow:
<TABLE>
<CAPTION>
Premises and
Accumulated Equipment,
Cost Depreciation Net
<S> <C> <C> <C>
AT DECEMBER 31, 1997:
LAND $ 1,508,662 $1,508,662
BUILDINGS 6,764,460 $1,931,969 4,832,491
LEASEHOLD IMPROVEMENTS 47,348 27,754 19,594
FURNITURE, EQUIPMENT AND VEHICLES 6,898,184 4,287,751 2,610,433
CONSTRUCTION IN PROGRESS 612,249 612,249
----------- ---------- ----------
TOTAL $15,830,903 $6,247,474 $9,583,429
=========== ========== ==========
At December 31, 1996:
Land $ 1,528,137 $1,528,137
Buildings 6,615,192 $1,733,859 4,881,333
Leasehold improvements 47,348 25,259 22,089
Furniture, equipment and vehicles 5,686,671 3,881,298 1,805,373
Construction in progress 17,780 17,780
----------- ---------- ----------
Total $13,895,128 $5,640,416 $8,254,712
=========== ========== ==========
</TABLE>
7. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1997, 1996 and 1995 follow:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income tax provision
Current $ 7,184,103 $ 6,239,079 $ 5,962,918
Deferred (230,850) (18,722) (364,386)
----------- ----------- -----------
Total $ 6,953,253 $ 6,220,357 $ 5,598,532
=========== =========== ===========
</TABLE>
The change in deferred taxes of $195,826 and $(173,014) related to unrealized
gains and losses on securities available for sale were allocated to
shareholders' equity in the years ended December 31, 1997 and 1996,
respectively.
II - 25
<PAGE> 44
A reconciliation of reported income tax expense for the years ended December 31,
1997, 1996 and 1995 to the amount of tax expense computed by multiplying income
before income taxes by the statutory federal income tax rate.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Statutory federal income tax rate 35% 35% 35%
=========== =========== ===========
Tax provision at statutory rate $ 7,484,554 $ 6,855,180 $ 6,175,226
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (1,134,464) (984,222) (907,226)
State income taxes net of federal tax benefit 728,035 645,091 592,397
Subsidiary's pre-merger earnings taxable to
subsidiary's former owners (188,145) (232,763) (184,809)
Other 63,273 (62,929) (77,056)
----------- ----------- -----------
Income tax provision $ 6,953,253 $ 6,220,357 $ 5,598,532
=========== =========== ===========
</TABLE>
The tax effect of the cumulative temporary differences and carryforwards that
gave rise to the deferred tax assets and liabilities at December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------
ASSETS LIABILITIES TOTAL
<S> <C> <C> <C>
EXCESS BOOK OVER TAX BAD DEBT EXPENSE $ 1,772,614 $ 1,772,614
EXCESS TAX OVER BOOK DEPRECIATION $ (419,729) (419,729)
UNREALIZED GAINS AND LOSSES ON SECURITIES
AVAILABLE FOR SALE (314,119) (314,119)
OTHER, NET 321,462 (329,906) (8,444)
----------- ----------- -----------
TOTAL $ 2,094,076 $(1,063,754) $ 1,030,322
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Assets Liabilities Total
<S> <C> <C> <C>
Excess book over tax bad debt expense $1,582,594 $ 1,582,594
Excess tax over book depreciation $(398,094) (398,094)
Unrealized gains and losses on securities
available for sale (118,293) (118,293)
Other, net 260,969 (331,878) (70,909)
---------- --------- -----------
Total $1,843,563 $(848,265) $ 995,298
========== ========= ===========
</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 - 26
<PAGE> 45
8. STOCK OPTIONS
At December 31, 1997, 1996 and 1995, 113,890, 117,838 and 137,664 shares of
common stock were reserved for stock options granted under the Company's stock
option plans, respectively, and 74,228, none, and 20,154 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, 1997, 1996 and 1995
follows:
<TABLE>
<CAPTION>
Shares Option Price Per Share Total
<S> <C> <C> <C>
Outstanding at December 31:
1997 113,890 $15.20 - $28.75 $2,235,495
1996 117,838 $10.45 - $20.67 $1,856,730
1995 137,664 $ 8.64 - $18.67 $1,907,614
Granted:
1997 32,450 $27.00 - $28.75 $ 881,275
1996 22,779 $20.67 - $20.67 $ 470,842
1995 28,474 $17.33 - $17.50 $ 493,797
Exercised:
1997 29,720 $10.45 - $20.67 $ 350,844
1996 32,106 $ 8.64 - $18.67 $ 334,453
1995 39,593 $ 7.25 - $15.73 $ 388,138
Expired:
1997 6,678 $15.73 - $27.00 $ 151,666
1996 10,499 $15.20 - $20.67 $ 187,273
1995 14,876 $ 8.64 - $15.73 $ 198,248
</TABLE>
Options granted become exercisable in accordance with the vesting schedule
specified by the Board of Directors in the grant. Options granted prior to
January 1, 1997 become exercisable over a five-year period at the rate of 20%
per year beginning one-year from the date of grant. Options granted during 1997
become exercisable over a five-year period at the rate of 20% after six-months
from the date of grant and 20% per year beginning one-year from the date of
grant. No option may be exercisable more than five-years after the date of
grant.
