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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:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BANK OF GRANITE CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(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:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] 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, the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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[BANK OF GRANITE CORPORATION LOGO]
23 NORTH MAIN STREET
GRANITE FALLS, NORTH CAROLINA 28630
(704) 496-2000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - APRIL 24, 2000
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Bank of Granite Corporation will be held
on Monday, April 24, 2000 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 election of seven persons named as director
nominees in the Proxy Statement dated March 23, 2000, which
accompanies the Notice;
2. 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, 2000; and
3. 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 6, 2000 are
entitled to receive notice of, and to vote at, this meeting.
Bank of Granite Corporation's 2000 Annual Shareholders Meeting proxy Ballot,
Proxy Statement and its 1999 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, 2000 Chairman and Chief Executive Officer
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[BANK OF GRANITE CORPORATION LOGO]
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PROXY STATEMENT
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SOLICITATION, VOTING AND REVOCABILITY OF PROXY
General
The accompanying Proxy is solicited by the Board of Directors of Bank of Granite
Corporation (the "Company") for use at the Annual Meeting of Shareholders to be
held on April 24, 2000, 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 Company is March 23, 2000.
A copy of the Company's 1999 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 6, 2000. The Company
will also provide to any shareholder, without charge, a copy of the Annual
Report for 1999 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 Company's recent filings with
the SEC through the SEC's internet site at www.sec.gov and search on the
Company'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 Company. 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 Company, 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 Company, 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 6, 2000, the record date, the Company had
issued and outstanding 11,407,601 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 Company at the close of business on March 6, 2000 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 Company entitled to vote at the Annual Meeting is
necessary to constitute a quorum at the Annual Meeting and any adjournment
thereof.
The approval of Proposal 1 (the Election of Directors), and Proposal 2 (the
Ratification of the Selection of the Company'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 6, 2000. Cumulative voting is not permitted.
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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 and
2. Each Proxy, unless the shareholder otherwise specifies, will be voted in
favor of Proposals 1 and 2. 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
Company will be voted (1) in favor of the proposed slate of directors and (2) in
favor of the ratification of Deloitte & Touche LLP as the Company'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 management and Board of the Company 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 Company, no individual shareholder owned beneficially
more than five percent (5%) of Bank of Granite Corporation's outstanding Common
Stock on the record date. Company 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 3,100 individuals and organizations.
On the record date, the Company's Common Stock was owned by approximately 5,700
individuals and entities, holding Stock either as holders of record, holders of
shares registered in street name or as beneficial owners.
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 Company's mortgage bank subsidiary, GLL & Associates,
Inc ("GLL") is composed of the Company's President, the Company's
Secretary/Treasurer and GLL's President.
During the fiscal year ended December 31, 1999, the Bank's Board of Directors
held 13 meetings, and the Company's Board of Directors held 5 meetings. All
members of both Boards of Directors attended more than 94% 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 93%.
Company and Bank directors, composed of the same persons, were paid an annual
retainer of $5,000 and fees of $200 for attendance at each monthly and special
meeting of the Board. GLL directors were paid $200 for attendance at each
quarterly meeting of GLL's Board. Directors received no additional compensation
for attending committee meetings. The Bank's Board of Directors supervises the
Bank's compensation matters and functions as the Bank's executive committee. The
Company's Board has standing audit and nominating committees. The functions,
composition and frequency of meetings for the audit and nominating committees in
fiscal year 1999 were as follows:
AUDIT COMMITTEE - The Audit Committee was composed of directors Paul M.
Fleetwood, III, Barbara F. Freiman and Boyd C. Wilson, Jr. The Committee, whose
members are neither officers nor employees of the Company 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 1999, 7 meetings were held. All Committee members attended more
than 71% of the total number of Audit Committee meetings held during the fiscal
year 1999.
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 Company 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 2001 Annual Shareholders
Meeting". During 1999, 1 meeting was held, which was attended by all Committee
members.
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ELECTION OF DIRECTORS
(PROPOSAL 1)
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 Company 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 6, 2000.
All of the nominees shown below have been previously elected as directors by the
Company's shareholders and are currently serving on the Board of Directors.
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 1.
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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 6, 2000. 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 Company's shareholder
records.
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Name Principle Occupation Age on Director Amount and Nature Ownership
during last five years Dec. 31, Since (1) of Beneficial as % of
1999 Ownership Common
Stock
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JOHN N. BRAY President, Vanguard 57 Bank (1992) 4,051 direct 0.05%
Hickory, N.C. Furniture, Inc. Corp (1992) 1,175 indirect(2)
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PAUL M. FLEETWOOD, President, Corporate 52 Bank (1998) 112,500 direct 0.99%
III, CPA Management Services, Inc Corp (1998) -- indirect
Hickory, N.C. and Catawba Valley
Building Supply, Inc.
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JOHN A. FORLINES, JR. Chairman and Chief 81 Bank (1954) 531,305 direct 4.78%
Granite Falls, N.C. Executive Officer, Corp (1987) 14,312 indirect(3)
Bank of Granite
Corporation, since
June 1987; Chairman,
Bank of Granite, since
1972 (Chief Executive
Officer, 1954-94)
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BARBARA F. FREIMAN Executive Director of the 65 Bank (1989) 6,576 direct 0.08%
Lenoir, N.C. Foundation of Caldwell Corp (1989) 2,272 indirect(2)
Community College and
Technical Institute
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HUGH R. GAITHER President and Chief 49 Bank (1997) 216 direct 0.00%
Newton, N.C. Executive Officer, Corp (1997) -- indirect
Ridgeview, Inc.
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CHARLES M. SNIPES President, Bank of 66 Bank (1982) 131,775 direct 1.47%
Hickory, N.C. Granite Corporation; Corp (1987) 35,562 indirect(2,3)
President and Chief GLL (1997)
Executive Officer
Bank of Granite
(since 1994); GLL
Chairman; Director
Vanguard Furniture, Inc.
and Ridgeview, Inc.
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BOYD C. WILSON, Vice President and 47 Bank (1996) 5,375 direct 0.10%
JR., CPA Controller, Kincaid Corp (1996) 5,871 indirect(2)
Hudson, N.C. Furniture Company
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DIRECTORS AND NAMED EXECUTIVE 795,173 direct 7.51%
OFFICERS AS A GROUP (9 PERSONS) 61,942 indirect
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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 Messrs. Forlines and Snipes
and other named executive officers consists of those shares of
Company Common Stock obtainable by such individuals within 60 days
of March 6, 2000.
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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 Company and its subsidiaries, Bank of Granite ("Bank") and GLL & Associates,
Inc. ("GLL") whose total salary and bonus exceeded $100,000 for 1999.
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Compensation
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Annual Long-term
--------------------------
Securities
Name and Base Underlying All
Principal Position Year Salary Bonus(1) Options(2) Other(3)
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JOHN A. FORLINES, JR 1999 $235,000 $ 45,700 5,000 $35,459
Company Chairman and Chief
Executive Officer; Bank Chairman 1998 $225,250 $ 45,800 4,375 $22,953
1997 $214,500 $ 46,020 4,375 $38,408
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CHARLES M. SNIPES 1999 $187,500 $ 36,500 5,000 $29,229
Company President;
Bank President and Chief Executive 1998 $180,250 $ 36,800 4,375 $19,483
Officer; GLL Chairman and Director
1997 $171,600 $ 36,820 4,375 $32,867
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KIRBY A. TYNDALL 1999 $ 90,000 $ 17,800 3,000 $13,026
Company, Bank and GLL
Secretary, Treasurer and Chief 1998 $ 85,000 $ 17,400 3,125 $ 8,295
Financial Officer, GLL Director
1997 $ 41,706 $ 17,160 3,125 $ 5,950
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GARY L. LACKEY 1999 $100,000 $ 60,316 1,000 $11,800
GLL President and Chief Executive
Officer, GLL Director 1998 $ 72,000 $ 80,606 1,250 $10,700
1997 $ 72,000 $161,081 -- $ 8,672
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Notes: (1) Figures shown represent actual incentive cash bonuses earned
and accrued during the year indicated. Mr. Lackey received an
additional $100,000 discretionary bonus from GLL in 1997 prior
to merger.
(2) Figures shown represent number of shares of Company 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 and by GLL to its 401(k) Plan (the
"Plans") and allocated to the indicated executive officer's
accounts. The plans are "tax qualified" under section 401(a)
of the Internal Revenue Code and cover all employees. The
following amounts were contributed to the indicated accounts:
Mr. Forlines $19,200 in 1999, $12,800 in 1998 and $22,400 in
1997; Mr. Snipes $19,200 in 1999, $12,800 in 1998 and $22,400
in 1997; Mr. Tyndall $12,888 in 1999, $8,173 in 1998 and
$5,902 in 1997; and Mr. Lackey $4,600 in 1999, $3,500 in 1998
and $1,472 in 1997.
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 to the indicated accounts: Mr. Forlines
$15,039 in 1999, $9,248 in 1998, and $14,982 in 1997; and Mr.
Snipes $7,716 in 1999, $4,566 in 1998 and $7,043 in 1997.
The remaining amounts include (i) the value of certain life
insurance premiums paid for the indicated executives, based on the
term insurance value of such payments as calculated under the
Internal Revenue Code P.S. 58 rates or those of the insurer, if
lower, and includable in the executive's taxable income for the
year and (ii) the value of the personal use portion of the
Company's vehicles provided to the executive.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
during 1999 to the named officers.
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Individual Grants Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term
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Number of % of Total
Securities Options Appreciation
Underlying Granted to Exercise or Assumed at
Name and Options Employees Base Price Expiration 5% 10%
Principal Position Granted(1) in 1999(2) ($/share)(3) Date(4) (5) (6)
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JOHN A. FORLINES, JR 5,000 17.4% $22.25 08/16/2004 $30,736 $67,919
Company Chairman and Chief
Executive Officer; Bank Chairman
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CHARLES M. SNIPES 5,000 17.4% $22.25 08/16/2004 $30,736 $67,919
Company President;
Bank President and Chief Executive
Officer; GLL Chairman and Director
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KIRBY A. TYNDALL 3,000 10.4% $22.25 08/16/2004 $18,442 $40,752
Company, Bank and GLL
Secretary, Treasurer and Chief
Financial Officer, GLL Director
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GARY L. LACKEY 1,000 3.5% $22.25 08/16/2004 $ 6,147 $13,584
GLL President and Chief Executive
Officer, GLL Director
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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 1999. The price at which shares of Company Common
Stock may be purchased upon the exercise of options under the
Plan is equal to 100% of the fair market value of the Company'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 1999.
(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 5.0% annualized appreciation
rate in the price of Company Common Stock. The potential
realizable value is calculated under the following formula: [(A x
B) - A] x C, where A = $22.25, 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 = the number of
securities underlying the grant at year end 1999.
(6) The dollar values shown represent the potential realizable value
of the grant of options at an assumed 10% annualized appreciation
rate in the price of Company Common Stock. The potential
realizable value is calculated under the following formula: [(A x
B) - A] x C, where A = $22.25, the exercise price per share (which
equals the market price at the time of the grant), B = 1.6105, the
assumed rate of stock price appreciation (10%) compounded annually
over the five-year term of the option; and C = the number of
securities underlying the grant at year end 1999.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
LAST FISCAL YEAR- END OPTION VALUES
The following table sets forth information with respect to the exercise of stock
options by the named officers during 1999 and unexercised options held as of
December 31, 1999.