The Company accounts for compensation costs related to the Company's employee
stock option plan in accordance with Accounting Principles Board Opinion No. 25.
Therefore, no compensation cost has been recognized for stock option awards
because the options are granted at exercise prices based on the market value of
the Company's stock on the date of grant. Had compensation cost for the
Company's employee stock option plan been determined consistent with FAS No.
123, the Company's pro forma net income and earnings per share for the years
ended December 31, 1997, 1996 and 1995 would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net income
As reported $14,431,187 $13,365,872 $12,044,972
Pro forma $14,269,300 $13,152,038 $11,942,309
Net income per share
As reported - Basic $ 1.58 $ 1.47 $ 1.33
- Diluted $ 1.57 $ 1.46 $ 1.32
Pro forma - Basic $ 1.56 $ 1.44 $ 1.32
- Diluted $ 1.55 $ 1.44 $ 1.31
</TABLE>
II - 27
<PAGE> 46
In estimating the compensation expense associated with FAS No. 123, using The
Black Scholes Method, the following assumptions were used:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Option value, aggregate $10.82 $ 7.43 $ 6.15
Risk-free rate 5.92% 6.11% 6.11%
Average expected term (years) 5 YEARS 5 years 4.9 years
Expected volatility 31.29% 33.41% 33.41%
Expected dividend yield 1.30% 1.20% 1.20%
</TABLE>
9. EMPLOYEE BENEFIT PLANS
The Bank 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 $608,899, $564,016 and $515,718 for the years ended
December 31, 1997, 1996 and 1995, respectively.
In 1994, the Bank adopted a Supplemental Executive Retirement Plan ("SERP"). The
SERP allows the Bank to supplement the level of certain executives' retirement
income over that which is obtainable through the tax-qualified retirement plan
sponsored by the Bank. Contributions totaled $22,025, $17,226 and $13,665 for
the years ended December 31, 1997, 1996 and 1995, respectively.
GLL sponsors a retirement plan for its employees under Section 401(k) of the
Internal Revenue Code. The plan covers all employees over 21 years of age who
have completed 1,000 hours of service. At it discretion, GLL may make matching
contributions to the plan. Contributions totaled $14,092, $13,576 and $10,776
for the years ended December 31, 1997, 1996 and 1995, respectively.
10. LEASES
LESSEE - OPERATING - The Company's subsidiaries lease certain premises and
equipment under operating lease agreements. As of December 31, 1997, future
minimum lease payments under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
Year Payments
<S> <C>
1998 $ 96,057
1999 57,449
2000 49,046
2001 43,337
2002 36,000
--------
Total $281,889
========
</TABLE>
Rental expense charged to operations under all operating lease agreements was
$187,778, $225,320 and $250,392 for the years ended December 31, 1997, 1996 and
1995, respectively.
LESSOR - OPERATING - In 1997 and earlier years, the Company leased certain
office space to others under operating lease agreements. Such arrangements ended
in 1997. The Company plans to retain the previously leased office space for its
own use.
Rental income received under all operating lease agreements was $41,268, $67,252
and $75,652 for the years ended December 31, 1997, 1996 and 1995, respectively.