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Shares Number of Securities Value of Unexercised
Acquired Value Underlying In-the-Money
Name and on Exercise Realized Unexercised Options at Options at
Principal Position (#)(1) ($)(2) Fiscal Year-end (#) Fiscal Year-end ($)(3)
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JOHN A. FORLINES, JR 5,858 $81,886 Exercisable 12,762 Exercisable $63,510
Company Chairman and Chief Unexercisable 10,925 Unexercisable $ 3,351
Executive Officer; Bank Chairman
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CHARLES M. SNIPES 5,858 $84,449 Exercisable 12,762 Exercisable $63,510
Company President; Unexercisable 10,925 Unexercisable $ 3,351
Bank President and Chief Executive
Officer; GLL Chairman and Director
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KIRBY A. TYNDALL -- $ -- Exercisable 2,500 Exercisable $ --
Company, Bank and GLL Unexercisable 6,750 Unexercisable $ --
Secretary, Treasurer and Chief
Financial Officer, GLL Director
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GARY L. LACKEY -- $ -- Exercisable 250 Exercisable $ --
GLL President and Chief Executive Unexercisable 2,000 Unexercisable $ --
Officer, GLL Director
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Notes: (1) Indicates number of shares acquired by indicated executive officer
through the exercise of options during 1999.
(2) Dollar amounts represent the aggregate dollar value realized by
the indicated executive officer upon the exercise of options
during 1999. The aggregate dollar value realized is calculated
based on the difference between the fair market value of Company
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 1999. 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
Company's Common Stock exceeds the exercise or base price of the
shares subject to the options at year end 1999. For those options
"in the money", value is computed based on the difference between
fair market value of Company Common Stock at year end 1999 and the
exercise or base price of the shares subject to the options. The
value of options exercisable and unexercisable at year end 1999 is
also shown.
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BOARD REPORT ON EXECUTIVE OFFICER COMPENSATION
All compensation paid to the Company'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 Company, which
consist of the same persons. This report is furnished by the Company's Board of
Directors, which acts as the Company'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
Company's performance. The compensation paid is designed to retain and reward
executive officers who are capable of leading the Company in achieving its
business objectives in an industry characterized by complexity,
competitiveness, and change. Annual compensation for the Company's CEO (and
other executive officers) consists of three elements:
- Base salary;
- An annual cash incentive that is directly and indirectly
linked to Company and individual performance (with Company
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 Company's shareholders.
For the Company'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 Company 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 Company CEO and other executive officer base salaries.
For 1999, the Committee increased the CEO's base salary by 4.3%. The Committee
determined that the 4.3% increase in the CEO's base salary was appropriate in
light of two primary factors. The first factor was a desire by the Company to
provide the CEO with a base salary comparable to that paid by other banking
organizations of similar size and financial performance. The Company's Board of
Directors annually reviews 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 Company's
2.40% return on assets placed the Company among the banking industry's top
performers during 1998.
For the Company's executives (and CEO), the annual cash incentive during the
years 1997, 1998 and 1999 ranged from 19.4% to 112.0% of base salary. For the
Bank's named executives, the annual cash incentive ranged from 19.4% to 41.1%
of base salary. For GLL's named executive, the annual cash incentive ranged
from 60.3% to 112.0% of base salary. For the Bank and GLL, this means that up to
approximately 41.1% and 112.0%, respectively, of executive annual compensation
was variable, could fluctuate significantly from year to year, and was directly
and indirectly tied to business and individual performance. The CEO's
percentage of annual cash incentive for 1999 was 19.4% of base salary. The
annual cash incentive for the Bank's named executives is based on the Bank's
return on assets (ROA). The Bank's Board of Directors, in its sole discretion,
sets the threshold ROA target, based in part on the Bank'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 Bank earns a ROA above
the threshold level, an increasing dollar incentive pool is created up to a
maximum dollar amount at a predetermined ROA level. The Company continued the
incentive plan for GLL's CEO that GLL had prior to the merger. The incentive
plan for GLL's CEO is based on a percentage of earnings before income taxes.
For the Company'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 Company's current financial performance and the number of stock
options previously granted.
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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 Company's 1997 Incentive Stock Option Plan
was designed to provide that compensation deductions, if any, available to the
Company 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
Paul M. Fleetwood, III, CPA
John A. Forlines, Jr.
Barbara F. Freiman
Hugh R. Gaither
Charles M. Snipes
Boyd C. Wilson, Jr., CPA
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The full Company Board of Directors serves as the Company's compensation
committee. John A. Forlines, Jr. and Charles M. Snipes both served as members
of the Company's and Bank's Board of Directors during 1999 and also served as
Company and Bank executive officers. Mr. Forlines is the Chairman and CEO of
the Company and Chairman of the Bank. Mr. Snipes is the President of the
Company, President and CEO of the Bank and Chairman of GLL. While Mr. Forlines
and Mr. Snipes specifically excluded themselves from any compensation committee
discussions concerning their own compensation, they did participate in
compensation committee discussions concerning the compensation of other
executive officers.
I - 9
12
SHAREHOLDER PERFORMANCE GRAPH
The performance graph shown on the following pages compares the Company's
cumulative total return over the most recent five year period with both the
Nasdaq Total Return 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 22 independent publicly owned community banks located in the southeastern
states of Alabama, Florida, Georgia, North Carolina, South Carolina, Tennessee,
Virginia and West Virginia. The banks range in asset size from $190 million to
$1.4 billion. Returns are shown on a total return basis which assumes the
reinvestment of dividends. Due to the trend of mergers and consolidation in the
banking industry, the investment banking firm changes the composition of the
Independent Bank Index from year to year to replace community banks that have
been acquired or otherwise changed their structure in such a way as to make
them unrepresentative of the community banks represented in the Index. The
following list contains the institutions included in the 1999 Independent Bank
Index.
Assets
Name, City, State ($ in millions)
United Security Bancshares, Inc., Thomasville, AL $ 472
TIB Financial Corporation, Key Largo, FL 372
Seacoast Banking Corporation, Stuart, FL 1,061
Capital City Bank Group, Inc., Tallahassee, FL 1,437
Fidelity National Corporation, Atlanta, GA 848
Southwest Georgia Financial Group, Moultrie, GA 220
PAB Bankshares, Inc., Valdosta, GA 535
Four Oaks Fincorp, Inc., Four Oaks, NC 225
FNB Financial Services Corporation, Reidsville, NC 560
First Bancorp, Troy, NC 535
CNB Corporation, Conway, SC 469
Palmetto Bancshares, Inc., Laurens, SC 624
Carolina Southern Bank, Spartanburg, SC 201
First Pulaski National Corporation, Pulaski, TN 282
National Bankshares, Inc., Blackburg, VA 463
FNB Corporation, Christiansburg, VA 497
Virginia Commonwealth Financial Corporation, Culpeper, VA 367
Americal National Bankshares, Inc., Danville, VA 478
Central Virginia Bankshares, Inc., Powhatan, VA 190
Virginia Financial Corporation, Staunton, VA 470
C&F Financial Corporation, West Point, VA 313
First Century Bankshares Inc., Bluefield, WV 375
I - 10
13
BANK OF GRANITE CORPORATION
FIVE YEAR PERFORMANCE INDEX
[chart of Five Year Performance Index appears here]
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------
Bank of Granite Corporation 100 118 179 192 219 173
Independent Bank Index 100 122 155 235 246 222
Nasdaq Total Return Index 100 141 174 213 300 542
The average compound annual returns for the five-year period ended December 31,
1999 were 11.6% for the Company, 17.3% for the Independent Bank Index and 40.2%
for the Nasdaq Total Return Index. Returns by year for the Company and the two
indices are presented below.
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Bank of Granite Corporation 18.0% 51.7% 7.3% 14.1% -21.0%
Independent Bank Index 22.0% 27.0% 51.6% 4.7% -9.8%
Nasdaq Total Return Index 41.0% 23.4% 22.4% 40.8% 80.7%
I - 11
14
TRANSACTIONS WITH OFFICERS AND DIRECTORS
The Company 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 Company 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 Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of ownership of Company Common Stock and reports of changes in
ownership. Executive officer, directors and greater than 10% shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, all Section 16(a) filings required of its executive
officers and directors for 1999 were made in a timely manner.
RATIFICATION OF SELECTION OF ACCOUNTANTS
(PROPOSAL 2)
The Board of Directors of the Company has selected the firm of Deloitte &
Touche, LLP as independent Certified Public Accountants to examine the
financial statements of the Company for the year ending December 31, 2000. The
firm is to report on the Company'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
Company'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 COMPANY'S INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS FOR THE YEAR ENDED DECEMBER 31, 2000 BY VOTING FOR PROPOSAL 2.
I - 12
15
PROPOSALS FOR 2001 ANNUAL SHAREHOLDERS MEETING
From time to time, individual shareholders may wish to submit proposals which
they believe should be voted upon by the Company's shareholders. The Securities
and Exchange Commission has adopted regulations which govern the inclusion of
such proposals in the Company's annual proxy materials. No such proposals were
submitted for the 2000 Annual Meeting. Shareholder proposals intended to be
presented at the 2001 Annual Meeting of Shareholders must be received by the
Secretary of the Company at its executive office, 23 North Main Street, P.O.
Box 128, Granite Falls, North Carolina 28630 no later than November 22, 2000
(which is 120 days prior to the expected date of the 2001 Proxy Statement) in
order to be eligible for inclusion in the Company's Proxy Ballot and Proxy
Statement for the 2001 Annual Meeting.
While the Company's Nominating Committee normally recommends and nominates
individuals to serve as directors of the Company, shareholders may also
nominate candidates for director, provided that such nominations are made in
writing and a received by the Company at its executive offices not later than
December 22, 2000 (which is 90 days prior to the expected date of the 2001
Proxy Statement). The nomination should be sent to the attention of the Company
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 Company 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 Company 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 on
April 24, 2000 at 10:30 a.m., at the 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, 2000 Secretary
I - 13
16
(THIS PAGE INTENTIONALLY LEFT BLANK)
17
MANAGEMENT'S DISCUSSION
AND ANALYSIS, AND
AUDITED FINANCIAL
STATEMENTS
II - 1
18
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 periods
include GLL as if GLL had been merged with the Company for all such 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 operations for the year ended December 31,
1999 compared to the year ended December 31, 1998, the year ended December 31,
1998 compared to the year ended December 31, 1997, and the year ended December
31, 1997 compared to the year ended December 31, 1996.
1999 COMPARED TO 1998
In 1999, the Company earned $14,736,792, or $1.28 per share, compared to
$13,448,435, or $1.17 per share, in 1998. The 1999 earnings equated to returns
of 2.46% on average assets and 13.42% on average equity.
The earnings increase was primarily attributable to lower loan loss provisions
in 1999, which were $1,862,585 compared to $4,321,740 in 1998. Loan loss
provisions in 1998, the previous year, included $3,046,425 related to loans to
one of the Bank's customers which proved to be uncollectible. Including the
write-off of accrued interest of $91,900 on the loans, the Bank recorded
expenses of $3,138,325 before tax, or $1,882,995 after tax, or $0.16 per share.
Other changes in revenues and expenses were in the categories of net interest
income, other income and other expenses.
Net interest income, the Company's largest source of revenues, increased to
$32,253,067 in 1999 from $31,501,214 in 1998. Interest income was $48,005,534
in 1999, up less than 1% from $47,577,090 in 1998, primarily due to increases
in the volumes of interest-earning assets which were significantly offset by
lower yields over the first half of the year. Average interest-earning assets
grew by $35,615,523, or 6.8%, although average loans, the highest yielding
asset category, only grew by $7,245,986, or less than 2%. Interest expense
decreased 2% to $15,752,467 in 1999 compared to $16,075,876 in 1998. Although
time deposit rates rose during 1999, the higher interest costs of time deposits
were more than offset by growth in lower cost transaction and savings accounts.
Average balances in noninterest-bearing demand accounts and interest-bearing
savings, NOW and money market accounts grew $15,971,039, or 7.9%, to
$218,302,256 in 1999 from $202,331,217 in 1998. Average balances in time
deposits grew $8,032,084, or 3.5%, to $240,211,383 in 1999 from $232,179,299 in
1998. Average overnight borrowings, principally commercial account balances
which are swept into the Company's commercial paper overnight, more than
doubled to $11,131,756 in 1999 from $5,348,189 in 1998. Average other
borrowings, which are used to fund mortgage banking activities, decreased
$3,307,633, or 18.1%, due to fewer mortgage originations which began to decline
when interest rates rose in the early summer of 1999.
The decline in mortgage origination activity was the principal reason that the
Company's fee income decreased in 1999. Other income was $8,209,542 in 1999, a
decrease of $454,011, or 5.2%, from such revenues of $8,663,553 in 1998. Fees
from the originations of mortgage loans decreased $411,988, or 11.8%, to
$3,090,820 in 1999 from $3,502,808 in 1998. Another important source of fee
income for the Company is gains from sales of the guaranteed portions of small
business administration ("SBA") loans. Such fee income from the sales of SBA
loans also declined $108,747 in 1999 to $312,502 from $421,249 in 1998. Both
mortgage and SBA lending activities often decline during periods of rising
rates.
II - 2
19
Other expenses, or overhead, increased $700,272, or 4.4%, to $16,536,075 in
1999 from $15,835,803 in 1998. Personnel expenses, the largest component of
overhead, increased $461,076, or 4.9%, to $9,904,199 in 1999 from $9,443,123 in
1998. Occupancy and equipment expenses declined slightly, while a $241,723
increase in other expenses related to mortgage origination activities accounted
for most of the $297,465, or 7.0%, increase in other overhead expenses.
1998 COMPARED TO 1997
In 1998, the Company produced strong earnings despite a significant third
quarter loan charge that ended the Company's record of successive earnings
increases. This unusual loan charge related to one borrower and is not believed
to be indicative of any pervasive problem within the loan portfolio. Despite
the loan charge of $1,882,995 after tax, the Company nevertheless managed to
return 2.39% on average assets and 13.35% on average equity. However, net
income for 1998 decreased to $13,448,435, or $1.17 per share, compared to
$14,431,187, or $1.26 per share, in 1997. Excluding the third quarter loan
charge, net income increased 6.2% primarily because of strong mortgage business
and the Bank's continued successful efforts to increase net interest income
over the previous period. Net interest income increased to $31,501,214 compared
to $28,568,306 in 1997. Interest income increased $3,549,236 primarily due to
increases in asset volumes. Approximately $3,833,000 of the increase in
interest income was attributable to increases in asset volumes slightly offset
by a decrease of $284,000 attributable to lower rates. Gross loans increased
$27,744,691 or 7.8%, most of which were GLL's mortgage loans in process.
Interest expense increased $616,328 of which approximately $1,419,000 was
attributable to deposit volume growth partially offset by a decrease of
approximately $803,000 attributable to lower rates. Other income increased 6.8%
to $8,663,553 compared to $8,110,184 in 1997. Excluding 1997 nonrecurring gains
from the sales of mortgage servicing rights, other income increased 15.4%. The
increase in service charges on deposit accounts of $279,235 resulted from
growth in transaction deposit accounts. During 1998, 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
$669,248 which was primarily due to increases in fees from mortgage
originations and annuity sales, both of which tend to rise during periods of
falling interest rates. For the year ended December 31, 1998, the Company
earned $3,502,808 in fees from the origination of mortgage loans compared to
$2,863,942 in 1997. Other income decreased by $393,152 primarily because 1997
included a $601,135 nonrecurring gain, before taxes, from the sale of GLL's
mortgage servicing rights. Another important source of nontraditional income is
gains from sales of the guaranteed portions of small business administration
("SBA") loans. Such sales of SBA loans generated income of $421,249 in 1998
compared to $242,898 in 1997. Other expenses, or overhead, increased $1,716,753
or 12.2% over the previous year. Salaries increased $1,265,467 or 18.3%. The
Bank's salaries increased 5.4% while GLL's salaries increased 54.8% because of
increased mortgage origination activity. Occupancy increased $153,358 primarily
because of two new Bank offices and three new GLL offices. Equipment expenses
increased $220,553 primarily because of depreciation of planned technology
replacements and expenses related to year 2000 transition (see "Year 2000
Transition" below). Other noninterest expenses increased $161,093, or 4%.
Excluding 1997 nonrecurring GLL merger costs of $405,678, before taxes, other
expenses rose 15.5% in 1998, primarily because of expenses associated with two
new banking offices, a new cash flow manager product and increased mortgage
loan production.
1997 COMPARED TO 1996
Net income for 1997 was $14,431,187, or $1.26 per share, compared to
$13,365,872, or $1.17 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 $165,000 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.
II - 3
20
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. Equipment expenses increased $136,322
primarily because of depreciation of new digital imaging technology. 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.
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 optimize net interest
income. Net interest income totaled $32,253,067, $31,501,214, and $28,568,306
for 1999, 1998 and 1997 respectively, representing an increase of 2.4% for 1999
over 1998, 10.3% for 1998 over 1997, and 11.9% for 1997 over 1996. Interest
rate spreads have been at least 4.5% 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,
1999 1998 1997
------------------------------- ----------------------------- -----------------------------
AVERAGE INTEREST Average Interest Average Interest
AVERAGE YIELD/ INCOME/ Average Yield/ Income/ Average Yield/ Income/
dollars in thousands BALANCE COST EXPENSE Balance Cost Expense Balance Cost Expense
ASSETS
Loans(1) $380,693 10.04% $ 38,235 $373,447 10.41% $ 38,894 $347,435 10.43% $ 36,246
Taxable securities 76,574 6.23% 4,768 69,309 6.23% 4,318 66,986 6.47% 4,331
Nontaxable securities(2) 74,506 7.27% 5,418 65,506 8.02% 5,252 61,997 8.07% 5,005
Federal funds sold 30,166 4.91% 1,481 18,058 5.27% 951 3,516 5.63% 198
-------- ------------------ ================== ========
Total interest-earning assets 561,939 8.88% 49,902 526,320 9.39% 49,415 479,934 9.54% 45,780
-------- ======== ========
Cash and due from banks 23,292 22,633 21,635
All other assets 13,317 13,961 11,295
-------- ======== --------
Total assets $598,548 $562,914 $512,864
======== ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
NOW deposits $ 70,087 1.52% 1,067 $ 62,799 1.39% 872 $ 60,716 2.38% 1,443
Money market deposits 31,917 3.27% 1,045 30,131 3.17% 956 28,971 2.70% 782
Savings deposits 25,295 1.74% 439 24,805 1.79% 443 23,926 2.35% 562
Time deposits of $100,000
or more 99,400 5.25% 5,222 101,043 5.65% 5,710 90,931 5.64% 5,132
Other time deposits 140,811 4.85% 6,826 131,137 5.37% 7,037 123,984 5.39% 6,679
-------- ================== ================== --------
Interest-bearing deposits 367,510 3.97% 14,599 349,915 4.29% 15,018 328,528 4.44% 14,598
Overnight borrowings 11,291 4.39% 496 5,568 4.72% 263 4,298 5.07% 218
Other borrowings 15,002 4.38% 657 18,310 4.34% 795 10,289 6.26% 644
======== ================== ------------------ --------
Total interest-bearing liabilities 393,803 4.00% 15,752 373,793 4.30% 16,076 343,115 4.51% 15,460
======== ======== --------
Noninterest-bearing deposits 90,845 84,376 77,240
Other liabilities 4,078 3,992 3,475
Shareholders' equity 109,822 100,753 89,034
Total liabilities and
shareholders' equity
-------- ======== ========
$598,548 $562,914 $512,864
======== ======== ========
Net yield on earning assets and
net interest income(2)(3) 6.08% $ 34,150 6.33% $ 33,339 6.32% $ 30,320
======== ======== ========
Interest rate spread(4) 4.88% 5.09% 5.03%
- ----------------------------------
(1) Non-accrual loans have been included.
(2) Yields and interest income on tax-exempt investments have been adjusted to
tax equivalent basis using 35% for 1999, 1998 and 1997.
(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.
II - 4
21
Changes in interest income and interest expense can result from changes in both
volume and rates. The following table sets forth the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in
the volume of interest earning assets and interest bearing liabilities and from
changes in yields and rates.
INTEREST RATE AND VOLUME VARIANCE ANALYSIS
for the years ended December 31,
1999 COMPARED TO 1998 1998 compared to 1997
---------------------------- -----------------------------
CHANGE Change
ATTRIBUTABLE TO Attributable to
------------------ ------------------
dollars in thousands VOLUME(1) RATE(1) TOTAL Volume(1) Rate(1) Total
Loans $ 741 $ (1,400) $ (659) $ 2,711 $ (63) $ 2,648
Taxable securities 452 (2) 450 147 (160) (13)
Nontaxable securities 688 (522) 166 282 (35) 247
Federal funds sold 616 (86) 530 792 (39) 753
Interest-earning assets 3,254 (2,767) 487 4,390 (755) 3,635
NOW deposits 106 89 195 39 (610) (571)
Money market deposits 58 31 89 34 140 174
Savings deposits 9 (13) (4) 18 (137) (119)
Time deposits of $100,000
or more (90) (398) (488) 571 7 578
Other time deposits 494 (705) (211) 385 (27) 358
Interest-bearing deposits 727 (1,146) (419) 934 (514) 420
Overnight borrowings 261 (28) 233 62 (17) 45
Other borrowings (144) 6 (138) 425 (274) 151
Interest-bearing liabilities 830 (1,154) (324) 1,351 (735) 616
- ----------------------------------
(1) The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variances.
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISKS
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, 1999, the Company's core deposits, defined as
total deposits excluding time deposits of $100,000 or more, totaled
$361,617,633, or 76.7%, 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 only 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.
II - 5
22
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.
INTEREST RATE SENSITIVITY (GAP ANALYSIS)
As of December 31, 1999
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
INTEREST-EARNING ASSETS
Interest-bearing due from banks $ 269 $ 269 $ 269
Federal funds sold 27,650 27,650 27,650
Securities (at amortized cost) (1):
U.S. Treasury 1,498 $ 1,002 2,500 $ 7,526 10,026
U.S. Government agencies 5,000 -- $ 4,000 9,000 53,930 62,930
States and political subdivisions 1,260 4,824 201 6,285 68,593 74,878
Other (including equity securities) 125 100 170 395 8,359 8,754
Loans (gross):
Real estate - Construction 35,348 358 137 35,843 3,114 38,957
Real estate - Mortgage 147,021 727 1,112 148,860 28,144 177,004
Commercial, financial and agricultural 122,875 1,036 1,387 125,298 16,415 141,713
Consumer 9,417 662 1,295 11,374 20,957 32,331
All other 791 -- -- 791 4 795
--------------------------------------------------------------------------
Total interest-earning assets $ 351,254 $ 8,709 $ 8,302 $ 368,265 $ 207,042 $ 575,307
--------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Savings and NOW accounts $ 98,307 $ 98,307 $ 98,307
Money market accounts 33,663 33,663 33,663
Time deposits of $100,000 or more 62,387 $ 25,251 $ 14,656 102,294 $ 7,748 110,042
Other time deposits 43,514 36,493 32,391 112,398 26,149 138,547
Overnight borrowings 13,462 13,462 13,462
Other borrowings 8,626 8,626 8,626
--------------------------------------------------------------------------
Total interest-bearing liabilities $ 259,959 $ 61,744 $ 47,047 $ 368,750 $ 33,897 $ 402,647
--------------------------------------------------------------------------
Interest sensitivity gap $ 91,295 $ (53,035) $ (38,745) $ (485)
Cumulative interest sensitivity gap 91,295 38,260 (485) (485)
Interest earning-assets as a percentage
of interest-bearing liabilities 135% 14% 18% 100%
- --------------------------------------- -----------------------------------------------
(1) Interest sensitivity periods for debt securities are based on
contractual maturities.