II - 28
<PAGE> 47
11. 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>
1997 1996 1995
<S> <C> <C> <C>
Federal funds purchased:
Maximum amount outstanding at any
month-end during the year $5,000,000 $2,000,000 $3,500,000
Average daily balance outstanding
during the year $ 634,426 $ 121,813 $ 389,372
Average annual interest rate paid
during the year 5.6% 5.8% 5.9%
Securities sold under agreements to repurchase:
Balance at end of year $3,882,016 $2,955,234 $2,982,870
Weighted average interest rate at end of year 5.0% 4.7% 4.8%
Maximum amount outstanding at any
month-end during the year $3,982,784 $4,803,891 $3,196,222
Average daily balance outstanding
during the year $3,712,406 $3,832,580 $2,933,733
Average annual interest rate paid
during the year 4.9% 4.7% 5.2%
</TABLE>
12. OTHER BORROWINGS
GLL temporarily funds its mortgages, from the time or origination until the time
of sale, through the use of lines of credit from one of the Company's
correspondent financial institutions. For the years ended December 31, 1997,
1996 and 1995 such lines of credit totaled $15,000,000, $12,000,000 and
$14,900,000, respectively. Prior to GLL's merger on November 5, 1997,
outstanding balances under the lines of credit incurred interest costs at the
lender's prime to prime-plus-one percent rate per annum. Subsequent to November
5, 1997, outstanding balances under the lines of credit incurred interest costs
at the 30-day LIBOR plus 50 basis points to 30-day LIBOR plus 75 basis points.
These lines of credit are secured by the mortgage loans obtained. In addition,
the Company serves as guarantor on borrowings under these arrangements occurring
after the merger date.
II - 29
<PAGE> 48
13. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
FAS No. 128, "Earnings Per Share," requires the presentation of the basic
earnings per share ("EPS") on the face of the income statement with dual
presentation of basic and diluted EPS with complex capital structures. Basic EPS
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Basic EPS excludes the dilutive effect that
could occur if any securities or other contracts to issue common stock were
exercised or converted into or resulted in the issuance of common stock. Diluted
EPS is computed by dividing net income by the sum of the weighted average number
of common shares outstanding for the period plus the number of additional common
shares that would have been outstanding if the potentially dilutive common
shares had been issued. Following is the reconciliation of EPS for the years
ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income $14,431,187 $13,365,872 $12,044,972
----------- ----------- -----------
Divide by: Weighted average
shares outstanding 9,140,088 9,104,832 9,069,217
----------- ----------- -----------
Basic earnings per share $ 1.58 $ 1.47 $ 1.33
=========== =========== ===========
DILUTED EARNINGS PER SHARE
Net income $14,431,187 $13,365,872 $12,044,972
----------- ----------- -----------
Divide by: Weighted average
shares outstanding 9,140,088 9,104,832 9,069,217
Potentially dilutive effect of
stock options 43,752 47,732 33,322
----------- ----------- -----------
Weighted average shares outstanding,
including potentially dilutive effect
of stock options 9,183,840 9,152,564 9,102,539
----------- ----------- -----------
Diluted earnings per share $ 1.57 $ 1.46 $ 1.32
=========== =========== ===========
</TABLE>
II - 30
<PAGE> 49
14. 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, 1997, the Bank had undivided profits, as
defined, of $79,918,077.
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.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank (set forth in the table below) to maintain
minimum amounts and ratios 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,
1997, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1997, the most recent notification from the FDIC categorized
the Bank 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 Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
TOTAL CAPITAL TO RISK WEIGHTED ASSETS $99,611 25.60% $31,128 8.00% $38,910 10.00%
TIER I CAPITAL TO RISK WEIGHTED ASSETS $94,743 24.35% $15,564 4.00% $23,346 6.00%
TIER I CAPITAL TO AVERAGE ASSETS $94,743 17.93% $21,135 4.00% $26,419 5.00%
As of December 31, 1996
Total capital to risk weighted assets $88,315 24.46% $28,889 8.00% $36,111 10.00%
Tier I capital to risk weighted assets $83,831 23.21% $14,444 4.00% $21,666 6.00%
Tier I capital to average assets $83,831 16.85% $19,897 4.00% $24,871 5.00%
</TABLE>
The average reserve balance required to be maintained under the requirements of
the Federal Reserve was approximately $9,096,000 for the year ended December 31,
1997. The Bank maintained average reserve balances in excess of the
requirements.