The Company uses several modeling techniques to measure interest rate risk
including the gap analysis previously discussed, the simulation of net interest
income under varying interest rate scenarios and the theoretical impact of
immediate and sustained rate changes referred to as "rate shocks." The
following table summarizes the estimated theoretical impact on the Company's
tax equivalent net interest income and market value of equity from hypothetical
"rate shocks" of plus and minus 1%, 2%, 3% and 4% as compared to the estimated
theoretical impact of rates remaining unchanged. The prospective effects of
these hypothetical interest rate changes, is based upon numerous assumptions
including relative and estimated levels of key interest rates. "Rate shock"
modeling is of limited usefulness because it does not take into account the
pricing strategies management would undertake in response to the depicted
sudden and sustained rate changes. Additionally, management does not believe
rate changes of the magnitude described are likely in the forecast period
presented.
dollars in thousands Estimated Resulting Theoretical Estimated Resulting Theoretical
Hypothetical Immediate Tax Equivalent Net Interest Income Market Value of Equity
and Sustained Rate Change Amount % Change Amount % Change
+4% $ 39,540 8.2% $ 111,415 0.2%
+3% 38,779 6.2% 111,464 0.2%
+2% 38,024 4.1% 111,451 0.2%
+1% 37,275 2.0% 111,376 0.1%
0% 36,532 0.0% 111,238 0.0%
-1% 35,795 -2.0% 111,038 -0.2%
-2% 35,064 -4.0% 110,780 -0.4%
-3% 34,338 -6.0% 110,469 -0.7%
-4% 33,618 -8.0% 110,114 -1.0%
II - 6
23
The following table presents the maturity distribution of the Company's loans
by type, including fixed rate loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
As of December 31, 1999
Within One to Five
One Five Years or
dollars in thousands Year Years More Total
Real estate - Construction $ 16,958 $ 14,467 $ 7,532 $ 38,957
Real estate - Mortgage 33,905 65,675 77,424 177,004
Commercial, financial and agricultural 82,001 53,217 6,495 141,713
Consumer 7,744 23,622 965 32,331
All other 773 11 11 795
-------- -------- ------- --------
Total $141,381 $156,992 $92,427 $390,800
======== ======== ======= ========
Predetermined rate, maturity
greater than one year $ 52,223 $15,369 $ 67,592
Variable rate or maturing within
one year 141,381 104,769 77,058 323,208
-------- -------- ------- --------
Total $141,381 $156,992 $92,427 $390,800
======== ======== ======= ========
The Company's rate paid on interest-bearing deposits declined to 3.97% in 1999
compared to 4.29% in 1998. The Company's deposit growth was primarily reflected
in time deposits, which decreased $3,268,696. Rate sensitive consumers chose to
place funds in more liquid and shorter term deposit accounts in anticipation of
rising 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,
dollars in thousands 1999 1998 1997
Non-interest-bearing deposits $ 90,845 $ 84,376 $ 77,240
Interest-bearing deposits 367,510 349,915 328,528
-------- -------- --------
Total $458,355 $434,291 $405,768
======== ======== ========
The preceding table includes certificates of deposits $100,000 and over which
at December 31, 1999 totaled approximately $110,042,000. The following table
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, 1999
Within Three to Six to Within One to
Three Six Twelve One Five
dollars in thousands Months Months Months Year Years Total
Time deposits of $100,000 or more $ 62,254 $ 25,251 $ 14,656 $ 102,161 $ 7,881 $ 110,042
--------------------------------------------------------------------------
CAPITAL RESOURCES
Funding for the future growth and expansion of the Company is dependent upon
earnings of the subsidiaries. As of December 31, 1999, the Company's ratio of
total capital to risk-adjusted assets was 27.57%. 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.
II - 7
24
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, 1999 were $390,189,234. This compares with $385,590,204 at December 31,
1998, an increase of $4,599,030 or 1.19%. The Company places emphasis on
consumer based installment loans and commercial loans to small and medium sized
business. The Company has a diversified loan portfolio with no concentrations
to any one borrower, industry or market region. The amounts and types of loans
outstanding for the past five years ended December 31 are shown on the
following table.
LOANS
As of December 31,
1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------------------
% OF % of % of % of % of
TOTAL Total Total Total Total
dollars in thousands AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
LOANS
Real estate -
Construction $ 38,957 10.0% $ 32,397 8.7% $ 37,227 10.4% $ 32,234 9.8% $ 27,108 8.7%
Mortgage 177,004 45.2% 188,167 48.7% 155,805 43.5% 143,243 43.3% 129,791 41.3%
Commercial,
financial and
agricultural 141,713 36.3% 129,854 33.6% 126,524 35.3% 116,469 35.2% 120,537 38.5%
Consumer 32,331 8.3% 35,734 9.3% 38,523 10.7% 38,214 11.6% 35,620 11.4%
All other 795 0.2% 117 0.0% 460 0.1% 194 0.1% 241 0.1%
-------- -------- -------- -------- --------
Total loans 390,800 100.0% 386,269 100.0% 358,539 100.0% 330,354 100.0% 313,297 100.0%
======== ======== ======== ======== ========
Deferred origination
fees, net (611) (679) (693) (610) (518)
-------- -------- -------- -------- --------
Total loans, net of
deferred fees $390,189 $385,590 $357,846 $329,744 $312,779
======== ======== ======== ======== ========
LOANS AND NONPERFORMING ASSETS
As of December 31,
dollars in thousands 1999 1998 1997 1996 1995
NONPERFORMING ASSETS
Nonaccrual loans $1,079 $ 639 $ 728 $ 409 $231
Loans past due 90 days or more
and still accruing interest 981 2,955 1,899 649 441
Foreclosed properties 54 290 79 -- --
------------------------------------------------------------
Total $2,114 $3,884 $2,706 $1,058 $672
============================================================
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.
Real estate loans comprised 55.2% of the portfolio in 1999 compared to 57.1% in
1998. Commercial loans comprised 36.3% of the portfolio in 1999 compared to
33.6% in 1998, while consumer loans comprised 8.3% in 1999 compared to 9.3% in
1998. Commercial loans of $141,712,933, consumer loans of $32,330,735 and real
estate mortgage loans of $177,004,429 are loans for which the principal source
of repayment is derived from the ongoing cash flow of the business. Real estate
construction loans of $38,956,900 are loans for which the principal source of
repayment comes from the sale of real estate or from obtaining permanent
financing.
II - 8
25
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 loan and assigns a corresponding loan
grade. All loans are periodically reviewed to determine whether any changes in
these loan grades are necessary. This loan grading system assists management in
determining the overall risk in the loan portfolio.
The allowance for loan losses is created by direct charges to operations.
Losses on loans are charged against the allowance for loan losses in the
accounting period in which they are determined by management to be
uncollectible. Recoveries during the period are credited to the allowance for
loan losses.
Impaired loans 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. 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 as impaired when, based on current information and events, it is probable
that the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. At December 31, 1999 and 1998, the
recorded investment in loans that are considered to be impaired was $2,357,685
($1,135,042 of which was on a nonaccrual basis) and $826,806 ($639,041 of which
was on a nonaccrual basis), respectively. The average recorded balance of
impaired loans during 1999 and 1998 was not significantly different from the
respective ending balances at December 31, 1999 and 1998. The related allowance
for loan losses for these loans was $746,783 and $250,979 at December 31, 1999
and 1998, respectively. For the years ended December 31, 1999 and 1998, the
Bank recognized interest income on those impaired loans of approximately
$107,241 and $16,467, 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 1.23%, 1.21% and 1.48% of net loans outstanding at December 31,
1999, 1998 and 1997, 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 0.46%, 1.31% and 0.22% at December 31, 1999,
1998 and 1997, respectively. These ratios reflect management's conservative
lending, and effective efforts to recover credit losses.
In the third quarter of 1998, the Company announced that one of the Bank's
borrowers, a textile related plant and its owners, was unable to repay loans
which the Bank had made for a period extending over several years. The Bank had
hoped that this borrower's business would improve. The borrower managed to
generate positive cash flows in mid-summer, but the positive cash flows proved
to be short-lived. The Bank increased its loan loss reserves by $3,046,425 and
wrote off related accrued interest of $91,900 resulting in an aggregate charge
to earnings of $3,138,325 before tax, or $1,882,995 after tax, or 16.4 cents
per share. The Bank also charged off its previously recognized estimated loss,
included in the allowance for loan losses, on the loans to this borrower. The
textile plant's assets were sold in the fourth quarter of 1998. Management
assessed the likelihood of any further recovery of this loss as remote. Because
this loan charge was related to one borrower and its financial circumstances,
the charge was not indicative of any pervasive problem within the loan
portfolio.
II - 9
26
The following table presents an analysis of the allowance for loan losses.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
for the years ended December 31,
dollars in thousands 1999 1998 1997 1996 1995
Balance at beginning of year $4,620 $5,203 $4,794 $4,645 $3,996
------------------------------------------------------
Loans charged off:
Real estate 662 228 70 - -
Commercial, financial and agricultural 954 4,458 452 533 297
Credit cards and related plans 33 20 19 17 8
Installment loans to individuals 232 382 308 192 288
-------------------------------------------------------
Total charge-offs 1,881 5,088 849 742 593
-------------------------------------------------------
Recoveries of loans previously charged off:
Real estate 16 5 4 - -
Commercial, financial and agricultural 58 119 3 27 40
Credit cards and related plans 7 5 3 5 5
Installment loans to individuals 64 54 73 39 80
-------------------------------------------------------
Total recoveries 145 183 83 71 125
-------------------------------------------------------
Net charge-offs 1,736 4,905 766 671 468
-------------------------------------------------------
Additions charged to operations 1,863 4,322 1,175 820 1,117
-------------------------------------------------------
$4,747 $4,620 $5,203 $4,794 $4,645
-------------------------------------------------------
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.46% 1.31% 0.22% 0.21% 0.16%
The following table presents the allocation of the allowance for loan losses by
category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31, 1999
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------- ------------------
% of % of % of % of % of
Total Total Total Total Total
dollars in thousands Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
Real estate $1,219 55.2% $ 913 57.1% $1,115 53.9% $1,378 53.1% $1,259 50.0%
Commercial,
Commercial, financial
and agricultural 2,909 36.3% 3,058 33.6% 3,241 35.3% 2,718 35.2% 2,717 38.5%
Consumer 447 8.3% 451 9.3% 615 10.7% 518 11.6% 498 11.4%
All other loans - 0.2% - 0.0% - 0.1% - 0.1% - 0.1%
Unallocated 172 n/a 198 n/a 232 n/a 180 n/a 171 n/a
------ ------ ------ ------ ------
Total loans $4,747 100.0% $4,620 100.0% $5,203 100.0% $4,794 100.0% $4,645 100.0%
====== ====== ====== ====== ======
INVESTMENT SECURITIES
At December 31, 1999, the securities classified as available for sale, carried
at market value, totaled $70,205,689 with an amortized cost of $71,447,969.
Securities available for sale are securities which will be held for an
indefinite period of time, including securities that management intends to use
as a part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk or the need to increase
regulatory capital or other similar factors. Securities available for sale
consist of U.S. Treasury Notes with an average life of 1.2 years, U.S.
Government Agencies with an average life of 3.7 years, and other bonds, notes
and debentures with an average life of 5.0 years. There have been no transfers
or sales of securities classified as held to maturity. Securities classified as
held to maturity totaled $85,139,790 with a market value of $84,030,013 at
December 31, 1999. 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 3.2 years, U.S. Government Agencies with an average life of 3.9
years, and municipal bonds with an average life of 5.2 years. During 1999,
$22,127,601 in securities matured and no securities were sold. The proceeds
from maturities were reinvested along with funds in excess of loan demand.
II - 10
27
CONTRACTUAL MATURITIES AND YIELDS OF DEBT SECURITIES
As of December 31, 1999
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
Available for sale:(1)
U.S. Treasury $ 2,500 6.74% $ 6,016 6.70%
U.S. government agency 9,000 6.19% 28,798 6.74% $16,380 6.61%
Other 395 8.67% 3,103 8.56% 199 7.13% $ 700 7.41%
------- ------- ------- ------
Total $11,895 6.39% $37,917 6.88% $16,579 6.62% $ 700 7.41%
======= ======= ======= ======
Held to maturity:
U.S. Treasury $ 1,510 6.00%
U.S. government agency 6,035 5.81% $ 2,717 6.05%
State and political subdivisions(2) $ 6,285 8.47% 32,200 8.32% 27,201 8.25% $9,192 7.68%
------- ------- ------- ------
Total $ 6,285 8.47% $39,745 7.85% $29,918 8.05% $9,192 7.68%
----------------------------------- ======= ======= ======= ======
(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 1999.
YEAR 2000 TRANSITION
As was the case with most businesses, the Company committed significant time
and effort to ensuring that its technology systems were year 2000 compliant.
Largely due to such preparations, the Company's transition into the year 2000
was uneventful, which was the Company's desired outcome.
During 1999, the Company spent approximately $45,650 on its year 2000
preparations, of which it capitalized new equipment and software of
approximately $11,000 and expensed approximately $34,650 against 1999 earnings.
The Company estimates that its total cumulative costs of year 2000 compliance
were $131,650, of which it capitalized approximately $33,000 and expensed
approximately $98,650 against earnings. In providing these amounts, the Company
has excluded the technology upgrade costs that were planned in the normal
course of business and not necessarily in response to its year 2000 compliance
plan. For example, the Company's routine technology upgrades for 1997, 1998 and
1999 included a new imaging system to replace its aging item processing system,
new ATM's and personal computer file servers throughout those respective
networks, a new teller automation system throughout its offices, Internet
banking software and numerous personal computer hardware and software systems
previously scheduled for replacement. The Company routinely makes investments
in technology in its efforts to improve customer service and to efficiently
manage its product and service delivery systems.
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.
FORWARD LOOKING STATEMENTS
The discussions presented in this annual report contain statements that could
be deemed forward looking statements within the meaning of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995,
which statements are inherently subject to risks and uncertainties. Forward
looking statements are statements that include projections, predictions,
expectations or beliefs about future events or results or otherwise are not
statements of historical fact. Such statements are often characterized by the
use of qualifying words (and their derivatives) such as "expect," "believe,"
"estimate," "plan," "project," or other statements concerning opinions or
judgments of the Company and its management about future events. Factors that
could influence the accuracy of such forward looking statements include, but
are not limited to, the financial success or changing strategies of the
Company's customers or vendors, actions of government regulators, the level of
market interest rates, and general economic conditions.
II - 11
28
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, 1999 and
1998, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. 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 at December 31, 1999
and 1998, and the results of its operations and its cash flows for the each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 21, 2000
- -------------------------------------------------------------------------------
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,
address 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 21, 2000 January 21, 2000
II - 12
29
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
ASSETS:
Cash and cash equivalents (Notes 1 and 18):
Cash and due from banks $ 23,219,670 $ 19,518,740
Interest-bearing deposits 268,826 175,437
Federal funds sold 27,650,000 38,600,000
---------------------------------
Total cash and cash equivalents 51,138,496 58,294,177
---------------------------------
Investment securities (Notes 1, 3 and 18):
Available for sale, at fair value (amortized cost of $71,447,969 and
$60,690,796 at December 31, 1999 and 1998, respectively) 70,205,689 61,954,639
---------------------------------
Held to maturity, at amortized cost (fair value of $84,030,013 and
$89,541,513 at December 31, 1999 and 1998, respectively) 85,139,790 87,053,892
---------------------------------
Loans (Notes 4 and 18) 390,189,234 385,590,204
Allowance for loan losses (Notes 1 and 5) (4,746,692) (4,619,586)
---------------------------------
Net loans 385,442,542 380,970,618
---------------------------------
Premises and equipment, net (Notes 1, 6 and 11) 9,673,010 10,095,628
Accrued interest receivable 5,456,567 5,104,174
Other assets 3,670,505 2,701,914
---------------------------------
Total assets $ 610,726,599 $ 606,175,042
=================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 18):
Demand $ 91,100,910 $ 91,967,287
NOW accounts 73,907,404 69,804,107
Money market accounts 33,663,278 29,970,288
Savings 24,399,214 23,904,317
Time deposits of $100,000 or more 110,041,565 101,235,647
Other time deposits 138,546,827 141,815,523
---------------------------------
Total deposits 471,659,198 458,697,169
Overnight borrowings (Notes 12 and 18) 13,461,774 7,890,961
Other borrowings (Notes 13 and 18) 8,626,481 30,004,405
Accrued interest payable 2,031,605 2,220,988
Other liabilities 1,496,432 1,919,548
---------------------------------
Total liabilities 497,275,490 500,733,071
=================================
COMMITMENTS AND CONTINGENCIES (Notes 11 and 17)
SHAREHOLDERS' EQUITY (Notes 1, 8, 9 and 15):
Common stock, $1.00 par value, authorized - 25,000,000 shares;
issued - 11,495,897 shares in 1999 and 11,464,913 shares in 1998;
outstanding - 11,439,201 shares in 1999 and 11,464,913 shares in 1998 11,495,897 11,464,913
Capital surplus 22,987,562 22,615,559
Retained earnings 80,976,641 70,601,642
Accumulated other comprehensive income, net of deferred
income taxes of $495,332 and $503,986 at
December 31, 1999 and 1998, respectively (746,948) 759,857
Less: Cost of common shares held in treasury,
56,696 shares (1,262,043) --
---------------------------------
Total shareholders' equity 113,451,109 105,441,971
---------------------------------
Total liabilities and shareholders' equity $ 610,726,599 $ 606,175,042
=================================
See notes to consolidated financial statements.
II - 13
30
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
INTEREST INCOME:
Interest and fees on loans $38,234,699 $38,894,447 $36,246,226
Federal funds sold 1,480,921 950,669 197,939
Interest-bearing deposits 17,072 12,652 10,766
Investments:
U.S. Treasury 716,294 1,095,055 1,208,692
U.S. Government agencies 3,266,514 2,384,251 2,200,475
States and political subdivisions 3,521,692 3,414,134 3,253,315
Other 768,342 825,882 910,441
-------------------------------------------
Total interest income 48,005,534 47,577,090 44,027,854
===========================================
INTEREST EXPENSE:
Time deposits of $100,000 or more 5,222,185 5,709,986 5,132,118
Other time and savings deposits 9,377,264 9,308,040 9,465,803
Overnight borrowings 495,568 263,088 217,916
Other borrowed funds 657,450 794,762 643,711
-------------------------------------------
Total interest expense 15,752,467 16,075,876 15,459,548
===========================================
NET INTEREST INCOME 32,253,067 31,501,214 28,568,306
PROVISION FOR LOAN LOSSES (Notes 1 and 5) 1,862,585 4,321,740 1,175,000
-------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 30,390,482 27,179,474 27,393,306
===========================================
OTHER INCOME:
Service charges on deposit accounts 3,532,646 3,552,422 3,273,187
Other service charges, fees and commissions 3,907,961 4,359,295 3,690,047
Securities gains 675 1,733 3,695
Other (Note 7) 768,260 750,103 1,143,255
-------------------------------------------
Total other income 8,209,542 8,663,553 8,110,184
===========================================
OTHER EXPENSES:
Salaries and wages 8,449,941 8,181,895 6,916,428
Employee benefits (Note 10) 1,454,258 1,261,228 1,344,946
Occupancy expense, net 775,127 756,656 603,298
Equipment rentals, depreciation and maintenance 1,331,106 1,407,846 1,187,293
Other (Note 7) 4,525,643 4,228,178 4,067,085
-------------------------------------------
Total other expenses 16,536,075 15,835,803 14,119,050
===========================================
INCOME BEFORE INCOME TAXES 22,063,949 20,007,224 21,384,440
INCOME TAXES (Note 1 and 8) 7,327,157 6,558,789 6,953,253
-------------------------------------------
NET INCOME $14,736,792 $13,448,435 $14,431,187
===========================================
PER SHARE AMOUNTS (Notes 1 and 14):
Net income - Basic $ 1.28 $ 1.17 $ 1.26
- Diluted 1.28 1.17 1.26
Cash dividends 0.38 0.34 0.30
Book value 9.92 9.20 8.33
See notes to consolidated financial statements.
II - 14
31
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
NET INCOME $ 14,736,792 $13,448,435 $14,431,187
=============================================
ITEMS OF OTHER COMPREHENSIVE INCOME:
Items of other comprehensive income,
before tax:
Unrealized gains (losses) on securities
available for sale (2,505,448) 477,819 485,705
Less: Reclassification adjustment for
gains included in net income 675 1,733 3,695
---------------------------------------------
Other comprehensive income,
before tax (2,506,123) 476,086 482,010
Less: Income taxes related to items
of other comprehensive income (999,318) 189,867 195,828
---------------------------------------------
Other comprehensive income,
net of tax (1,506,805) 286,219 286,182
---------------------------------------------
COMPREHENSIVE INCOME $ 13,229,987 $13,734,654 $14,717,369
=============================================
See notes to consolidated financial statements.
II - 15
32
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
COMMON STOCK, $1.00 par value
At beginning of year $ 11,464,913 $ 9,146,272 $ 9,116,552
Shares issued under stock option plan 30,984 26,786 29,720
Stock split shares issued -- 2,291,855 --
--------------------------------------------------
At end of year 11,495,897 11,464,913 9,146,272
--------------------------------------------------
CAPITAL SURPLUS
At beginning of year 22,615,559 22,234,753 21,913,629
Shares issued under stock option plan 372,003 380,806 321,124
--------------------------------------------------
At end of year 22,987,562 22,615,559 22,234,753
--------------------------------------------------
RETAINED EARNINGS
At beginning of year 70,601,642 63,362,060 52,800,932
Net income 14,736,792 13,448,435 14,431,187
Cash dividends (4,361,793) (3,895,419) (3,340,932)
GLL's premerger distributions of income
as a Subchapter S corporation -- -- (529,127)
Stock split shares issued -- (2,291,855) --
Cash paid for fractional shares -- (21,579) --
--------------------------------------------------
At end of year 80,976,641 70,601,642 63,362,060
--------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES
At beginning of year 759,857 473,638 187,456
Net change in unrealized gains or losses
on securities available for sale,
net of deferred income taxes (1,506,805) 286,219 286,182
--------------------------------------------------
At end of year (746,948) 759,857 473,638
--------------------------------------------------
COST OF COMMON SHARES HELD
IN TREASURY
At beginning of year -- -- --
Cost of common shares repurchased (1,262,043) -- --
--------------------------------------------------
At end of year (1,262,043) -- --
--------------------------------------------------
Total shareholders' equity (Notes 1, 8 and 15) $ 113,451,109 $ 105,441,971 $ 95,216,723
==================================================
See notes to consolidated financial statements.