II - 31
<PAGE> 50
15. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial data for Bank of Granite Corporation (parent company only)
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
CONDENSED BALANCE SHEETS 1997 1996
<S> <C> <C>
Assets:
Cash on deposit with bank subsidiary $ 92,101 $ 554,879
Investment in subsidiary bank at equity 91,815,602 81,274,287
Investment in subsidiary mortgage bank at equity 977,161 712,455
Other investments 2,437,108 1,686,437
Other (92,428) 2,707
------------ -----------
Total $ 95,229,544 $84,230,765
============ ===========
Liabilities and Shareholders' Equity:
Other liabilities $ 12,821 $ 212,196
Shareholders' equity 95,216,723 84,018,569
------------ -----------
Total $ 95,229,544 $84,230,765
============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
CONDENSED RESULTS OF OPERATIONS 1997 1996 1995
<S> <C> <C> <C>
Equity in earnings of subsidiary bank:
Dividends $ 3,355,797 $ 3,073,673 $ 2,672,759
Undistributed 10,373,222 9,572,301 8,766,424
Equity in earnings of subsidiary mortgage bank:
Premerger earnings distributed to former owners 529,127 708,000 400,000
Undistributed 265,733 (42,962) 128,028
Income (expenses), net (92,692) 54,860 77,761
------------ ------------ -----------
Net income $ 14,431,187 $ 13,365,872 $12,044,972
============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------------
CONDENSED CASH FLOW 1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 126,757 $ 107,219 $ 40,107
Dividends received from subsidiary bank 3,355,797 3,073,673 2,672,759
Net cash provided (used) by other
operating activities (403,337) 36,677 6,687
----------- ----------- -----------
Net cash provided by operating activities 3,079,217 3,217,569 2,719,553
----------- ----------- -----------
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 275,000 311,205 --
Purchases of securities available for sale (826,907) (622,449) (841,656)
----------- ----------- -----------
Net cash used by investing activities (551,907) (111,244) (755,593)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 350,844 334,467 388,138
Net dividends paid (3,340,932) (3,058,856) (2,628,388)
Cash paid for fractional shares -- (17,414) --
----------- ----------- -----------
Net cash used by financing activities (2,990,088) (2,741,803) (2,240,250)
----------- ----------- -----------
Net increase (decrease) in cash (462,778) 364,522 (276,290)
Cash at beginning of year 554,879 190,357 466,647
=========== =========== ===========
Cash at end of year $ 92,101 $ 554,879 $ 190,357
=========== =========== ===========
</TABLE>
II - 32
<PAGE> 51
(concluded from previous page)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------
CONDENSED CASH FLOW 1997 1996 1995
<S> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 14,431,187 $ 13,365,872 $ 12,044,972
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (10,638,955) (9,529,339) (8,894,452)
Premerger earnings distributed to former owners (529,127) (708,000) (400,000)
Premium amortization and discount
accretion, net 1,154 (722) (711)
Gains on sales or calls of
securities available for sale -- (159,047) (15,238)
Decrease (increase) in interest receivable (13,754) 4,169 (17,118)
Decrease in other assets 28,087 44,442 900
Increase (decrease) in other liabilities (199,375) 200,194 1,200
------------ ------------ ------------
Total adjustments (11,351,970) (10,148,303) (9,325,419)
------------ ------------ ------------
Net cash provided by operating activities $ 3,079,217 $ 3,217,569 $ 2,719,553
============ ============ ============
Supplemental disclosure of non-cash transactions:
Transfer from retained earnings to common stock $ -- $ 3,000,827 $ --
Increase (decrease) in unrealized
gains or losses on securities
available for sale 197,804 72,130 (156,315)
Increase (decrease) in deferred income
taxes on unrealized gains or losses
on securities available for sale (78,687) (27,464) 61,400
</TABLE>
16. 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, 1997 and 1996 was
$57,413,413 and $56,138,188, respectively. Additionally, standby letters of
credit of $3,773,055 and $2,251,294 were outstanding at December 31, 1997 and
1996, respectively.
The Bank's exposure to credit loss for commitments to extend credit and standby
letters of credit is the contractual amount of those financial instruments. The
Bank uses the same credit policies for making commitments and issuing standby
letters of credit as it does for on-balance sheet financial instruments. Each
customer's creditworthiness is evaluated on an individual case-by-case basis.