II - 16
33
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Interest received $ 47,872,990 $ 47,553,684 $ 43,502,445
Fees and commissions received 8,208,867 8,661,820 8,106,489
Interest paid (15,941,850) (15,993,318) (15,299,830)
Cash paid to suppliers and employees (15,704,077) (15,052,781) (13,634,214)
Income taxes paid (7,879,196) (6,431,963) (7,117,782)
------------------------------------------------
Net cash provided by operating activities 16,556,734 18,737,442 15,557,108
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 8,147,800 16,385,000 20,952,023
Proceeds from maturities and/or calls of
securities held to maturity 13,979,801 13,363,782 9,449,238
Proceeds from sales of securities
available for sale -- 300,000 275,000
Purchases of securities available for sale (18,932,550) (26,117,501) (21,613,206)
Purchases of securities held to maturity (12,257,296) (21,460,889) (11,182,401)
Net increase in loans (6,334,509) (32,649,423) (28,867,752)
Capital expenditures (618,827) (1,563,295) (2,307,031)
Proceeds from sales of fixed assets 48,972 27,980 20,000
Proceeds from sales of other real estate 320,125 68,495 --
------------------------------------------------
Net cash used by investing activities (15,646,484) (51,645,851) (33,274,129)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and savings accounts 7,424,807 22,670,083 4,828,655
Net increase in certificates of deposit 5,537,222 21,450,902 12,049,538
Net increase (decrease) in overnight borrowings 5,570,813 (991,055) 5,926,782
Net increase (decrease) in other borrowings (21,377,924) 23,716,705 (3,348,559)
Net proceeds from issuance of common stock 402,987 407,592 350,844
Cash paid for fractional shares -- (21,579) --
Dividends paid (4,361,793) (3,895,419) (3,340,932)
Purchases of common stock for treasury (1,262,043) -- --
GLL's premerger distributions of income
as a Subchapter S corporation -- -- (529,127)
------------------------------------------------
Net cash provided (used) by financing activities (8,065,931) 63,337,229 15,937,201
------------------------------------------------
NET INCREASE (DECREASE) IN
CASH EQUIVALENTS (7,155,681) 30,428,820 (1,779,820)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 58,294,177 27,865,357 29,645,177
------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 51,138,496 $ 58,294,177 $ 27,865,357
================================================
See notes to consolidated financial statements.
(continued on next page)
II - 17
34
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded from previous page)
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 14,736,792 $ 13,448,435 $ 14,431,187
------------------------------------------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 985,384 1,025,541 958,413
Provision for loan loss 1,862,585 4,321,740 1,175,000
Premium amortization, net 219,849 108,114 156,895
Deferred income taxes (163,046) 225,722 (230,850)
Gains on sales or calls of
securities available for sale -- (1,733) (2,933)
Gains on calls of securities
held to maturity (675) -- (762)
Losses (gains) on disposal or sale
of equipment 7,089 (2,395) (99)
Loss (gain) on sale of other real estate (31,276) 10,569 --
Increase (decrease) in taxes payable (388,993) (98,896) 66,321
Increase in interest receivable (352,393) (131,520) (682,304)
Increase (decrease) in interest payable (189,383) 82,558 159,718
Increase in other assets (95,076) (390,457) (380,223)
Increase (decrease) in other liabilities (34,123) 139,764 (93,255)
------------------------------------------------
Net adjustments to reconcile net
income to net cash provided by
operating activities 1,819,942 5,289,007 1,125,921
------------------------------------------------
Net cash provided by
operating activities $ 16,556,734 $ 18,737,442 $ 15,557,108
================================================
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS:
Increase (decrease) in unrealized
gains or losses on securities
available for sale $ (2,506,123) $ 476,086 $ 482,010
Increase (decrease) in deferred income
taxes on unrealized gains or losses
on securities available for sale (999,318) 189,867 195,828
Transfer from retained earnings to
common stock for stock split -- 2,291,855 --
Transfer from loans to other real
estate owned 95,967 289,928 79,063
See notes to consolidated financial statements.
II - 18
35
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
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 fourteen
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 through eight mortgage offices. 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 reflect 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 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 and as an item of other comprehensive income. 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.
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.
The Company reviews long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amounts of such assets 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.
II - 19
36
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.
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
Company discontinues the accrual of interest when the collectibility of such
interest becomes doubtful. 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 5.
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
purpose of computing diluted earnings per share. See Note 14 for further
information regarding the computation of earnings per share. Dividends per share
represent amounts declared by the Board of Directors.
During 1998, the Company declared a 5-for-4 stock split effected in the form of
a stock dividend payable May 29, 1998 to shareholders of record on May 8, 1998.
All share and per share amounts reflect the split.
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.
II - 20
37
STOCK-BASED COMPENSATION - The Company measures compensation costs related to
employee incentive 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 at the date of grant) in
accordance with Accounting Principles Board Opinion No. 25 rather than the fair
value of the equity instrument granted in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 123. See Note 9 for further information
regarding SFAS 123 disclosures.
NEW ACCOUNTING STANDARD - In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Management has not evaluated the
impact that the adoption of SFAS 133 will have on the Company's financial
statements.
2. COMPLETED ACQUISITION
On November 5, 1997, the Company acquired all of the common stock of GLL &
Associates, Inc. ("GLL") in a merger accounted for as a pooling of interests.
Operating results for 1997 include the operations of GLL for 1997 as if it had
been a part of the Company as of January 1, 1997. 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 - 21
38
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1999 and 1998 are as follows:
Gross Unrealized
Amortized ---------------------------- Fair
Type and Contractual Maturity Cost Gains Losses Value
AVAILABLE FOR SALE
AT DECEMBER 31, 1999:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 2,500,393 $ 3,357 $ -- $2,503,750
AFTER 1 YEAR BUT WITHIN 5 YEARS 6,015,718 5,458 10,862 6,010,314
----------------------------------------------------------------------
TOTAL U.S. TREASURY 8,516,111 8,815 10,862 8,514,064
----------------------------------------------------------------------
U. S. GOVERNMENT AGENCIES DUE:
WITHIN 1 YEAR 8,999,535 -- 13,829 8,985,706
AFTER 1 YEAR BUT WITHIN 5 YEARS 28,797,912 -- 457,718 28,340,194
AFTER 5 YEARS BUT WITHIN 10 YEARS 16,379,952 -- 603,743 15,776,209
----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 54,177,399 -- 1,075,290 53,102,109
----------------------------------------------------------------------
OTHERS DUE:
WITHIN 1 YEAR 395,147 3,654 -- 398,801
AFTER 1 YEAR BUT WITHIN 5 YEARS 3,103,767 50,026 -- 3,153,793
AFTER 5 YEARS BUT WITHIN 10 YEARS 199,005 -- 4,365 194,640
AFTER 10 YEARS 699,503 -- 23,869 675,634
EQUITY SECURITIES 4,357,037 149,309 339,698 4,166,648
----------------------------------------------------------------------
TOTAL OTHERS 8,754,459 202,989 367,932 8,589,516
----------------------------------------------------------------------
TOTAL AVAILABLE FOR SALE $71,447,969 $211,804 $1,454,084 $70,205,689
======================================================================
HELD TO MATURITY
AT DECEMBER 31, 1999:
U. S. TREASURY DUE:
AFTER 1 YEAR BUT WITHIN 5 YEARS $ 1,509,790 $ 682 $ 9,534 $ 1,500,938
----------------------------------------------------------------------
TOTAL U.S. TREASURY 1,509,790 682 9,534 1,500,938
----------------------------------------------------------------------
U. S. GOVERNMENT AGENCIES DUE:
AFTER 1 YEAR BUT WITHIN 5 YEARS 6,034,748 -- 103,495 5,931,253
AFTER 5 YEARS BUT WITHIN 10 YEARS 2,717,406 -- 121,388 2,596,018
----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 8,752,154 -- 224,883 8,527,271
----------------------------------------------------------------------
STATE AND LOCAL DUE:
WITHIN 1 YEAR 6,284,787 20,054 1,196 6,303,645
AFTER 1 YEAR BUT WITHIN 5 YEARS 32,200,622 238,898 125,225 32,314,295
AFTER 5 YEARS BUT WITHIN 10 YEARS 27,200,562 220,496 650,817 26,770,241
AFTER 10 YEARS 9,191,875 -- 578,252 8,613,623
----------------------------------------------------------------------
TOTAL STATE AND LOCAL 74,877,846 479,448 1,355,490 74,001,804
----------------------------------------------------------------------
TOTAL HELD TO MATURITY $85,139,790 $480,130 $1,589,907 $84,030,013
======================================================================
For the year ended December 31, 1999, there were no sales of securities
available for sale. Calls of securities held to maturity resulted in gross gains
of $675 and no gross losses in 1999.
II - 22
39
Amortized Gross Unrealized Fair
----------------------------
Type and Contractual Maturity Cost Gains Losses Value
AVAILABLE FOR SALE
AT DECEMBER 31, 1998:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 1,998,921 $ 27,329 $ -- $ 2,026,250
AFTER 1 YEAR BUT WITHIN 5 YEARS 8,519,819 268,932 -- 8,788,751
----------------------------------------------------------------------
TOTAL U.S. TREASURY 10,518,740 296,261 -- 10,815,001
----------------------------------------------------------------------
U. S. GOVERNMENT AGENCIES DUE:
WITHIN 1 YEAR 999,754 4,934 -- 1,004,688
AFTER 1 YEAR BUT WITHIN 5 YEARS 24,790,630 430,736 -- 25,221,366
AFTER 5 YEARS BUT WITHIN 10 YEARS 13,103,054 157,384 43,750 13,216,688
----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 38,893,438 593,054 43,750 39,442,742
----------------------------------------------------------------------
OTHERS DUE:
WITHIN 1 YEAR 2,507,932 27,653 -- 2,535,585
AFTER 1 YEAR BUT WITHIN 5 YEARS 3,527,695 211,272 -- 3,738,967
AFTER 5 YEARS BUT WITHIN 10 YEARS 577,810 39,143 492 616,461
AFTER 10 YEARS 949,390 10,584 3,164 956,810
EQUITY SECURITIES 3,715,791 231,872 98,590 3,849,073
----------------------------------------------------------------------
TOTAL OTHERS 11,278,618 520,524 102,246 11,696,896
----------------------------------------------------------------------
TOTAL AVAILABLE FOR SALE $60,690,796 $1,409,839 $145,996 $61,954,639
======================================================================
HELD TO MATURITY
AT DECEMBER 31, 1998:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 999,473 $ 840 $ -- $ 1,000,313
AFTER 1 YEAR BUT WITHIN 5 YEARS 1,513,402 55,817 -- 1,569,219
----------------------------------------------------------------------
TOTAL U.S. TREASURY 2,512,875 56,657 -- 2,569,532
----------------------------------------------------------------------
U. S. GOVERNMENT AGENCIES DUE:
WITHIN 1 YEAR 1,000,071 9,929 -- 1,010,000
AFTER 1 YEAR BUT WITHIN 5 YEARS 4,489,042 72,521 -- 4,561,563
AFTER 5 YEARS BUT WITHIN 10 YEARS 5,274,546 212,206 -- 5,486,752
----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AGENCIES 10,763,659 294,656 -- 11,058,315
----------------------------------------------------------------------
STATE AND LOCAL DUE:
WITHIN 1 YEAR 5,974,265 38,853 -- 6,013,118
AFTER 1 YEAR BUT WITHIN 5 YEARS 32,080,098 875,983 3,854 32,952,227
AFTER 5 YEARS BUT WITHIN 10 YEARS 24,531,311 1,095,870 11,105 25,616,076
AFTER 10 YEARS 11,191,684 206,869 66,308 11,332,245
----------------------------------------------------------------------
TOTAL STATE AND LOCAL 73,777,358 2,217,575 81,267 75,913,666
----------------------------------------------------------------------
TOTAL HELD TO MATURITY $87,053,892 $2,568,888 $ 81,267 $89,541,513
======================================================================
Sales of securities available for sale for the year ended December 31, 1998
resulted in realized gross gains of $1,733. Calls of securities held to maturity
did not result any gains or losses in 1998.
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.
Securities with an amortized cost of $51,731,723 and $32,559,307 were pledged as
collateral for public deposits and for other purposes as required by law at
December 31, 1999 and 1998, respectively.
II - 23
40
4. LOANS
Loans at December 31, 1999 and 1998, classified by type, are as follows:
1999 1998
Real estate:
Construction $ 38,956,900 $ 32,397,016
Mortgage 177,004,429 188,166,947
Commercial, financial and agricultural 141,712,933 129,854,299
Consumer 32,330,735 35,734,161
All other loans 795,453 117,113
-------------------------------------
390,800,450 386,269,536
Deferred origination fees, net (611,216) (679,332)
-------------------------------------
Total $ 390,189,234 $ 385,590,204
=====================================
Nonperforming assets at December 31, 1999 and 1998 are as follows:
1999 1998
Nonaccrual loans $ 1,078,992 $ 639,041
Loans 90 days or more and still
accruing interest 981,345 2,955,113
Foreclosed properties 54,079 289,928
-------------------------------------
Total $ 2,114,416 $ 3,884,082
=====================================
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 1999, 1998 and 1997 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, 1999 and 1998, directors' and principal officers'
direct and indirect indebtedness to the Bank aggregated $3,827,286 and
$2,329,753, respectively. During 1999, additions to such loans were $3,455,378
and repayments totaled $1,957,845. In the opinion of management, these loans do
not involve more than normal risk of collectibility, nor do they present other
unfavorable features.
II - 24
41
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1999,
1998 and 1997 are as follows:
1999 1998 1997
Balance at beginning of year $4,619,586 $5,202,578 $4,793,889
====================================================
Loans charged off:
Real estate 662,171 227,920 69,773
Commercial, financial and agricultural 953,827 4,458,165 451,881
Credit cards and related plans 33,036 20,343 19,386
Installment loans to individuals 232,158 381,349 307,788
----------------------------------------------------
Total charge-offs 1,881,192 5,087,777 848,828
====================================================
Recoveries of loans previously charged off:
Real estate 16,223 4,581 3,762
Commercial, financial and agricultural 57,643 119,360 3,000
Credit cards and related plans 7,463 5,166 3,281
Installment loans to individuals 64,384 53,938 72,474
----------------------------------------------------
Total recoveries 145,713 183,045 82,517
====================================================
Net charge-offs 1,735,479 4,904,732 766,311
Additions charged to operations 1,862,585 4,321,740 1,175,000
----------------------------------------------------
Balance at end of year $4,746,692 $4,619,586 $5,202,578
====================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.46% 1.31% 0.22%
At December 31, 1999 and 1998, the recorded investment in loans that are
considered to be impaired, including accrued interest, was $2,357,685
($1,135,042 of which is on a nonaccrual basis) and $843,273 ($649,340 of which
is on a nonaccrual basis), respectively. The average recorded balance of
impaired loans during 1999 and 1998 is not significantly different from the
balance at December 31, 1999 and 1998. The related allowance for loan losses for
these loans was $746,783 and $250,979 at December 31, 1999 and 1998,
respectively. For the years ended December 31, 1999, 1998 and 1997, the Bank
recognized interest income on those impaired loans of approximately $107,241,
$16,467 and $19,012, respectively.
II - 25
42
6. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1999 and 1998 follow:
Premises and
Accumulated Equipment,
Cost Depreciation Net
AT DECEMBER 31, 1999:
LAND $ 1,753,559 $1,753,559
BUILDINGS 7,680,369 $2,369,234 5,311,135
LEASEHOLD IMPROVEMENTS 9,968 416 9,552
FURNITURE, EQUIPMENT AND VEHICLES 7,288,288 4,950,253 2,338,035
CONSTRUCTION IN PROGRESS 260,729 260,729
----------------------------------------------------
TOTAL $16,992,913 $7,319,903 $ 9,673,010
====================================================
At December 31, 1998:
Land $ 1,753,559 $ 1,753,559
Buildings 7,653,443 $2,145,124 5,508,319
Leasehold improvements 50,324 29,908 20,416
Furniture, equipment and vehicles 7,039,110 4,415,509 2,623,601
Construction in progress 189,733 189,733
----------------------------------------------------
Total $16,686,169 $6,590,541 $10,095,628
====================================================
7. OTHER INCOME AND EXPENSES
For the years ended December 31, 1999, 1998 and 1997, items included in other
income that exceeded 1% of total revenues are set forth below. There were no
items included in other expenses that exceeded 1% of total revenues for the
years indicated.
1999 1998 1997
Items included in other income
Gains on sales of mortgage servicing rights $ -- $ -- $601,135
8. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1999, 1998 and 1997 follow:
1999 1998 1997
Income tax provision
Current $ 7,490,203 $6,333,067 $ 7,184,103
Deferred (163,046) 225,722 (230,850)
-----------------------------------------------------
Total $ 7,327,157 $6,558,789 $ 6,953,253
=====================================================
Changes in deferred taxes of $(999,318), $189,867 and $195,828 related to
unrealized gains and losses on securities available for sale during 1999, 1998
and 1997, respectively, were allocated to shareholders' equity in the respective
years.
II - 26
43
A reconciliation of reported income tax expense for the years ended December 31,
1999, 1998 and 1997 to the amount of tax expense computed by multiplying income
before income taxes by the statutory federal income tax rate follows.
1999 1998 1997
Statutory federal income tax rate 35% 35% 35%
---------------------------------------------------------
Tax provision at statutory rate $ 7,722,382 $ 7,002,528 $ 7,484,554
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (1,226,880) (1,184,198) (1,134,464)
State income taxes net of federal tax benefit 710,898 678,163 728,035
GLL's pre-merger earnings taxable to
GLL's former owners -- -- (188,145)
Other 120,757 62,296 63,273
---------------------------------------------------------
Income tax provision $ 7,327,157 $ 6,558,789 $ 6,953,253
=========================================================
The tax effect of the cumulative temporary differences and carryforwards that
gave rise to the deferred tax assets and liabilities at December 31, 1999 and
1998 are as follows:
DECEMBER 31, 1999
---------------------------------------------------
ASSETS LIABILITIES TOTAL
EXCESS BOOK OVER TAX BAD DEBT EXPENSE $1,745,145 $ 1,745,145
EXCESS TAX OVER BOOK DEPRECIATION $(511,825) (511,825)
UNREALIZED GAINS OR LOSSES ON SECURITIES
AVAILABLE FOR SALE 495,332 495,332
OTHER, NET 302,159 (253,714) 48,445
---------------------------------------------------
TOTAL $2,542,636 $(765,539) $ 1,777,097
===================================================
December 31, 1999
-----------------------------------------------------
Assets Liabilities Total
Excess book over tax bad debt expense $1,586,042 $ 1,586,042
Excess tax over book depreciation $ (472,145) (472,145)
Unrealized gains on securities
available for sale (503,986) (503,986)
Other, net 338,051 (333,229) 4,822
-----------------------------------------------------
Total $1,924,093 $(1,309,360) $ 614,733
=====================================================
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.
9. STOCK OPTIONS
At December 31, 1999, 1998 and 1997, 144,325, 149,529 and 142,102 shares of
common stock, respectively, were reserved for stock options outstanding under
the Company's stock option plans, and 26,893, 52,860 and 93,072 shares of common
stock, respectively, were reserved for stock options not yet granted. Option
prices are established at market value on the dates granted by the Board of
Directors.
II - 27
44
Certain option information for the years ended December 31, 1999, 1998 and 1997
follows:
Exercise Price Per Share
-----------------------------------------
Range
--------------------- Weighted
Shares From To Average
Outstanding, December 31, 1996 147,258 $ 8.36 $ 16.54 $ 12.61
Granted 40,558 21.60 23.00 21.73
Exercised 37,143 8.36 16.54 9.44
Expired and canceled 8,571 12.58 21.60 18.13
-------
Outstanding, December 31, 1997 142,102 12.16 23.00 15.70
Granted 43,562 24.40 32.75 29.59
Exercised 32,785 12.16 22.40 12.43
Expired and canceled 3,350 16.54 29.60 24.01
-------
Outstanding, December 31, 1998 149,529 12.58 32.75 20.28
GRANTED 28,800 22.00 27.63 22.26
EXERCISED 30,984 12.58 21.60 13.01
EXPIRED AND CANCELED 3,020 14.00 29.60 23.38
-------
OUTSTANDING, DECEMBER 31, 1999 144,325 $ 13.86 $ 32.75 $ 22.17
=======
For various price ranges, weighted average characteristics of outstanding stock
options at December 31, 1999 follow:
Outstanding Options Exercisable Options
-------------------------------------------------------------------------
Range of Remaining Weighted Weighted
Exercise Prices Shares Life (years) Average Price Shares Average Price
$ 13.76 - 14.75 21,187 0.9 $ 13.87 21,187 $ 13.87
14.76 - 16.75 20,967 1.3 16.54 16,764 16.54
16.76 - 21.75 29,059 2.3 21.60 17,434 21.60
21.76 - 22.75 28,500 4.7 22.21 -- --
22.76 - 28.75 4,050 2.7 23.56 2,125 23.16
28.76 - 29.75 39,312 3.4 29.60 7,862 29.60
29.76 - 32.75 1,250 3.4 31.93 250 31.93
------- ------
$ 12.58 - 32.75 144,325 2.7 $ 22.17 65,622 $ 18.86
======= ======
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 and after December 31, 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 SFAS No.
123, the Company's pro forma net income and earnings per share for the years
ended December 31, 1999, 1998 and 1997 would have been as follows:
1999 1998 1997
Net income
As reported $ 14,736,792 $ 13,448,435 $ 14,431,187
Pro forma 14,606,433 13,183,494 14,269,300
Net income per share
As reported - Basic $ 1.28 $ 1.17 $ 1.26
- Diluted 1.28 1.17 1.26
Pro forma - Basic 1.27 1.15 1.25
- Diluted 1.27 1.15 1.24
II - 28
45
In estimating the compensation expense associated with SFAS No. 123, using The
Black Scholes Method, the following assumptions were used:
1999 1998 1997
Option value, aggregate $ 8.37 $ 10.61 $ 8.65
Risk-free rate 6.18% 5.09% 5.92%
Average expected term (years) 4.2 YEARS 4.5 years 5 years
Expected volatility 42.21% 38.75% 31.29%
Expected dividend yield 1.57% 1.30% 1.30%
Expected turnover 2.63% 1.42% 2.00%
10. 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 $559,898, $361,927 and $608,899 for the years
ended December 31, 1999, 1998 and 1997, respectively.
The Bank sponsors 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 $22,755, $13,814 and $22,025 for
the years ended December 31, 1999, 1998 and 1997, 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 its discretion, GLL may make matching
contributions to the plan. Contributions totaled $82,239, $88,680 and $14,092
for the years ended December 31, 1999, 1998 and 1997, respectively.
11. LEASES
LESSEE - OPERATING - The Company's subsidiaries lease certain premises and
equipment under operating lease agreements. As of December 31, 1999, future
minimum lease payments under noncancelable operating leases are as follows:
Year Payments
2000 $ 205,907
2001 193,579
2002 178,286
2003 176,295
2004 177,254
thereafter 535,000
--------------
Total $ 1,466,321
==============
Rental expense charged to operations under all operating lease agreements was
$256,173, $257,652 and $187,778 for the years ended December 31, 1999, 1998 and
1997, respectively.
LESSOR - OPERATING - The Company leases one small office space to an
unaffiliated lessee. In 1997 and earlier years, the Company leased certain
additional office space to others under longer term operating lease agreements
which ended in 1997. The Company now uses the previously leased space for its
own use.
Rental income received under all operating lease agreements was $3,600, $3,600
and $42,168 for the years ended December 31, 1999, 1998 and 1997, respectively.