The amount and type of collateral, if deemed necessary by management, is based
upon this evaluation of creditworthiness. Collateral held varies, but may
include marketable securities, deposits, property, plant and equipment,
investment assets, inventories and accounts receivable. Management does not
anticipate any significant losses as a result of these financial instruments.
II - 33
<PAGE> 52
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of FAS 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, 1997 December 31, 1996
---------------------- ----------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 27,865 27,865 $ 29,645 29,645
Marketable securities 131,109 132,807 128,661 129,940
Loans 357,846 359,051 329,744 330,854
Liabilities:
Demand deposits 192,976 192,976 188,147 188,147
Time deposits 221,600 218,665 209,551 206,776
Off-balance-sheet unrealized
gains (losses) - Commitments 92 90
</TABLE>
The fair value of marketable securities is based on quoted market prices, dealer
quotes and prices obtained from independent pricing services. The fair value of
loans, time deposits, commitments and guarantees is estimated based on present
values using applicable risk-adjusted spreads to the U.S. Treasury curve to
approximate current entry-value interest rates applicable to each category of
such financial instruments.
No adjustment was made to the entry-value interest rates for changes in credit
of loans for which there are no known credit concerns. Management segregates
loans in appropriate risk categories. Management believes that the risk factor
embedded in the entry-value interest rates, along with the general reserves
applicable to the loan portfolio for which there are no known credit concerns,
result in a fair valuation of such loans on an entry-value basis.
As required by the Statement, demand deposits are shown at their face value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1997. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
* * * * * *
II - 34
<PAGE> 53
APPENDIX A
*** SAMPLE BALLOT ***
REVOCABLE PROXY
BANK OF GRANITE CORPORATION
<TABLE>
<S> <C>
[X] PLEASE MARK VOTES For Against Abstain
AS IN THIS EXAMPLE 1. APPROVAL TO INCREASE [ ] [ ] [ ]
This Proxy is Solicited on THE AUTHORIZED COMMON
Behalf of the Board of Directors. SHARES TO 25,000,000.
The undersigned hereby appoints
John A. Forlines, Jr., Robert E. 2. ELECTION OF DIRECTORS [ ] [ ] [ ]
Cline, and Barbara F. Freiman, John N Bray, Paul M.
or each of them, as Proxies, Fleetwood, III, CPA,
each with the power to appoint John A. Forlines, Jr.,
his or her substitute and hereby Barbara F. Freiman,
authorizes each of them to Hugh R. Gaither, Charles
represent and to vote as M. Snipes, Boyd C.
designated below all the shares Wilson, Jr., CPA.
of Common Stock held on record INSTRUCTION: To withhold authority to vote
by the undersigned on March 13, for any individual nominee, mark "For All
1998, at the Annual Meeting Except" and write that nominee's name in
of Shareholders to be held on the space provided below.
April 27, 1998, or any ------------------------------------------------
adjournment thereof.
3. THE RATIFICATION OF [ ] [ ] [ ]
THE ACCOUNTING FIRM
DELOITTE & TOUCHE, LLP
as the Corporation's
Independent Certified
Public Accountants for
Please be sure to sign and date the year ending
this Proxy in the space below. December 31, 1998.
- --------------------- ------------ 4. In their discretion, the
Stockholder Date Proxies are authorized
to vote upon other such
- --------------------- ------------ business as may properly
Co-holder (if any) Date come before the meeting.
</TABLE>
- -------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
BANK OF GRANITE CORPORATION
Shares of Common Stock of the Corporation will be voted as specified. If no
specification is made, shares will be voted FOR Proposal 1 to Increase the
Number of Authorized Common Shares to 25,000,000, FOR Proposal 2 to Elect the
Board of Directors' nominees to the Board of Directors, FOR Proposal 3 to Ratify
the Accounting Firm of Deloitte & Touche, LLP as the Corporation's Auditors, and
otherwise at the discretion of the Proxies.
The above signed hereby acknowledges receipt of the Notice of Annual Meeting of
the Shareholders of the Corporation called for April 27, 1998, a Proxy Statement
for the Annual Meeting and the 1997 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.
YOUR VOTE IS IMPORTANT TO US!
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