II - 29
46
12. OVERNIGHT BORROWINGS
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:
1999 1998 1997
Federal funds purchased:
Balance at end of year $ -- $ -- $ 5,000,000
Weighted average interest rate at end of year -- -- 6.13%
Maximum amount outstanding at any
month-end during the year $ 6,500 $ -- $ 5,000,000
Average daily balance outstanding
during the year $ 42 $ 71,233 $ 634,426
Average annual interest rate paid
during the year 4.76% 5.86% 5.62%
Securities sold under agreements to repurchase:
Balance at end of year $ 1,643,832 $ 1,538,350 $ 3,882,016
Weighted average interest rate at end of year 3.76% 4.20% 5.00%
Maximum amount outstanding at any
month-end during the year $ 2,237,625 $ 4,188,622 $ 3,982,784
Average daily balance outstanding
during the year $ 1,963,163 $ 3,669,825 $ 3,712,406
Average annual interest rate paid
during the year 4.41% 4.89% 4.91%
In 1998, the Bank began selling a commercial sweep product whereby qualifying
amounts are swept overnight from a commercial deposit account into commercial
paper issued by the Company. During 1998, most of the Bank's qualifying
commercial customers who were buying securities overnight under agreements by
the Bank to repurchase such securities converted to the commercial paper sweep
account product.
1999 1998
Commercial deposits swept into commercial paper:
Balance at end of year $ 11,817,942 $ 6,352,611
Weighted average interest rate at end of year 4.25% 4.25%
Maximum amount outstanding at any
month-end during the year $ 12,020,897 $ 6,352,611
Average daily balance outstanding
during the year $ 9,327,372 $ 1,826,915
Average annual interest rate paid
during the year 4.39% 4.36%
13. OTHER BORROWINGS
GLL temporarily funds its mortgages, from the time of 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, 1999,
1998 and 1997 such lines of credit totaled $21,000,000, $20,000,000 and
$15,000,000, 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 originated. In
addition, the Company serves as guarantor on borrowings under these
arrangements occurring after the merger date.
II - 30
47
14. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
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, 1999, 1998 and 1997.
Basic and diluted earnings per share and weighted average shares outstanding
for 1997 have been restated to reflect the 5-for-4 stock split effected in the
form of a stock dividend paid May 29, 1998 to shareholders of record on May 8,
1998.
1999 1998 1997
BASIC EARNINGS PER SHARE
Net income $ 14,736,792 $ 13,448,435 $ 14,431,187
------------------------------------------------------------------
Divide by: Weighted average shares outstanding 11,477,971 11,461,607 11,425,110
------------------------------------------------------------------
Basic earnings per share $ 1.28 $ 1.17 $ 1.26
==================================================================
DILUTED EARNINGS PER SHARE
Net income $ 14,736,792 $ 13,448,435 $ 14,431,187
------------------------------------------------------------------
Divide by: Weighted average shares outstanding 11,477,971 11,461,607 11,425,110
Potentially dilutive effect of
stock options 21,547 47,922 54,690
------------------------------------------------------------------
Weighted average shares outstanding,
including potentially dilutive effect
of stock options 11,499,518 11,509,529 11,479,800
------------------------------------------------------------------
Diluted earnings per share $ 1.28 $ 1.17 $ 1.26
==================================================================
15. REGULATION AND REGULATORY RESTRICTIONS
The 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 the Company is
dividends received from its subsidiaries, the Bank and GLL. 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, 1999, the Bank had undivided profits, as defined, of
$96,542,166.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
II - 31
48
Quantitative measures established by regulation to ensure capital adequacy
require the Company (set forth in the table below) and the Bank 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,
1999, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1999, the most recent regulatory notifications categorized
both the Company and the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Company
and the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. Management is not aware of
conditions or events subsequent to such notifications that would cause a change
in the Company's or the Bank's capital categories.
The Company's actual capital amounts and ratios are also presented in the table:
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
---------------- -------------- ----------------
(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
AS OF DECEMBER 31, 1999
TOTAL CAPITAL TO RISK WEIGHTED ASSETS $118,831 27.57% $34,476 8.00% $43,095 10.00%
TIER I CAPITAL TO RISK WEIGHTED ASSETS 114,084 26.47% 17,238 4.00% 25,857 6.00%
TIER I CAPITAL TO AVERAGE ASSETS 114,084 18.73% 24,359 4.00% 30,449 5.00%
As of December 31, 1998
Total capital to risk weighted assets $109,362 26.20% $33,394 8.00% $41,742 10.00%
Tier I capital to risk weighted assets 104,682 25.08% 16,697 4.00% 25,045 6.00%
Tier I capital to average assets 104,682 17.77% 23,566 4.00% 29,457 5.00%
The average reserve balance required to be maintained under the requirements of
the Federal Reserve was approximately $5,350,000 for the year ended December 31,
1999. The Bank maintained average reserve balances in excess of the
requirements.
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial data for Bank of Granite Corporation (parent company only)
follows:
December 31,
------------------------------
CONDENSED BALANCE SHEETS 1999 1998
Assets:
Cash on deposit with bank subsidiary $ 12,597,230 $ 6,399,611
Investment in subsidiary bank at equity 107,471,986 100,755,309
Investment in subsidiary mortgage bank at equity 2,685,128 2,007,661
Other investments 2,226,814 2,382,306
Other assets 403,527 262,516
------------------------------
Total $125,384,685 $111,807,403
==============================
Liabilities and Shareholders' Equity:
Other borrowings $ 11,817,942 $ 6,352,611
Other liabilities 115,634 12,821
Shareholders' equity 113,451,109 105,441,971
------------------------------
Total $125,384,685 $111,807,403
==============================
II - 32
49
For the Years Ended December 31,
------------------------------------------------
CONDENSED RESULTS OF OPERATIONS 1999 1998 1997
Equity in earnings of subsidiary bank:
Dividends $ 6,444,319 $ 3,949,744 $ 3,355,797
Earnings retained 8,029,240 8,594,848 10,373,222
Equity in earnings of subsidiary mortgage bank:
Premerger earnings distributed to former owners -- -- 529,127
Earnings retained 678,743 1,025,273 265,733
Income (expenses), net (415,510) (121,430) (92,692)
------------------------------------------------
Net income $ 14,736,792 $ 13,448,435 $ 14,431,187
================================================
For the Years Ended December 31,
------------------------------------------------
CONDENSED CASH FLOW 1999 1998 1997
Cash flows from operating activities:
Interest received $ 158,961 $ 136,548 $ 126,757
Interest paid (409,016) (79,563) --
Dividends received from subsidiary bank 6,444,319 3,949,744 3,355,797
Net cash used by other
operating activities (77,119) (492,435) (403,337)
------------------------------------------------
Net cash provided by operating activities 6,117,145 3,514,294 3,079,217
------------------------------------------------
Cash flows from investing activities:
Proceeds from maturities of securities
available for sale 250,000 300,000 --
Proceeds from sales of securities
available for sale -- 300,000 275,000
Purchases of securities available for sale (414,008) (649,989) (826,907)
------------------------------------------------
Net cash used by investing activities (164,008) (49,989) (551,907)
------------------------------------------------
Cash flows from financing activities:
Net increase in overnight borrowings 5,465,331 6,352,611 --
Net proceeds from issuance of common stock 402,987 407,592 350,844
Net dividends paid (4,361,793) (3,895,419) (3,340,932)
Cash paid for fractional shares -- (21,579) --
Purchases of common stock for treasury (1,262,043) -- --
------------------------------------------------
Net cash provided (used) by financing activities 244,482 2,843,205 (2,990,088)
------------------------------------------------
Net increase (decrease) in cash 6,197,619 6,307,510 (462,778)
Cash at beginning of year 6,399,611 92,101 554,879
------------------------------------------------
Cash at end of year $ 12,597,230 $ 6,399,611 $ 92,101
================================================
II - 33
50
(table concluded from previous page)
For the Years Ended December 31,
------------------------------------------------
CONDENSED CASH FLOW 1999 1998 1997
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 14,736,792 $ 13,448,435 $ 14,431,187
------------------------------------------------
Adjustments to reconcile net income to net
cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries (8,707,983) (9,620,121) (10,638,955)
Premerger earnings distributed to former owners -- -- (529,127)
Premium amortization and discount
accretion, net (1,440) 298 1,154
Gains on sales or calls of
securities available for sale -- (1,733) --
Decrease (increase) in interest receivable 1,661 6,072 (13,754)
Decrease (increase) in other assets (14,698) (318,657) 28,087
Increase (decrease) in other liabilities 102,813 -- (199,375)
------------------------------------------------
Total adjustments (8,619,647) (9,934,141) (11,351,970)
------------------------------------------------
Net cash provided by operating activities $ 6,117,145 $ 3,514,294 $ 3,079,217
================================================
Supplemental disclosure of non-cash transactions:
Transfer from retained earnings to common stock $ -- $ 2,291,855 $ --
Increase (decrease) in unrealized
gains or losses on securities
available for sale (320,940) (106,226) 197,804
Increase (decrease) in deferred income
taxes on unrealized gains or losses
on securities available for sale 127,974 42,359 (78,687)
17. 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, 1999 and 1998 was
$74,923,283 and $60,929,611, respectively. Additionally, standby letters of
credit of $3,188,371 and $3,901,923 were outstanding at December 31, 1999 and
1998, 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 - 34
51
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair value amounts have been determined by the Company,
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 Company 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.
DECEMBER 31, 1999 December 31, 1998
----------------------------- ------------------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
Assets:
Cash and cash equivalents $ 51,138,496 $ 51,138,496 $ 58,294,177 $ 58,294,177
Marketable securities 155,345,479 154,235,702 149,008,531 151,496,152
Loans 390,189,234 387,470,000 385,590,204 387,910,000
Liabilities:
Demand deposits 223,070,806 223,070,806 215,645,999 215,645,999
Time deposits 248,588,392 248,085,000 243,051,170 240,316,000
Overnight borrowings 13,461,774 13,461,774 7,890,961 7,890,961
Other borrowings 8,626,481 8,626,481 30,004,405 30,004,405
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.
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, 1999. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amounts presented herein.
******
II - 35
52
APPENDIX A
***** SAMPLE BALLOT *****
REVOCABLE PROXY
BANK OF GRANITE CORPORATION
[X] PLEASE MARK VOTES With- For All
AS IN THIS EXAMPLE For hold Except
1. ELECTION OF DIRECTORS [_] [_] [_]
This Proxy is Solicited on John N Bray
Behalf of the Board of Directors. Paul M. Fleetwood, III, CPA
The undersigned hereby appoints John A. Forlines, Jr.
John A. Forlines, Jr., John N. Bray, Barbara F. Freiman
and Barbara F. Freiman, or each of Hugh R. Gaither
them, as Proxies, each with the Charles M. Snipes
power to appoint his or her Boyd C. Wilson, Jr., CPA
substitute and hereby authorizes INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE
each of them to represent and to FOR ANY INDIVIDUAL NOMINEE, MARK "FOR ALL
vote as designated below all the EXCEPT" AND WRITE THAT NOMINEE'S NAME IN
shares of Common Stock held on THE SPACE PROVIDED BELOW.
record by the undersigned on --------------------------------------------
March 6, 2000, at the Annual For Against Abstain
Meeting of Shareholders to be held 2. THE RATIFICATION OF [_] [_] [_]
on April 24, 2000, or any THE ACCOUNTING FIRM DELOITTE &
adjournment thereof. TOUCHE, LLP as the Corporation's
Independent Certified Public
Accountants for the year ending
December 31, 2000.
3. In their discretion, the Proxies are
authorized to vote upon other such
business as may properly come before
the meeting.
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 Elect the Board of
Directors' nominees to the Board of
Directors and FOR Proposal 2 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
Please be sure Corporation called for April 24, 2000, a
to sign and Proxy Statement for the Annual Meeting and
date this Proxy Date the 1999 Annual Report to Shareholders.
in the space
below. ----------------- Please sign EXACTLY as your name(s)
appear(s) on this proxy card. When shares
----------------- ----------------- are held jointly, each holder should sign.
Shareholder Co-holder (if any) When signing in a representative capacity,
sign above sign above please give title.
- -----------------------------------------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
BANK OF GRANITE CORPORATION
YOUR VOTE IS IMPORTANT TO US!
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY