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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
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
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
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BANK OF GRANITE CORPORATION
23 NORTH MAIN STREET
GRANITE FALLS, NC 28630
(704) 496-2000
Notice of Annual Meeting of Shareholders - April 22, 1996
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Bank of Granite Corporation will be held
on Monday April 22, 1996 at 10:30 a.m. The meeting will be held at the Holiday
Inn, 130 South Lenoir Rhyne Boulevard, S.E. (at Interstate 40, Exit #125),
Hickory, North Carolina for the following purposes:
1. To consider the amendment of the Certificate of Incorporation
of Bank of Granite Corporation to increase the authorized
common stock from 10,000,000 to 15,000,000 shares.
2. To consider the election of seven persons named as director
nominees in the Proxy Statement dated March 14, 1996, which
accompanies the Notice.
3. To consider the ratification of the selection of Deloitte &
Touche LLP as Bank of Granite Corporation's independent
Certified Public Accountants for the fiscal year ending
December 31, 1996, and
4. To transact such other business as may properly be brought
before the meeting or any adjournment thereof.
Shareholders of record at the close of business on March 14, 1996 are entitled
to receive notice of and vote at this meeting.
Bank of Granite Corporation's 1996 Annual Shareholders Meeting Proxy Ballot,
Proxy Statement and its 1995 Annual Report are enclosed with this Notice.
YOUR VOTE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE MEETING, PLEASE
MARK, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY IN THE ENVELOPE PROVIDED FOR
THAT PURPOSE. IF YOU ATTEND THE MEETING, YOU MAY, OF COURSE, WITHDRAW YOUR
PROXY AND VOTE IN PERSON.
By Order of the Board of Directors
/s/ John A. Forlines, Jr.
-------------------------
Granite Falls, NC JOHN A. FORLINES, JR.
March 14, 1996 Chairman and Chief Executive Officer
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BANK OF GRANITE CORPORATION
PROXY STATEMENT
SOLICITATION, VOTING AND REVOCABILITY OF PROXY
General
The accompanying Proxy is solicited by the Board of Directors of Bank of Granite
Corporation (the "Corporation") for use at the Annual Meeting of Shareholders to
be held on April 22, 1996, and any adjournment thereof. The time and place of
the meeting is set forth is the accompanying Notice of Meeting. The approximate
date on which this Proxy Statement and the accompanying Proxy are first being
sent or given to Shareholders of the Corporation is March 21, 1996.
A copy of the Corporation's 1995 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 14, 1996. The
Corporation will also provide to any shareholder without charge a copy of the
Annual Report for 1995 filed on Form 10-K with the Securities and Exchange
Commission upon written request to Randall C. Hall, Secretary, Bank of Granite
Corporation, P.O. Box 128, Granite Falls, North Carolina 28630.
Solicitation
All expenses of preparing, printing and mailing the Proxy and all material used
in the solicitation thereof will be borne by the Corporation. In addition to the
use of the mails, proxies may be solicited through personal interview and
telephone by directors, officers and other employees of the Corporation, none of
whom will receive additional compensation for their services.
Revocability of Proxy
This Proxy shall be revocable at any time prior to its exercise by filing a
written request with Randall C. Hall, Secretary of the Corporation, by voting in
person at the Shareholders Meeting, or by presenting a duly executed proxy
bearing a later date.
Voting Securities and Vote Required for Approval
At the close of business on March 14, 1996, the record date, the Corporation had
issued and outstanding 5,985,385 shares of Common Stock, par value $1.00 per
share, which is the only class of stock outstanding. Only the holders of record
of Common Stock of the Corporation at the close of business on March 14, 1996
are entitled to receive notice of the Annual Meeting of Shareholders and to vote
on such matters to come before the Annual Meeting or any adjournment thereof.
Presence, in person or by proxy, of the holders of a majority of the outstanding
shares of Common Stock of the Corporation entitled to vote at the Annual Meeting
is necessary to constitute a quorum at the Annual Meeting or any adjournment
thereof.
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The approval of Proposal 1 (the Amendment of the Article of Incorporation),
Proposal 2 (the Election of Directors), Proposal 3 (the Ratification of the
Selection of the Corporation's Independent Accountants), and approval of all
other items which may be submitted to the shareholders for their consideration
at the Annual Meeting requires the affirmative vote of a majority of shares
present and voting. Each shareholder is entitled to one (1) vote for each share
of Common Stock held by him or her at the close of business on the record date,
March 14, 1996. Cumulative voting is not permitted.
The Board of Directors unanimously recommends a vote in favor of Proposals 1, 2
and 3. Each Proxy, unless the shareholder otherwise specifies, will be voted in
favor of Proposals 1, 2 and 3. In each case where the shareholder has
appropriately specified how the Proxy is to be voted, it will be voted in
accordance with his or her specifications. Executed but unmarked Proxies that
are returned to the Corporation will be voted in favor of the proposed amendment
of the articles of incorporation, in favor of the proposed slate of directors
and in favor of the ratification of Deloitte & Touche LLP as the Corporation's
independent accountants. Shareholders may designate a person or persons other
than those named in the enclosed Proxy to vote their shares at the Annual
Meeting or any adjournment thereof. As to any other matter or business which may
be brought before the Annual Meeting or any adjournment thereof, a vote may be
cast pursuant to the accompanying Proxy in accordance with the judgement of the
person or persons voting the same, but the management and Board of the
Corporation do not know of any other matter or business to come before the
Annual Meeting.
PRINCIPAL HOLDERS OF VOTING SECURITIES
To the knowledge of the Corporation, no individual shareholder owned
beneficially more than five percent (5%) of Bank of Granite Corporation's
outstanding Common Stock on the record date. Corporation Common Stock is held by
Cede & Co. as nominee of securities depositories for various segments of the
financial industry. As of the record date, Cede & Co. held shares registered in
street name for approximately 1,300 individuals and organizations as follows:
Amount and Nature of Percent
Name and Address Beneficial Ownership of Class
---------------- -------------------- --------
Cede & Co. 2,076,895 shares 34.70%
New York, NY
On the record date, the Corporation's Common Stock was owned by approximately
3,000 individuals and entities, holding Stock either as record holder of as
beneficial owner.
No change in control of the Corporation has occurred since the beginning of the
Corporation's last fiscal year, and as far as the Corporation's management is
aware, there are no plans for change in control of the Corporation.
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INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
Boards of Bank of Granite Corporation and its sole subsidiary, Bank of Granite
(the "Bank") are composed of the same persons.
During the fiscal year ended December 31, 1995, the Bank's Board of Directors
held 13 meetings, and the Corporation's Board of Directors held 7 meetings. All
members of both Boards of Directors attended more than 75% of the total number
of meetings of the Boards of Directors and the total number of meetings held by
committees of the Boards of which they are members. Overall attendance at both
Boards' meeting was approximately 91%.
Corporation and Bank directors were paid an annual retainer of $3,500 and fees
of $250 for attendance at each meeting of the Board. Directors received no
additional compensation for attending committee meetings. The Corporation's
Board has standing audit and nominating committees. The Bank's Board of
Directors supervises all compensation matters, and performs certain executive
committee functions for the Corporation's Board of Directors. The functions,
composition and frequency of meetings for the audit and nominating committees in
fiscal year 1995 were as follows:
AUDIT COMMITTEE - The Audit Committee was composed of directors Robert E. Cline,
Barbara F. Freiman and Myron L. Moore, Jr. The Committee, whose members are
neither officers nor employees of the Corporation or Bank, provides general
oversight of the internal audit function, reviews the findings of external
audits and examinations, evaluates the adequacy of the Bank's insurance
coverage, and reviews the activities of the Bank's regulatory compliance
efforts. During 1995, ten (10) meetings were held. All Committee members
attended more than 75% of the total number of Audit Committee meetings held
during the fiscal year 1995.
NOMINATING COMMITTEE - The Nominating Committee was composed of directors John
A. Forlines, Jr., Barbara F. Freiman, Myron L. Moore, Jr., and Charles M.
Snipes. The Committee makes recommendations to the Board of Directors with
respect to nominees for election as directors. The Committee would consider
shareholder nominees for Corporation and Bank Board membership. Any shareholder
wishing to nominate a candidate for director must follow the procedures set
forth in the section of this Proxy Statement entitled "Proposals for 1997 Annual
Shareholders Meeting." During 1995, one meeting was held. All Committee members
attended at least 75% of the total number of Nominating Committee meetings held
during fiscal year 1995.
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PROPOSED AMENDMENT OF CORPORATION'S CERTIFICATE OF INCORPORATION
(PROPOSAL 1)
The Corporation's Certificate of Incorporation ("Certificate") states that
number of shares of Corporation Common Stock ("Common Stock") the Corporation is
permitted to issue. The present Certificate provides that the Corporation may
issue up to 10,000,000 shares of Common Stock.
PROPOSAL: The Board of Directors has proposed that the Certificate be amended to
increase the authorized number of shares of Common Stock from 10,000,000 to
15,000,000. As of the Record Date, there were 5,985,385 issued and outstanding
shares of Corporation Common Stock, which left 4,014,615 shares of Common Stock
available for use by the Corporation in the form of authorized but unissued
shares. The amendment of the Certificate to increase the authorized number of
shares to 15,000,000 would result, as of the Record Date, in 9,014,615
authorized but unissued shares of Common Stock.
The proposed amendment of the Certificate requires the affirmative vote of a
majority of shares of Corporation Common Stock present and entitled to vote at
the Annual Meeting.
ADVANTAGES: In the opinion of the Board of Directors and Corporation Management,
increasing the number of authorized but unissued shares of Common Stock through
an amendment of the Certificate would be in the best interest of the Corporation
for the following reasons.
- First, in order to declare a stock dividend or a stock split, there
must be a sufficient number of authorized but unissued shares of Common
Stock available to be issued to existing Corporation shareholders.
Thus, additional authorized but unissued shares of Corporation Common
Stock might eventually be necessary for the Corporation to declare
stock dividends or stock splits to existing shareholders. Note,
however, that there are no plans at this time by the Corporation to
declare a stock dividend or stock split. Nor does the existence of
authorized but unissued shares of Common Stock affect the ability of
the Corporation to declare cash dividends.
- Second, merger and acquisition transactions frequently require the
use of authorized but unissued shares of Common Stock. If the
Corporation determined it was in its best interest to acquire or merge
with another financial institution, the acquisition or merger agreement
might require the exchange of shares of each corporation's stock and
the issuance of new authorize but unissued shares by the Corporation.
Thus, a sufficient number of Corporation authorized but unissued shares
of Common Stock must be available for issuance under such
circumstances. Note, however, that there are no plans at this time by
the Corporation to acquire or merge with another financial institution.
- Third, certain executive and employee benefit programs sponsored by
the Corporation require the use of authorized but unissued shares of
stock. An example is the Corporation's stock option plan. Under the
terms of the stock option plan, participants purchase authorized but
unissued shares of Common Stock. Other benefit plans, not yet sponsored
by the Corporation, could also require the availability and use of
authorized but unissued shares of Common Stock. Note, however, that
there are no plans at this time by the Corporation to adopt another
benefit plan which might require the use of authorized but unissued
shares of Common Stock.
- Fourth, the Corporation may desire to raise additional capital
through the sale on the primary market of authorized by unissued shares
of Common Stock. Such additional capital could, for example, be used by
the Corporation to improve its equity capital position or to
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provide funds needed for expansion. Note, however, there are no plans
at this time by the Corporation to raise additional capital through the
sale on the primary market of authorized by unissued shares of Common
Stock.
- Finally, the Corporation may become subject to a hostile takeover
attempt. One defensive tactic to an unwanted takeover is to have
available for sale to existing or new shareholders a sufficient number
of authorized but unissued shares of Common Stock. The sale of new
shares of Common Stock would function to dilute any existing ownership
interest of the potential acquirer, thus making the hostile acquisition
more difficult to achieve. Note, however, that the Corporation is not
at this time subject to any hostile takeover attempt.
DISADVANTAGES: Although there are many advantages of the proposed amendment,
the amendment of the Certificate to increase the authorized number of shares of
Common Stock from 10,000,000 to 15,000,000 could dilute existing shareholders'
ownership interests in the Corporation at some point in the future. This could
occur, for example, where authorized but unissued shares of Common Stock are
sold on the primary market and existing shareholders are not given (or do not
take advantage of) the right to maintain their percentage ownership interests
through the purchase of a portion of the new issuance of stock. In such case,
the sale of new shares of Common Stock would dilute the existing shareholder's
ownership interest in the Corporation. However, there are no plans by the
Corporation at this time to issue authorized but unissued shares of Common Stock
except in connection with the Corporation's stock option plan or in the ordinary
course of its operations.
THE BOARD OF DIRECTORS AND CORPORATION MANAGEMENT RECOMMEND THAT THE PROPOSED
AMENDMENT OF THE CORPORATION'S CERTIFICATE BE APPROVED BY SHAREHOLDERS. SHARES
REPRESENTED BY PROXIES ON THE ACCOMPANYING PROXY FORM WILL BE VOTED FOR THE
APPROVAL OF AMENDING THE CERTIFICATE OF INCORPORATION AS SET FORTH IN THE PROXY
STATEMENT UNLESS SPECIFIED OTHERWISE.
ELECTION OF DIRECTORS
(PROPOSAL 2)
Seven (7) directors are being considered for election at the Annual Meeting,
each to hold office for one year or until a successor is elected and qualified.
The Corporation Board's nominees are shown below along with biographical
summaries and beneficial ownership of Common Stock. The information is
presented, unless otherwise indicated, as of March 14, 1996.
All of the director nominees shown below have been elected previously a director
by the Corporation shareholders, with the exception of Boyd C. Wilson, Jr. All
director nominees are currently serving on the Board.
No director nominee listed holds any other directorship in a company with a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934. There are no family relationships between any director or person
nominated by the Corporation Board to be come a director.
To the knowledge of management, no director nominee beneficially owns more than
5% of the outstanding shares of Corporation Common Stock.
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.
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THE BOARD OF DIRECTORS RECOMMENDS THAT THE DIRECTOR NOMINEES,
SHOWN IN THE FOLLOWING TABLE, BE ELECTED AS DIRECTORS.
DIRECTORS AND EXECUTIVE OFFICERS OF
BANK OF GRANITE CORPORATION
The number of shares of Bank of Granite Corporation stock beneficially owned by
the nominees are those owned as of March 14, 1996. Unless otherwise indicated,
each director has sole voting power (or shares such power with his spouse) with
respect to the shares set forth in the table on the following page. The source
of information provided in the table is the Corporation's shareholder records.
DIRECTORS AND EXECUTIVE OFFICERS OF
BANK OF GRANITE CORPORATION
AMOUNT AND NATURE OWNERSHIP AS A
AGE ON DIRECTOR OF BENEFICIAL PERCENTAGE OF
NAME PRINCIPAL OCCUPATION DEC. 31, 1995 SINCE(1) OWNERSHIP COMMON STOCK
- ---- -------------------- ------------- -------- --------- ------------
JOHN N. BRAY President, Vanguard Furniture, Inc. 53 Bank (1992) 2,056 direct .04%
Hickory, NC Corp. (1992) 627 indirect(2)
ROBERT E. CLINE President, Cline Realty Company, Inc. 70 Bank (1984) 7,141 direct .30%
Hickory, NC Corp. (1987) 10,544 indirect
JOHN A. FORLINES, JR. Chairman and Chief Executive 77 Bank (1954) 278,855 direct 4.91%
Granite Falls, NC Officer, Bank of Granite Corp. (1987) 14,949 indirect(3)
Corporation, since June 1987;
Chairman, Bank of Granite, since
1972 (and Chief Executive Officer
from 1954 through April, 1994)
BARBARA F. FREIMAN Director of Institutional 61 Bank (1989) 3,309 direct .07%
Lenoir, NC Effectiveness and Development, Corp. (1989) 1,151 indirect(2)
Caldwell Community College
MYRON L. MOORE, JR. Treasurer, Lenoir Mirror Company; 71 Bank (1959) 5,077 direct .16%
Lenoir, NC Director, Bank of Granite, 1947 Corp. (1987) 4,687 indirect(2)
through 1954
CHARLES M. SNIPES President, Bank of Granite 62 Bank (1982) 72,704 direct 1.46%
Hickory, NC Corporation; President and Chief Corp. (1987) 14,949 indirect(2)
Executive Officer (beginning May,
1994), Bank of Granite; Director,
Vanguard Furniture, Inc.
BOYD C. WILSON, JR. Vice President and Controller, 43 Bank (1996) 1,326 direct .03%
Hudson, NC Kincaid Furniture Company Corp. (1996) 742 indirect(2)
Directors and Executive 371,174 direct 7.04%
Officers as a Group(4) 49,917 Indirect
Notes:
(1) Bank of Granite Corporation, the holding company for Bank of Granite,
was organized in June, 1987.
(2) Shares of stock indirectly owned include those held in their spouse's
name or by corporations controlled by such individuals.
(3) The indirect stock ownership shown for John A. Forlines, Jr., and
Charles M. Snipes consists of those shares of Corporation Common
Stock currently obtainable by such individuals on the record date,
March 14, 1996, through the Corporation's Incentive Stock Option
Plan, as described later in this proxy under the section "Information
Pertaining to Stock Option Plan."
(4) Includes those director nominees listed in the table along with two
executive officers not required to be listed individually.
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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 Corporation and its subsidiary, Bank of Granite ("Bank"), whose total salary
and bonus exceeded $100,000 during 1995.
SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
AWARD OF
EXECUTIVE OFFICER AND STOCK ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS(2) COMPENSATION(3)
- --------------------- ---- ------ -------- ---------- ---------------
JOHN A. FORLINES, JR. 1995 $184,000 $38,768 3,500 $38,602
Corporation Chairman and Chief
Executive Officer; Bank 1994 $178,380 $38,768 2,500 $34,024
Chairman
1993 $168,288 $38,696 3,750 $30,797
CHARLES M. SNIPES 1995 $137,604 $27,184 3,500 $25,558
Corporation President; Bank
President and Chief Executive 1994 $125,100 $27,184 2,500 $26,234
Officer
1993 $118,008 $27,128 3,750 $22,916
DAVID R. CLARK 1995 $119,004 NA 2,500 $18,433
Bank Executive Vice President
and Chief Operating Officer
Notes:
(1) Figures shown represent actual incentive cash bonuses paid during the
year indicated.
(2) Figures shown represent number of shares of Corporation Common Stock
subject to options which were awarded to the named executive officers
shown during the years indicated.
(3) Figures shown indicate amounts contributed by the Bank to its
Profit-sharing Plan ("Plan") and allocated to the indicated executive
officer's accounts. The Plan is a "tax qualified" plan under Section
401 (a) of the Internal Revenue Code and covers all Bank employees. The
following amounts were contributed to John A. Forlines, Jr.'s Plan
accounts: $22,500 (1995), $22,500 (1994), and $30,000 (1993). The
following amounts were contributed to Charles M. Snipes' Plan accounts:
$22,500 (1995), $22,500 (1994), and $21,962 (1993). The following
amounts were contributed to David R. Clark's Plan account.: $17,851
(1995).
Figures shown also indicate amounts contributed by the Bank to the
indicated executive officer's Supplemental Executive Retirement Plan
("SERP") accounts. Because of Internal Revenue Code limitations on
amounts which can be contributed to the named executive's
Profit-sharing Plan accounts, the SERP was implemented by the Bank
during 1994 to held replace those contributions "lost" by the named
executives due to these limitations. Participation in the SERP is
determined by the Board of Directors. The SERP is not a qualified plan
under the Internal Revenue Code. Contribution earnings are tied to the
30 year US Treasury bond. The following amounts were contributed by the
Bank to John A. Forlines, Jr.'s accounts: $11,447 (1995), and $10,587
(1994). The following amounts were contributed to Charles M. Snipes'
accounts: $2,218 (1995), and $343 (1994).
The remaining amounts shown represent the value of certain split dollar
insurance plan premiums paid for the indicated executives, based on
term insurance value of such payments as calculated under the Internal
Revenue Code P.S. 58 rates or those of the insurer, if lower.
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STOCK OPTION GRANTS DURING 1995
POTENTIAL REALIZABLE VALUE AT ASSUMED
ANNUAL RATES FOR STOCK PRICE
INDIVIDUAL GRANTS APPRECIATION FOR OPTION TERM
----------------- ----------------------------
NUMBER OF % OF TOTAL OPTIONS EXERCISE
SECURITIES GRANTED TO OR BASE
UNDERLYING EMPLOYEE IN FISCAL PRICE PER EXPIRATION 5% 10%
EXECUTIVE OFFICER OPTIONS(1) YEAR(2) SHARE(3) DATE(4) APPRECIATION(5) APPRECIATION(6)
- ----------------- ---------- ------- -------- ------- --------------- ---------------
JOHN A. FORLINES, JR. 3,500 19.2 $26.00 11/13/00 $25,130 $55,545
Corporation Chairman
and Chief Executive
Officer; Bank Chairman
CHARLES M. SNIPES 3,500 19.2 $26.00 11/13/00 $25,130 $55,545
Corporation President;
Bank President and
Chief Executive Officer
Notes:
(1) Figures indicate number of shares of stock granted under the Plan in
the form of options to the indicated executive officer during 1995. The
price at which shares of Corporation Common Stock may be purchased upon
the exercise of options under the Plan is equal to 100% of the fair
market value of the Corporation's Common Stock on the date the options
are granted. All options granted pursuant to the Plan must be exercised
within 5 years from the date of grant. Outstanding options must also be
exercised during employment or within 3 months after a participating
executive's termination of service. If termination of service is by
reason of death, an option may 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 transferrable by the holder except
by will or by the laws of dissent 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 1995.
(3) The exercise or base price is the dollar amount at which each share of
stock subject to option may be acquired by the indicated executive
officer. The exercise or base price is the closing market price per
share of the Common Stock on the date of the award of the option.
(4) The date shown indicates the date upon which the options granted will
expire.
(5) The dollar values shown represent the potential realizable value of the
grant of options at an assumed 5% annualized appreciate rate in the
price of Corporation Common Stock. The potential realizable value is
calculated under the following formula: [(A x B) - C] x D, where A =
$26.00, the per share market price at the time of the grant; B =
1.2763, the assumed rate of stock price appreciation (5%) compounded
annually over the 5-year term of the option; C = $26.00, the per share
exercise price of the option; and D = 3,500, the number of securities
underlying the grant at year end 1995.
(6) The dollar values shown represent the potential realizable value of the
grant of options at an assumed 10% annualized appreciation rate in the
price of Corporation Common Stock. The potential realizable value is
calculated under the following formula: [(A x B) - C] x D, where A =
$26.00, the per share market price at the time of the granite; B =
1.6105, the assumed rate of stock price appreciation (10%) compounded
annually over the 5-year term of the option; C= $26.00, the per share
exercise price of the option; and D = 3,500, the number of securities
underlying the grant at year end 1995.
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AGGREGATED OPTION EXERCISES DURING 1995 AND YEAR END OPTION VALUES
OPTIONS EXERCISED DURING 1995 NUMBER AND VALUE OF SHARES SUBJECT TO UNEXERCISED
OPTIONS AT YEAR END
NUMBER OF SHARES VALUE OF SHARES
SHARES VALUE UNEXERCISED, EXERCISABLE UNERXERCISED, EXERCISABLE
EXECUTIVE OFFICER ACQUIRED(1) REALIZED(2) AND UNEXERCISABLE(3) AND UNEXERCISABLE(3)
- ----------------- ----------- ----------- -------------------- --------------------
JOHN A. FORLINES, JR. 473 48,503 Unexercised - 19,749 Unexercised - $188,235
Corporation Chairman Exercisable - 11,936 Exercisable - $145,816
and Chief Executive Unexercisable - 7,813 Unexercisable - $ 42,419
Officer; Bank Chairman
CHARLES M. SNIPES 4,687 59,049 Unexercised - 19,749 Unexercised - $188,235
Corporation President; Exercisable - 11,936 Exercisable - $145,816
Bank President and Unexercisable - 7,813 Unexercisable - $ 42,419
Chief Executive Officer
Notes:
(1) Indicates number of shares acquired by indicated executive officer
through the exercise of options during 1995.
(2) Dollar amounts represent the aggregate dollar value realized by the
indicated executive officer upon the exercise of options during 1995.
The aggregate dollar value realized is calculated based on the
difference between the fair market value of Corporation Common Stock on
the date of exercise, less the underlying option's exercise or base
price.
(3) Dollar amounts shown represent the value of stock options held by the
indicated executive officers at year end 1995. 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 Corporation Common Stock exceeds the
exercise or base price of the shares subject to the options at year end
1995. For those options "in the money", value is computed based on the
difference between the fair market value of Corporation Common Stock at
year end 1995 and the exercise or base price of the shares subject to
the options. The value of options exercisable and unexercisable at year
end 1995 is also shown.
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BOARD REPORT ON EXECUTIVE OFFICER COMPENSATION
The Corporation's compensation committee must provide Corporation shareholders
a report discussing the basis for the compensation committee's action in
establishing compensation for Corporation and Bank executive officers. The
report is also required to discuss the relationship, if any, between the
Corporation's performance and executive officer compensation. Finally, the
report must specifically discuss the factors and criteria upon which the
compensation paid the Corporation's CEO was based.
The fundamental philosophy of Bank of Granite Corporation's compensation
program is to offer competitive compensation opportunities for all executive
officers which are based both on the individual's contribution and on the
Corporation's performance. The compensation paid is designed to retain and
reward executive officers who are capable of leading the Corporation in
achieving its business objectives in an industry characterized by complexity,
competitiveness, and change. The compensation of Corporation executives is
reviewed and approved annually by the full Corporation Board of Directors,
which acts as the Corporation's board compensation committee. Annual
compensation for the Corporation's CEO (and other executive officers) consists
of three elements:
- base salary;
- An annual cash incentive that is directly and indirectly linked to
Corporation and individual performance (with Corporation
performance measured on the basis of Return on Assets); and
- Long-term equity participation, consisting of the issuance of stock
options, designed to better align the interests of executive
officers with those of the Corporation's shareholders.
For the Corporation's executives (and CEO), base salary is targeted to
approximate average salaries for individuals in similar positions with similar
levels of responsibilities who are employed by other banking organizations of
similar size. The Corporation frequently participates in local, state and other
salary/compensation surveys and has access to other published
salary/compensation data. The results of such surveys are used by the
Corporation Board of Directors in helping to set appropriate levels of
Corporation CEO and other executive officer base salaries.
During 1995, the Corporation increased the CEO's base salary by 3.2%. The
Corporation Board of Directors determined that the 3.2% increase in the CEO base
salary was appropriate in light of two primary factors. The first factor was a
desire by the Corporation to provide the CEO with a base salary comparable to
that paid by other banking organizations of similar size and financial
performance. The Corporation Board of Directors annually review national,
regional, statewide and local peer group salary data (to the extent available)
in its determination of a comparable base salary. A second factor considered by
the Corporation Board of Directors was the following 1995 Corporation
performance accomplishment: a 2.66% Return on Assets, which placed the
Corporation among the banking industry's top performers during 1995.
I-11
13
For the Corporation's executives (and CEO), the annual cash incentive during the
years 1993, 1994 and 1995 ranged from 20.5% to 23.0% of base salary. This means
that up to approximately 23.0% of the executive's annual compensation was
variable, could fluctuate significantly from year to year, and was directly and
indirectly tied to business and individual performance. The annual cash
incentive is based on the banking organization's return on assets (ROA). The
Corporation's Board of Directors, in its sole discretion, sets a threshold ROA
target, based in part on the Corporation's financial performance in prior years
and the performance of banking organizations of similar size in the Bank's
general geographic region. If the threshold ROA target is achieved, a stated
dollar amount will be paid into an incentive compensation pool. The incentive
compensation pool amounts are then distributed among incentive plan participants
based on such participants' base salaries as a percentage of all participants
base salaries. If the Corporation earns ROA above the threshold level, an
increasing dollar incentive pool is created up to a maximum dollar amount at a
predetermined ROA level.
For the Corporation's CEO, executives (and other key employees), stock options
may be granted each year in the sole discretion of the Board of Directors. While
no formal system is employed in determining the number of stock options granted,
both in the aggregate and to any one individual, the Board does take into
account the Corporation's current financial performance and the number of stock
options previously granted.
This report is provided as a summary of current Board practice with regard to
annual compensation review and authorization of executive officer compensation
and with respect to specific action taken for the CEO.
Because executive officer and CEO salaries are not expected currently or in the
near future to exceed those limitations provided under Section 162(m) of the
Internal Revenue Code, the Board currently has no specific policy which
addresses the income tax deductibility of "qualifying compensation" under this
specific code section.
Board of Directors
Bank of Granite Corporation
I-12
14
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Certain information must be disclosed regarding the relationships of members of
the Corporation's compensation committee with either the Corporation or the
Bank, or in certain circumstances, with other corporations. This will provide
shareholders with information regarding the independence of decision-making by
the Corporation's compensation committee.
The full Corporation Board of Directors serves as the Corporation's compensation
committee. Disclosure is required of any member of the compensation committee
who was, at any time during the last completed fiscal year, an officer or
employee of the Corporation or the Bank. John A. Forlines, Jr. and Charles M.
Snipes both served as members of the Corporation Board of Directors during 1995
and also served as Corporation and Bank executive officers. Mr. Forlines is the
Chairman and CEO of Bank of Granite Corporation, and Chairman of the Bank of
Granite. Mr. Snipes is the President of Bank of Granite Corporation and
President and CEO of the Bank of Granite. While Mr. Forlines, and Mr. Snipes
specifically excluded themselves from any Corporation Board of Directors'
discussions concerning their own compensation, they did participate with other
Corporation Board members in discussions concerning other executive officers'
compensation.
SHAREHOLDER PERFORMANCE GRAPH
The Corporation is required to provide its shareholders with a line graph
comparing the Corporation's cumulative total shareholder return with a
performance indicator of the overall stock market and either a published
industry index or a Corporation-determined peer comparison. The purpose of the
chart is to help shareholders determine the reasonableness of the compensation
committee's decisions with respect to the setting of various levels of executive
officer compensation. Shareholder return (measured through increases in stock
price and payment of dividends) is often a benchmark used in assessing corporate
performance and the reasonableness of compensation paid executive officers.
However, the shareholders should recognize that corporations often use a number
of other performance benchmarks (in addition to shareholder return) to set
various levels of executive officer compensation. Shareholders should thus
consider other relevant performance indicators in assessing shareholder return,
such as growth in earnings per share, book value per share, and cash dividends
per share, along with other performance measures such as return on equity and
return on assets.
The performance graph shown on the following page compares the Corporation's
cumulative total return over the most recent 5-year period with both the NASDAQ
Index, the Standard & Poor's 500 Index, and an Independent Bank Index
(reflecting changes in certain peer group bank stocks). The Independent Bank
Index is the compilation of the total return to shareholders of a group of 18
independent community banks located in the southeastern states of Florida,
Georgia, North Carolina, Tennessee and Virginia. The banks range in asset size
from $170 million to $788 million. Returns are shown on a total return basis,
assuming the reinvestment of dividends.
I-13
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BANK OF GRANITE CORP.
FIVE YEAR PERFORMANCE INDEX
[GRAPH]
BANK OF GRANITE CORP. INDEPENDENT BANK INDEX NASDAQ INDEX
--------------------- ---------------------- ------------
1990 100 100 100
1991 135 111 161
1992 201 152 187
1993 218 188 215
1994 225 225 210
1995 265 299 296
I-14
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TRANSACTIONS WITH OFFICERS AND DIRECTORS
The Corporation has had, and expects to have in the future, banking transactions
in the ordinary course of its business with directors, officers and their
associates, on the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others;
and, in the opinion of Corporation management, these transactions do not and
will not involve more than the normal risk of collectibility or present other
unfavorable features.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's
directors and executive officers, and persons who own more than 10% of the
Corporation's Common Stock, to file with the Securities and Exchange Commission
initial reports of ownership of Corporation Common Stock and reports of changes
in ownership. Executive officer, directors and greater than 10% shareholders are
required by SEC regulations to furnish the Corporation with copies of all
Section 16(a) forms they file.
To the Corporation's knowledge, all Section 16(a) filing requirements applicable
to its executive officers, directors and greater than 10% beneficial owners were
made in a timely manner.
RATIFICATION OF SELECTION OF ACCOUNTANTS
(PROPOSAL 3)
The Board of Directors of the Corporation has selected the firm of Deloitte &
Touche LLP as independent Certified Public Accountants to examine the financial
statements of the Corporation for the year ending December 31, 1996. The firm is
to report on the Corporation's consolidated balance sheets, and related
consolidated statements of income, consolidated statements of cash flow, and
consolidated changes in shareholders' equity, and to perform such other
appropriate accounting services as may be required by the Board of Directors. It
is expected that representatives of Deloitte & Touche LLP, who also served as
the Corporation's accounting firm for the past fiscal year, will be present at
the shareholders' meeting. They will be provided with any opportunity to make a
statement if they desire to do so and to answer appropriate questions which may
be raised at the meeting.
The fee arrangement between Deloitte & Touche LLP and Bank of Granite
Corporation is based on rates and terms customary in their practice.
The Board of Directors recommends that the firm of Deloitte & Touche LLP be
ratified as the Corporation's Independent Certified Public Accountants for the
year ended December 31, 1996.
I-15
17
PROPOSALS FOR 1997 ANNUAL SHAREHOLDER MEETING
From time to time, individual shareholders may wish to submit proposals which
they believe should be voted upon by the Corporation's shareholders. The
Securities and Exchange Commission has adopted regulations which govern the
inclusion of such proposals in the Corporation's annual proxy materials. No such
proposals were submitted for the 1996 Annual Meeting. Shareholder proposals
intended to be presented at the 1997 Annual Meeting of Shareholders must be
received by the Secretary of the Corporation at its executive office, 23 North
Main Street, P. O. Box 128, Granite Falls, North Carolina 28630 no later
November 14, 1996 (which is 120 days prior to the expected date of the 1997
Proxy Statement) in order to be eligible for inclusion in the Corporation's
Proxy Ballot and Proxy Statement for the 1997 Annual Meeting.
While the Corporation's Nominating Committee normally recommends and nominates
individuals to serve as directors of the Corporation, shareholders may also
nominate candidates for director, provided that such nominations are made in
writing and are received by the Corporation at its executive offices not later
than December 14, 1996 (which is 90 days prior to the expected date of the 1996
Proxy Statement). The nomination should be sent to the attention of the
Corporation Secretary and must include, concerning the director nominee, the
following information: full name, age, date of birth, educational background and
business experience, including positions held for at least the preceding five
years. The nomination must also include home and business addresses and
telephone numbers and include a signed representation by the nominee to timely
provide all information requested by the Corporation as part of its disclosure
in regard to the solicitation of proxies for the election of directors. The name
of each such candidate for director must be placed in nomination at the Annual
Meeting by a shareholder present in person. The nominee must also be present in
person at the meeting. A vote for a person who has not been duly nominated
pursuant to these requirements is void.
OTHER BUSINESS
Management of the Corporation knows of no other business to be presented to the
meeting. If other matters should properly come before the Annual Meeting or any
adjournment thereof, a vote may be cast pursuant to the accompanying Proxy in
accordance with the judgment of the person or persons voting the same.
All shareholders are urged to attend the Annual Meeting of Shareholders of April
22, 1996 at 10:30 a.m., at Holiday Inn, 138 South Lenoir Rhyne Boulevard, S.E.
(at Interstate 40, Exit #125), Hickory, North Carolina, and to vote your shares
in person. If you do not plan to attend, please sign and return your Proxy
promptly. A Proxy may be revoked at any time before it is voted, and the giving
of a Proxy will not affect the right of a shareholder to attend the meeting and
vote in person.
By Order of the Board of Directors
Bank of Granite Corporation
Granite Falls, North Carolina
/s/ Randall C. Hall
----------------------------
Randall C. Hall
Secretary
Granite Falls, North Carolina
March 14, 1996
I-16
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I-17
19
MANAGEMENT'S DISCUSSION
AND ANALYSIS AND
AUDITED FINANCIAL
STATEMENTS
II-1
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis is provided to assist in understanding and
evaluating the Company's results of operations and financial condition. The
following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. In 1987 Bank
of Granite Corporation (the "Company") was formed under a plan whereby all
previously issued shares of Bank of Granite stock were exchanged for shares of
the Company. The Bank then became a wholly-owned subsidiary of the Company.
All information is presented as consolidated data.
RESULTS OF OPERATIONS
The following discussion relates to the operations for the year ended December
31, 1995 compared to the year ended December 31, 1994, the year ended December
1994 compared to the year ended December 31, 1993, and the year ended December
31, 1993 compared to the year ended December 31, 1992.
1995 COMPARED TO 1994
Net income for 1995 was $11,516,944 or $1.92 per share compared to $9,842,273
or $1.64 per share in 1994. This 17% increase in net income resulted primarily
from the subsidiary Bank's continued successful efforts to increase net
interest income over the previous period. Net interest income increased to
$23,365,432 compared to $20,059,106 in 1994. The increase in interest income
was attributable to increases in interest rates and loan volume. Approximately
56% of the increase in interest income was attributable to increases in rate.
Gross loan increased $31,833,940 or 11.8%. Interest expense increased
$3,687,242 of which 74% was attributable to increases in rate, the remaining
26% was attributable to a growth in interest-bearing deposits of $27,990,100 or
10.1%. Other income remained relatively flat at $4,120,865 compared to
$4,256,497 in 1994. The increase in service charges on deposit accounts of
$70,263 reflects growth in deposits accounts. During 1995 the bank continued
to place emphasis on non-traditional banking services such as annuities,
leasing, originating mortgage loans and small business administration. In
focusing on these products the bank experienced volatility in earnings commonly
associated with such products. Other service fees and commissions decreased
$51,259 which was primarily due to decreases in the sales of annuities.
Annuity sales fluctuate with interest rates. For the most part interest rates
were on the rise during 1995, thus negatively impacting annuity sales. Fees
from the origination of mortgage loans began to reflect increases over the
previous year during the fourth quarter. For the year ended December 31, 1995
the bank earned $406,225 compared to $328,137 in 1994. Other income decreased
by $114,684 which was primarily attributable to decreases in the sales of the
guaranteed portion of small business administration loans. Net losses on
securities resulted from securities being called at a premium as well as the
sale of a mutual fund investment. The funds from these transactions were
reinvested at higher yields. Other expenses increased $107,016 or 1.2% over
the previous year. Salaries and benefits increased $257,807 or 5.2% as a
result of general salary increases and the cost of providing related benefits.
Equipment rentals, depreciation and maintenance increased $95,697 or 13.0%
primarily as a result of additional technology purchases and installation. The
Federal Deposit Insurance Corporation insurance premiums decreased to $395,372.
During 1995 the FDIC assessment rate was reduced from 23 cents per $100 of
deposit to 4 cents per $100 of deposit. The reduction in rate reflects the
bank's strength and the Bank Insurance Fund reaching its recapitalization
level of 1.25% of insured deposits held in commercial banks. Other operating
expenses reflect a non-recurring loss of $50,816 on the sale of other real
estate owned during 1995.
II-2
21
1994 COMPARED TO 1993
Net income for 1994 was $9,842,273 or $1.64 per share compared to $8,749,266 or
$1.46 per share in 1993. The 12.5% increase in net income resulted primarily
from the subsidiary Bank's continued successful efforts to increase net
interest income over the previous period coupled with efforts to increase
non-interest income over previous periods. Net interest income increased to
$20,059,106 in 1994 compared to $16,865,043 in 1993. The increase in interest
income was attributable to increases in interest rates and growth in loan
volume. The prime rate increased six times during 1994 from 6.00% to 8.5% and
loans grew 10.67% to $269,851,459. The increase in interest expense resulted
from a growth of 4.42% in interest-bearing deposits. Other income increased to
$4,256,497 in 1994 compared to $4,211,175 in 1993, primarily due to increases
in volume of service charges on deposit accounts. The $120,378 increase
reflects growth in deposit accounts. Other service fees and commissions, and
other income reflect a decrease of $75,056 compared to last year. The
decrease is a result of rising interest rates which negatively impacted fees
associated with originating and renewing mortgage loans. In 1994 the Company
earned $328,137 for originating mortgage loan compared to $487,020 last year.
Management continued to place emphasis on non-traditional banking services such
as annuities and leasing which produced $106,453 in non-interest income.
Additionally, sales of the guaranteed portions of small business administration
loans produced $268,068 in income. Other expenses increased to $9,146,805 in
1994 compared to $7,641,494 in 1993. Salaries and employee benefits increased
by $827,899, accounting for 55.00% of the total increase in non-interest
expense. Equipment rentals, depreciation and maintenance expense increased
$59,317 or 8.76% as a result of purchases of additional computer software and
related peripherals. FDIC premiums increased by $53,451 or 7.93% reflecting a
growth in deposits. A non-recurring loss on the sale of other real estate
owned amounted to $111,547 or 7.41% of the total increase in non-interest
expense. Telephone and telegraph expenses increased $101,485 or 6.74% of the
total increase in non-interest expense due to the installation and operation of
a new telephone system.
1993 COMPARED TO 1992
Net income for 1993 was $8,749,266 or $1.46 per share compared to $7,807,285 or
$1.32 per share in 1992. The 12.1% increase in net income resulted primarily
from the subsidiary Bank's continued successful efforts to increase net
interest income over previous periods coupled with efforts to increase its
non-interest income over previous periods. Net interest income increased to
$16,865,043 in 1993 compared to $15,336,204 in 1992. The increase in interest
income was attributable to growth in volume. Interest rates remained flat
during 1993, resulting in maturing loans and investments repricing at lower
yielding rates. The decrease in interest expense resulted from higher yielding
deposits maturing and reinvesting at lower interest rates. Other income
increased to $4,211,175 in 1993 compared to $4,058,640 in 1992 primarily due to
an increase in both rate and volume in other service fees and commission and
other income. Management continued to place emphasis on non-traditional
banking services relatively new to the Bank, such as annuities, leasing, and
originating mortgage loans, which produced $565,730 in non-interest income
compared to $440,631. Additionally, sales of the guaranteed portion of small
business administration loans produced $314,416. Other expenses increased to
$7,641,494 in 1993 compared to $7,310,170 in 1992. Salaries and employee
benefits increased by $210,317, accounting for 63.5% of the total increase in
non-interest expense. Equipment rentals, depreciation and maintenance expense
increased $69,768 or 11.5% as a result of purchases of computer software and
related peripherals. FDIC premiums increased $30,714 as a result of deposit
growth.
II-3
22
NET INTEREST INCOME
Net interest income (the difference between interest earned on interest-earning
assets and interest paid on interest-bearing liabilities, primarily deposits in
the Company's subsidiary bank) represents the most significant portion of the
Company's earnings. It is management's on-going policy to maximize net
interest income. Net interest income totaled $23,365,432, $20,059,106 and
16,865,043 for 1995, 1994 and 1993, respectively, representing and increase of
16.5% for 1995 over 1994, 18.9% for 1994 over 1993, and 10.0% for 1993 over
1992. Interest rate spreads have been at least 4.4% over the last three years,
and the Company continues efforts to maximize these favorable spreads by
management of both loan and deposit rates in order to support the overall
earnings growth. The following table presents the daily average balances,
interest income/expense and average rates earned and paid on interest-earning
assets and interest-bearing liabilities of the Company for the last three
years.
AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
Dollars in thousands FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ------- ------- -------- ------- ------- -------- -------
ASSETS:
Cash and due from banks $ 19,462 $ 18,744 $ 17,306
Net loans(1) 282,625 $ 29,848 10.6% 252,321 $ 23,368 9.3% 231,178 $ 19,853 8.6%
Taxable securities 62,128 3,623 5.8% 62,497 3,290 5.3% 60,300 3,464 5.7%
Non-taxable securities(2) 50,864 2,845 8.6% 49,087 2,719 8.5% 43,713 2,562 8.9%
Federal funds sold and securities
purchased under agreement to resell 4,163 251 6.0% 4,053 196 4.8% 7,513 235 3.1%
Bank premises and equipment, net 8,104 7,575 6,492
Other assets 5,731 4,897 4,683
Total assets $433,077 $399,174 $371,185
Total interest earning assets $403,907 $ 36,567 9.4% $371,707 $ 29,573 8.4% $345,328 $ 26,114 7.9%
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest bearing deposits $291,056 $ 13,025 4.5% $271,408 $ 9,383 3.5% $258,162 $ 9,179 3.6%
Non-interest bearing deposits 67,223 62,169 55,637
Federal funds purchased and securities
sold under agreement to repurchase 3,323 176 5.3% 3,490 127 3.6% 2,711 66 2.4%
Other liabilities 3,314 1 2,455 4 .2% 2,519 4 .2%
Shareholders' equity 68,161 59,652 52,156
Total liabilities and shareholders'
equity $433,077 $399,174 $371,185
Total interest bearing liabilities $294,379 $ 13,202 4.5% $274,956 $ 9,514 3.5% $260,915 $ 9,249 3.5%
Net interest earned and net yield
on earning assets(3) $ 23,365 6.2% $ 20,059 5.4% $ 16,865 5.3%
Interest rate spread(4) 4.9% 4.9% 4.4%
(1) Non-accrual loans have been included.
(2) Yields on tax-exempt investments have been adjusted to a tax
equivalent basis using 35% for 1995 and 1994, and 34% for 1993.
(3) Net yield on earning assets is computed by dividing net interest
earned by average earning assets.
(4) The interest rate spread is the interest earning assets rate less the
interest earning liabilities rate.
Changes in interest income and interest expense can result from changes in both
volume and rates. The following table sets for the dollar amount of increase
(decrease) in interest income and interest expense resulting from changes in
the volume of interest earning assets and interest bearing liabilities and from
changes in yields and rates.
II-4
23
INTEREST RATE/VOLUME ANALYSIS
Dollars in thousands FOR THE YEARS ENDED DECEMBER 31,
1995 Compared to 1994 1994 Compared to 1993
--------------------- ---------------------
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
---------- -------- ----- ---------- -------- -----
Interest Earning Assets:
Taxable investment securities $ (20) $ 353 $ 333 $ 120 $ (294) $ (174)
Non-taxable investment securities 99 27 126 307 (150) 157
Federal funds sold 5 50 55 (138) 99 (39)
Loans 3,015 3,465 6,480 1,878 1,637 3,515
------- ------- ------- ------- ------- -------
Total $ 3,099 $ 3,895 $ 6,994 $ 2,167 $ 1,292 $ 3,459
------- ------- ------- ------- ------- -------
Interest Bearing Liabilities:
Savings deposits $ 29 $ 34 $ 63 $ 73 $ (28) $ 45
Other time deposits 977 2,455 3,432 33 (26) 7
Other (46) 238 192 235 (22) 213
------- ------- ------- ------- ------- -------
Total $ 960 $ 2,727 $ 3,687 $ 341 $ (76) $ 265
------- ------- ------- ------- ------- -------
(1) The rate/volume variance for each category has been allocated equally
on a consistent basis between rate and volume variances.
LIQUIDITY AND INTEREST RATE SENSITIVITY
The objectives of the Company's liquidity management policy include providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for on-going operations of the
Company and regulatory requirements of the Bank. Liquidity requirements of the
Company are met primarily through two categories of funds. The first is core
deposits which includes demand deposits, savings accounts and certificates of
deposits. The Company considers these to be a stable portion of the Company's
liability mix and the result of on-going stable consumer and commercial banking
relationships. At December 31, 1995 core deposits totaled $292,898,093 or
77.7% of the Company's total deposits.
The other principal method of funding utilized by the Bank is through large
denomination certificates of deposit, federal funds purchased, repurchase
agreements and other short-term borrowings. The Company's policy is to
emphasize core deposit growth rather than growth of purchased liabilities as
the cost of purchased liabilities are greater.
The majority of the Bank's deposit mix are rate-sensitive instruments with
rates which tend to fluctuate with market rates. This, coupled with the
Company's short-term certificates of deposit, has increased the opportunities
for deposit repricing. The Company is placing greater significance on
monitoring and management of the Company's asset/liability position. The
Company's policy of managing the bank subsidiary's interest margin (gap between
interest earning assets compared to interest-bearing liabilities) is to
maximize net interest income while maintaining a stable deposit base. The
BankAEs deposit base generally is not subject to volatility experienced in
national financial markets in recent years; however, the Company does realize
the importance of minimizing such volatility while at the same time maintaining
and improving earnings. A common method used to
II-5
24
manage interest rate sensitivity is to measure, over various time periods, the
interest rate sensitivity positions, or gaps; however, this method addresses
only the magnitude of timing differences and does not address earnings or
market value. Therefore, management prepares on a regular basis earnings
projections based on a range of interest rate scenarios of rising, flat and
declining rates in order to more accurately measure interest rate risk.
Interest-bearing liabilities and the loan portfolio are generally repriced to
current market rates. The CompanyAEs balance sheet is asset-sensitive, meaning
that in a given period there will be more assets than liabilities subject to
immediate repricing as the market rates change. Because a major portion of the
loan portfolio is repriced immediately as market rates change and exceed
immediately sensitive interest-bearing deposits, the earning position could
improve in a rising rate environment and could deteriorate in a declining rate
environment, depending on the correlation of rate changes in these two
categories.
INTEREST RATE SENSITIVITY
Dollars in thousand DECEMBER 31, 1995
Non-Sensitive
Interest Sensitivity in Days and Sensitive
1-90 91-180 181-365 Over One
Days Days Days Total Year Total
---- ---- ---- ----- ---- -----
Interest Earning Assets
Federal funds sold $ 1,500 $ 1,500 $ 1,500
Securities:
U.S. Treasury 2,000 $ 6,004 8,004 $ 7,502 15,506
U.S. Government agencies 4,000 $ 1,999 11,000 16,999 26,288 43,287
States and political subdivisions 715 1,178 1,218 3,111 52,732 55,843
Other 100 100 8,793 8,893
Loans
Real estate:
Construction 22,950 303 565 23,818 3,290 27,108
Mortgage 105,879 835 1,591 108,305 10,393 118,698
Commercial, financial and
agricultural 112,743 1,547 1,932 116,222 4,315 120,537
Consumer 14,676 2,618 4,554 21,848 13,772 35,620
All other 241 241 241
-------- -------- -------- -------- -------- --------
Total interest earning assets $264,804 $ 8,480 $ 26,864 $300,148 $127,085 $427,233
-------- -------- -------- -------- -------- --------
Interest Bearing Liabilities
Interest bearing deposits:
Savings and NOW accounts $ 77,403 $ 77,403 $ 77,403
Money market accounts 27,341 27,341 27,341
Time deposits of $100,000 or more 47,196 $ 16,961 $ 13,149 77,306 $ 6,839 84,145
Other time deposits 43,083 20,170 22,280 85,533 29,921 115,454
Federal funds purchased and securities
sold under agreements to repurchase 2,983 2,983 2,983
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities $198,006 $ 37,131 $ 35,429 $270,566 $ 36,760 $307,326
-------- -------- -------- -------- -------- --------
Interest sensitivity gap $ 66,798 $(28,651) $ (8,565) $ 29,582
Cumulative gap $ 66,798 $ 38,147 $ 29,582 $ 29,582
Interest earning assets as a
percentage of interest
bearing liabilities 134% 23% 76% 111%
-------- -------- -------- --------
* All securities as presented are at amortized cost.
* Loan are gross of net origination fees/costs.
II-6
25
The following table presents the maturity and distribution of the BankAEs loans
by type, including maturity and fixed rate loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
Dollars in thousands DECEMBER 31, 1995
One to Five Years
Loan Maturities One Year Five Years or More Total
- --------------- -------- ---------- ---------- -----
Real estate:
Construction $ 9,103 $ 13,101 $ 4,904 $ 27,108
Mortgage 40,828 60,452 17,418 118,698
Commercial, financial and agricultural 75,146 39,775 5,616 120,537
Consumer 16,607 18,114 899 36,620
All other 193 45 3 241
-------- -------- ------- --------
Total $141,877 $131,487 $28,840 $302,204
-------- -------- ------- --------
Predetermined rate, maturity
greater than one year $ 26,292 $ 5,477 $ 31,769
Variable rate or maturing
within one year $141,877 105,195 23,363 270,435
-------- -------- ------- --------
Total $141,877 $131,487 $28,840 $302,204
-------- -------- ------- --------
* Loans are gross of net origination fees/costs.
The Bank's yield on interest-bearing liabilities increased to 4.5% during
1995 compared to 3.5% in 1994. The bank's primary growth in deposits are
reflected in time deposits, which increased $29,474,887. Rate sensitive
consumers capitalized upon the higher yielding time deposits during the rising
rate environment in 1995. An increased customer awareness of interest rates
increases the importance of rate management by the Company. The CompanyAEs
management continuously monitors market pricing, competitors' rates, and
internal interest rate spreads to maintain the Company's growth and
profitability. Deposits being the principal source of funds for continued
growth, the Company attempts to structure the BankAEs rates so as to promote
deposit and asset growth while at the same time increasing the overall
profitability of the Company. The daily average amounts of deposits of the
Bank are summarized below.
AVERAGE DEPOSITS
Dollars in thousands FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993
---- ---- ----
Non-interest bearing deposits $ 67,223 $ 62,169 $ 55,637
Interest bearing deposits 291,056 271,408 258,162
-------- -------- --------
Total $358,279 $333,577 $313,799
-------- -------- --------
The above table includes certificates of deposit $100,000 and over which at
December 31, 1995 totaled $84,145,000. Of this total $47,196,000 had scheduled
maturities or repriced within three months, $16,961,000 within six months,
$13,149,000 within six to twelve months and $6,839,000 within thirteen to sixty
months.
II-7
26
CAPITAL RESOURCES
Future growth and expansion of the Company is dictated by the ability to
generate capital which is generated principally by earnings of the subsidiary
Bank. As of December 31, 1995 the Company's ratio of total capital to
risk-adjusted assets was 22.7%. The Company is one of the soundest and most
strongly capitalized in the nation, and fully expects to be able to meet future
capital needs caused by growth and expansion as well as regulatory capital
requirements. The Company is not aware of any current recommendation by
regulatory authorities which if implemented would materially affect the
Company's liquidity, capital resources or operations.
LOANS
Historically, the Bank has made both consumer and commercial loans within its
market area. The Company generally considers its market to be Caldwell,
Catawba and Burke counties of North Carolina. Total loans at December 31, 1995
were $301,685,399. This compares with $269,851,459 at December 31, 1994, an
increase of $31,833,940 or 11.8%. The Company places emphasis on consumer
based installment loans and commercial loans to small and medium sized
business. The Bank has a diversified loan portfolio with no concentrations to
any one borrower, industry or market region. The amounts and types of loans
outstanding for the past five years ended December 31 are shown on the
following table.
LOANS
Dollars in thousands DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Real estate:
Construction $ 27,108 $ 20,728 $ 18,020 $ 16,219 $ 15,548
Mortgage 118,697 98,953 85,456 65,688 48,119
Commercial, financial and agricultural 120,537 117,002 111,076 121,795 128,541
Consumer 35,620 33,156 29,233 26,010 27,837
All other loans 241 419 377 259 350
-------- -------- -------- -------- --------
Subtotal 302,203 270,258 244,162 229,971 220,395
Net deferred origination costs (fees) (518) (407) (337) (193) (37)
-------- -------- -------- -------- --------
Total $301,685 $269,851 $243,825 $229,778 $220,358
-------- -------- -------- -------- --------
Nonperforming assets at December 31
are as follows:
Restructured loans $ 253 $ 350
Foreclosed properties 273 $ 281 $ 12
Nonaccrual loans $ 231 744 86 174 267
Loans 90 days or more past due
and still accruing 441 1,231 685 649 1,090
-------- -------- -------- -------- --------
Total $ 672 $ 2,228 $ 1,394 $ 1,104 $ 1,369
-------- -------- -------- -------- --------
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed hereunder, or under "Loans" or
"Asset Quality" narrative discussions do not (i) represent or result from
trends or uncertainties that management expects will materially impact future
operating results, liquidity or capital resources, or (ii) represent material
credits about which management is aware of any information that causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
II-8
27
The composition of the portfolio remained level with real estate loans
comprising 48% of the portfolio compared to 44% in 1994; commercial loans
comprising 40% of the portfolio compared to 43% in 1994; and consumer loans
comprising 12% compared to 12% in 1994. Commercial loans of $120,536,374,
consumer loans of $35,620,407 and real estate mortgage loans of $118,697,296
are loans for which the principal source of repayment is derived from the
ongoing cash flow of the business. Real estate construction loans of
$27,108,399 are loans for which the principal source of repayment comes from
the sale of real estate or from obtaining permanent financing.
PROVISION AND ALLOWANCES FOR LOANS LOSSES
Management determines the allowance for loans losses based on a number of
factors including reviewing and evaluating the Company's loan portfolio in
order to identify potential problem loans, credit concentrations and other risk
factors connected to the loans portfolio as well as current and projected
economic conditions locally and nationally. Upon loan origination, management
evaluates the relative quality of each loans and assigns a corresponding loan
grade. All loans are periodically reviewed to determine whether any changes in
these loan grades are necessary. This loan grading system assists management
in determining the overall risk in the loan portfolio. The allowance for loan
losses is created by direct charges to operations. Losses on loans are charged
against the allowance for loan losses in the accounting period in which they
are determined by management to be uncollectible. Recoveries during the period
are credited to the allowance for loan losses.
In 1995 the Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for the Impairment of a Loan" (SFAS No. 114)
(subsequently amended by SFAS No. 118). SFAS No. 114 requires that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical matter, at
the loan's observable market value or fair value of the collateral if the loan
is collateral dependent. At December 31, 1995, the recorded investment in
loans that are considered to be impaired under SFAS No. 114 was $516,887
($228,729 of which is on non-accrual basis). The average recorded balance of
impaired loans during 1995 was not significantly different from the balance at
December 31, 1995. The related allowance for loan losses determined in
accordance with SFAS No. 114 for these loans is $284,444 at December 31, 1995.
For the year ended December 31, 1995, the Bank recognized interest income on
those impaired loans of approximately $27,085.
Management realizes that general economic trends greatly affect loan losses and
no assurances can be made that further charges to the loan loss allowance may
not be significant in relation to the amount provided during a particular
period, or that further evaluation of the loan portfolio based on conditions
then prevailing may not require sizeable additions to the allowance, thus
necessitating similarly sizeable charges to operations. The allowance for loan
losses was 1.56%, 1.50% and 1.50% of net loan outstanding at December 31, 1995,
1994 and 1993, respectively, which was consistent with both management's desire
for strong reserves, and credit quality ratings of the loan portfolio. The
ratio of net charge-offs during the year to average loans outstanding during
the period were .16%, .12% and .15% at December 31, 1995, 1994 and 1993,
respectively. These ratios reflect management's conservative lending, and
effective efforts to recover credit losses.
The following table presents the allocation of the allowance for loan losses by
category, and an analysis of the allowance for loan losses.
II-9
28
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands) FOR THE YEARS ENDED DECEMBER 31,
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Balance at beginning of year $3,996 $3,603 $3,391 $2,991 $2,900
Loans charged off:
Commercial, financial and agricultural 297 136 331 330 634
Credit cards and related plans 8 10 3 17 19
Installment loans to individuals 288 246 63 203 152
------ ------ ------ ------ ------
Total charge-offs 593 392 397 550 805
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 40 57 5 24 53
Credit cards and related plans 5 1 3 8 2
Installment loans to individuals 80 23 26 38 22
------ ------ ------ ------ ------
Total recoveries 125 81 34 70 77
------ ------ ------ ------ ------
Net charge-offs 468 311 363 480 728
------ ------ ------ ------ ------
Additions charged to operations 1,117 704 575 880 819
------ ------ ------ ------ ------
Balance at end of year $4,645 $3,996 $3,603 $3,391 $2,991
------ ------ ------ ------ ------
Ratio of net charge-offs during the year
to average loans outstanding during the period .16% .12% .15% .21% .34%
INVESTMENT SECURITIES
At December 31, 1995, the securities classified as available for sale, carried
at market value, totaled $50,129,581 with an amortized cost of $49,387,964.
Securities available for sale are securities which will be held for an
indefinite period of time, including securities that management intends to use
as a part of its asset/liability strategy, or that may be sold in response to
changes in interest rates, changes in prepayment risk or the need to increase
regulatory capital or other similar factors. Securities available for sale
consist of U.S. Treasury Notes with an average life of 1 year 4 months, U.S.
Government Agencies with an average life of 2 years 4 month, and other bonds,
notes and debentures with an average life in excess of 5 years. In December of
1995, the Financial Accounting Standards Board allowed for a one time
reclassification of investments between held available for sale and held to
maturity without the ramifications of tainting the portfolios. During that
window of opportunity, the Bank moved $8,482,462 from held to maturity to held
available for sale. There were no other transfers or sales of securities
classified as held to maturity. Investment securities totaled $74,141,480 with
a market value of $76,413,677 at December 31, 1995. Management determined that
it has both the ability and intent to hold those securities classified as
investment securities until maturity. Investment securities consist of U.S.
Treasury Notes with an average life of 1 year 3 months, U.S. Government
Agencies with an average life of 2 years 6 months, and municipal bonds with an
average life of 6 years 2 months. During the year $23,991,063 in securities
matured; $894,378 in proceeds were collected from securities sold. The
proceeds from maturities and sales were reinvested along with $9,573,241 of
funds in excess of consumer demand.
II-10
29
INVESTMENT SECURITIES MATURITIES AND YIELDS
Dollars in thousands DECEMBER 31, 1995
After One Year After Five Years
Within One but Within but Within After Ten
Year Five Years Ten Years Years
---- ---------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Securities Available for Sale:
U.S. Treasury $ 6,004 5.46% $ 6,000 7.13%
U.S. Government agencies 12,000 5.23% 14,491 6.62% $ 2,000 8.27%
Others 100 6.62% 5,342 7.73% 2,891 6.56% $ 560 5.61%
------- ---- ------- ---- ------- ---- ------- ----
Total $18,104 5.26% $25,833 7.02% $ 4,891 7.42% $ 560 5.61%
------- ------- ------- -------
Investment Securities:
U.S. Treasury $ 2,000 6.52% $ 1,502 6.13%
U.S. Government agencies 5,000 4.95% 9,796 7.01%
States and political subdivisions 3,111 9.44% 17,355 9.31% $27,282 8.68% $ 8,095 8.91%
------- ---- ------- ---- ------- ---- ------- ----
Total $10,111 6.64% $28,653 8.35% $27,282 8.68% $ 8,095 8.91%
------- ------- ------- -------
Yield data is presented on a tax equivalent basis.
INFLATION
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of a bank is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same.
While the effect of inflation is normally not as significant as is the
influence on those businesses which have large investments in plant and
inventories, it does have an effect. There are normally corresponding
increases in the money supply, and banks will normally experience above average
growth in assets, loans and deposits. Also, general increases in the prices of
goods and services will result in increased operating expenses.
II-11
30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of Bank of Granite Corporation:
We have audited the accompanying consolidated balance sheets of Bank of Granite
Corporation and its subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiary at
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1994, the Company changed its method of accounting for certain
investments in debt and equity securities to conform with Statement of
Financial Accounting Standards No. 115, and effective January 1, 1993, the
Company changed its method of accounting for income taxes to comply with the
provisions of Statement of Financial Accounting Standards No. 109.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 26, 1996
II-12
31
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
1995 1994
ASSETS:
Cash and cash equivalents (Note 1):
Cash and due from banks $ 19,621,179 $ 18,490,835
Federal funds sold 1,500,000 1,000,000
------------ ------------
Total cash and cash equivalents 21,121,179 19,490,835
------------ ------------
Investment Securities (Notes 1 and 2):
Available for sale, at fair value (amortized cost of $49,387,963 and
$43,761,624 at December 31, 1995 and 1994, respectively) 50,129,581 42,567,008
------------ ------------
Held to maturity, at amortized cost (fair value of $76,413,677 and
$68,744,157 at December 31, 1995 and 1994, respectively) 74,141,480 70,358,672
------------ ------------
Loans (Note 3) 301,685,399 269,851,459
Allowance for loan losses (Notes 1 and 4) (4,644,725) (3,996,491)
------------ ------------
Net loans 297,040,674 265,854,968
------------ ------------
Premises and equipment, net (Notes 1, 5 and 9) 8,153,776 8,232,541
------------ ------------
Accrued interest receivable 4,201,673 3,632,726
------------ ------------
Other assets 1,663,969 2,030,420
------------ ------------
TOTAL $456,452,332 $412,167,170
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $72,686,095 $66,963,099
NOW accounts 56,047,252 50,996,639
Money market accounts 27,341,113 34,556,005
Savings 21,355,568 20,676,076
Time deposits of $100,000 or more 84,145,051 71,898,484
Other time deposits 115,468,065 98,239,745
------------ ------------
Total deposits 377,043,144 343,330,048
Securities sold under agreements to repurchase (Note 10) 2,982,870 3,280,855
Accrued interest payable 1,872,764 1,242,753
Other liabilities 933,303 1,145,640
------------ ------------
Total liabilities 382,832,081 348,999,296
------------ ------------
COMMITMENTS AND CONTINGENT LIABILITIES (Notes 9 and 13)
SHAREHOLDERS' EQUITY (Notes 1, 7 and 11)
Common stock, $1.00 par value, authorized - 10,000,000
shares; issued and outstanding - 1995 - 5,984,604 shares;
1994 - 5,958,209 shares 5,984,604 5,958,209
Capital surplus 21,378,741 21,016,998
Net unrealized gain (loss) on securities available for sale, net
of deferred income tax (benefit) of $291,307 and ($469,244)
at December 31, 1995 and 1994, respectively (Notes 1 and 6) 450,311 (725,372)
Retained earnings 45,806,595 36,918,039
------------ ------------
Total shareholders' equity 73,620,251 63,167,874
------------ ------------
TOTAL $456,452,332 $412,167,170
============ ============
See notes to consolidated financial statements.
II-13
32
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
INTEREST INCOME:
Interest and fees on loans $29,847,478 $23,367,806 $19,852,778
Federal funds sold 251,047 195,777 235,262
Investments:
U. S. Treasury 961,701 978,074 1,315,159
U. S. Government agencies 2,033,620 1,871,600 1,708,951
States and political subdivisions 2,845,134 2,719,179 2,561,907
Other 627,990 440,966 440,040
----------- ----------- -----------
Total interest income 36,566,970 29,573,402 26,114,097
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 4,748,413 3,004,682 2,682,321
Other time and savings deposits 8,276,096 6,378,081 6,496,493
Federal funds purchased and securities sold under
agreements to repurchase 175,549 127,175 66,302
Other borrowed funds 1,480 4,358 3,938
----------- ----------- -----------
Total interest expense 13,201,538 9,514,296 9,249,054
----------- ----------- -----------
NET INTEREST INCOME 23,365,432 20,059,106 16,865,043
PROVISION FOR LOAN LOSSES (Notes 1 and 4) 1,117,000 704,000 575,000
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 22,248,432 19,355,106 16,290,043
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 2,843,085 2,772,822 2,652,444
Other service fees and commissions 976,951 1,027,210 1,081,760
Loss on sale of securities, net (40,952)
Other 341,781 456,465 476,971
----------- ----------- -----------
Total other income 4,120,865 4,256,497 4,211,175
----------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 4,216,795 3,903,589 3,338,860
Profit-sharing and other employee benefits (Note 8) 1,011,019 1,066,418 803,248
Occupancy expense, net 463,655 439,883 396,326
Equipment rentals, depreciation and maintenance 832,181 736,484 677,167
Federal Deposit Insurance Corporation insurance
premiums 395,372 727,874 674,423
Other 2,334,799 2,272,557 1,751,470
----------- ----------- -----------
Total other expenses 9,253,821 9,146,805 7,641,494
----------- ----------- -----------
II-14
33
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING FOR INCOME TAXES (Note 6) $17,115,476 $14,464,798 $12,859,724
INCOME TAXES (Notes 1 and 6) 5,598,532 4,622,525 3,984,532
----------- ----------- -----------
INCOME BEFORE CUMULATIVE EFFECT OF
A CHANGE IN ACCOUNTING FOR INCOME TAXES 11,516,944 9,842,273 8,875,192
CUMULATIVE EFFECT ON PRIOR YEARS OF
A CHANGE IN ACCOUNTING FOR INCOME TAXES (125,926)
----------- ----------- -----------
NET INCOME $11,516,944 $ 9,842,273 $ 8,749,266
=========== =========== ===========
PER SHARE AMOUNTS (Note 1):
Earnings per share before cumulative effect of a
change in accounting for income taxes $ 1.92 $ 1.64 $ 1.48
Cumulative effect on prior years of a change in
accounting for income taxes (0.02)
----------- ----------- -----------
Net income $ 1.92 $ 1.64 $ 1.46
=========== =========== ===========
Cash dividends $ 0.44 $ 0.38 $ 0.34
=========== =========== ===========
See notes to consolidated financial statements.
II-15
34
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NET UNREALIZED TOTAL
GAIN (LOSS) SHAREHOLDERS'
COMMON STOCK ON SECURITIES EQUITY
----------------------- CAPITAL RETAINED AVAILABLE (NOTES 1, 7
SHARES AMOUNT SURPLUS EARNINGS FOR SALE AND 12)
BALANCE AT DECEMBER 31, 1992 4,715,976 $4,715,976 $20,249,185 $23,758,697 $48,723,858
Net income 8,749,266 8,749,266
Cash dividends (1,988,807) (1,988,807)
Shares issued under stock option plan 31,384 31,384 503,310 534,694
--------- ---------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1993 4,747,360 4,747,360 20,752,495 30,519,156 56,019,011
Net income 9,842,273 9,842,273
Cash dividends (2,237,479) (2,237,479)
Shares issued under stock option plan 19,891 19,891 264,503 284,394
Stock split-shares issued 1,190,958 1,190,958 (1,190,958)
Cash paid for fractional shares (14,953) (14,953)
Net unrealized loss on securities
available for sale $ (725,372) (725,372)
--------- ---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 5,958,209 5,958,209 21,016,998 36,918,039 (725,372) 63,167,874
--------- ---------- ----------- ----------- ---------- -----------
Net income 11,516,944 11,516,944
Cash dividends (2,628,388) (2,628,388)
Shares issued under stock option plan 26,395 26,395 361,743 388,138
Net unrealized gain on securities
available for sale 1,175,683 1,175,683
--------- ---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 5,984,604 $5,984,604 $21,378,741 $45,806,595 $ 450,311 $73,620,251
========= ========== =========== =========== ========== ===========
See notes to consolidated financial statements.
II-16
35
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING
ACTIVITIES:
Interest received $36,121,165 $29,440,507 $26,074,610
Fees and commissions received 4,161,817 4,256,497 4,211,175
Interest paid (12,571,527) (9,279,256) (9,411,893)
Cash paid to suppliers and employees (8,941,068) (7,729,308) (7,344,386)
Income taxes paid (5,744,696) (4,462,586) (4,221,634)
----------- ----------- -----------
Net cash provided by operating activities 13,025,691 12,225,854 9,307,872
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of securities
available for sale 14,586,063 9,000,000
Proceeds from maturities of securities held
to maturity 9,405,000 11,975,000
Proceeds from maturities of securities held for
investment 27,909,000
Purchases of securities available for sale (12,693,750) (12,319,707)
Purchases of securities held to maturity (21,764,932) (9,632,419)
Purchases of securities held for investment (43,324,187)
Proceeds from sales of securities available for sale 894,378
Net increase in loans (32,783,187) (26,337,243) (14,410,494)
Capital expenditures (622,914) (2,133,462) (955,185)
Proceeds from sales of equipment 469 16,587 200
Proceeds from sales of other real estate owned 429,665
----------- ----------- -----------
Net cash used in investing activities (42,549,208) (29,431,244) (30,780,666)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits,
NOW accounts and savings accounts 4,238,209 7,553,182 22,536,521
Net increase (decrease) in certificates of
deposit 29,474,887 8,261,946 (2,805,559)
Net increase (decrease) in federal
funds purchased and securities
sold under agreements to repurchase (297,985) 573,270 (494,041)
Net decrease in other borrowed funds (21,000) (21,000) (21,000)
Net proceeds from issuance of common stock 388,138 284,394 534,694
Dividends paid (2,628,388) (2,237,479) (1,988,807)
Cash paid for fractional shares (14,953)
----------- ----------- -----------
Net cash provided by financing activities 31,153,861 14,399,360 17,761,808
----------- ----------- -----------
II-17
36
BANK OF GRANITE CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 1,630,344 $(2,806,030) $(3,710,986)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 19,490,835 22,296,865 26,007,851
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $21,121,179 $19,490,835 $22,296,865
=========== =========== ===========
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net income $11,516,944 $ 9,842,273 $ 8,749,266
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 700,477 648,960 577,056
Provision for loan losses 1,117,000 704,000 575,000
Premium amortization and discount accretion, net 123,142 154,492 165,351
Deferred income taxes (364,386) (77,608) 69,108
Net loss on sale of securities available for sale 40,952
Loss on disposal of equipment 733 33,295 609
Loss on sale of other real estate owned 50,816
Increase in accrued interest receivable (568,947) (287,387) (204,838)
Increase (decrease) in accrued interest payable 630,011 235,040 (162,839)
(Increase) decrease in other assets (29,714) 224,417 (276,317)
Increase (decrease) in other liabilities (191,337) 748,372 (184,524)
----------- ----------- -----------
Total adjustments 1,508,747 2,383,581 558,606
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES $13,025,691 $12,225,854 $9,307,872
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH TRANSACTIONS:
Transfer of loans to other real estate owned $ 480,481
Transfer from retained earnings to common
stock for stock split $ 1,190,958
Unrealized (gain) loss on securities available
for sale (1,936,234) 1,194,616
Transfer of investments from held to maturity
to available for sale 8,482,462
Deferred income tax provision (benefit) on net
unrealized gain/loss securities available for sale
allocated to shareholders' equity 760,551 (469,244)
See notes to consolidated financial statements.
II-18
37
BANK OF GRANITE CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bank of Granite Corporation is a bank holding company with
one subsidiary, Bank of Granite (the "Bank"), which is a state chartered,
commercial bank. The Bank is headquartered in Granite Falls, North
Carolina and provides consumer and commercial banking services in the Blue
Ridge foothills and Catawba River Valley areas of North Carolina through
ten banking offices. The Bank was organized and incorporated in North
Carolina on August 2, 1906.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Bank of Granite Corporation and its wholly-owned subsidiary,
Bank of Granite (referred to herein collectively as the "Company"). All
significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.
INVESTMENT SECURITIES - The Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt
and Equity Securities (SFAS No. 115), effective January 1, 1994. SFAS No.
115 requires investments to be classified in three categories. Debt
securities that the Company has the positive intent and ability to hold to
maturity are classified as "held to maturity securities" and reported at
amortized cost. Debt and equity securities that are bought and held
principally for the purpose of selling in the near term are classified as
"trading securities" and reported at fair value, with unrealized gains and
losses included in earnings. Debt securities not classified as either
held-to-maturity securities or trading securities and equity securities not
classified as trading securities are to be classified as "available for
sale securities" and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
shareholders' equity.
Prior to 1994, the accounting for debt securities held as assets was
dependent upon their classification as held for investment, trading
securities or securities held for sale. Such securities classified as
investment were carried at cost, adjusted for the amortization of premiums
and the accretion of discounts. Trading securities were carried at current
market values, and debt securities available for sale were carried at the
lower of amortized cost or market value. In order to qualify as held for
investment securities, the Company must have had the ability to hold the
securities to maturity and a positive intention to hold them for the
foreseeable future. Management utilized these criteria in determining the
accounting treatment accorded such securities.
Gains and losses on investment securities are recognized at the time of
sale (trade date) based upon the specific identification method.
In December 1995, the Company adopted the FASB Special Report: A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in
Debt and Equity Securities (the "Guide"). With the adoption of the Guide,
management elected to transfer certain securities classified as "held to
maturity" into the "available for sale" category as permitted by the Guide.
There have been no other transfers or sales of securities classified as
held to maturity. The total amount of securities
II-19
38
transferred is disclosed as a non-cash transaction in the Statement of
Cash Flows.
PREMISES AND EQUIPMENT - Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization,
computed by the straight-line method, are charged to operations over the
properties' estimated useful lives, which range from 25 to 50 years for
buildings and 5 to 15 years for furniture and equipment or, in the case of
leasehold improvements, the term of the lease if shorter. Maintenance and
repairs are charged to operations in the year incurred. Gains and losses
on dispositions are included in current operations.
ALLOWANCE FOR LOAN LOSSES - The provision for loan losses charged to
operations is an amount sufficient to bring the allowance for loan losses
to an estimated balance considered adequate to absorb potential losses in
the portfolio. Management's determination of the adequacy of the allowance
is based on an evaluation of the portfolio, current economic conditions,
historical loan loss experience and other risk factors. Recovery of the
carrying value of loans is dependent to some extent on future economic,
operating and other conditions that may be beyond the Company's control.
Unanticipated future adverse changes in such conditions could result in
material adjustments to the allowance for loan losses.
The Bank adopted Statement of Financial Accounting Standards No. 114,
Accounting by Creditors for Impairment of a Loan (SFAS No. 114)
(subsequently amended by SFAS No. 118). SFAS 114 requires that impaired
loans be measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical matter,
at the loan's observable market value or fair value of the collateral if
the loan is collateral dependent. The Bank's policy for recognition of
interest income on impaired loans is the same as its interest income
recognition policy for non-impaired loans. The total of impaired loans,
impaired loans on a nonaccrual basis, the related allowance for loan losses
and interest income recognized on impaired loans is disclosed in Note 4.
REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate acquired by foreclosure
is stated at the lower of cost or fair value. Any initial losses at the
time of foreclosure are charged against the allowance for loan losses with
any subsequent losses or writedowns included in the income statement as a
component of other expenses.
INCOME TAXES - Provisions for income taxes are based on amounts reported in
the consolidated statements of income (after exclusion of non-taxable
income such as interest on state and municipal securities) and include
changes in deferred income taxes. Deferred taxes are computed using the
asset and liability approach. The tax effects of differences between the
tax and financial accounting basis of assets and liabilities are reflected
in the balance sheets at the tax rates expected to be in effect when the
differences reverse. The method of accounting for income taxes conforms to
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, which was adopted by the Company on January 1, 1993. In connection
with the adoption of SFAS 109, a cumulative effect of a change in
accounting principle of $125,926 was recognized.
PER SHARE AMOUNTS - Per share amounts have been computed using the weighted
average number of shares of common stock and dilutive common stock
equivalents outstanding during the years (1995 - 5,996,371; 1994 -
5,985,610 and 1993 - 5,960,451). The weighted average number of shares of
common stock and dilutive common stock equivalents outstanding and all per
share amounts for 1994 and periods prior have been adjusted to reflect the
five for four stock split effected in the form of a 25% stock dividend in
1994. Dividends per share represent amounts declared by the
II-20
39
Board of Directors.
INCOME AND EXPENSE - The Company utilizes the accrual method of accounting,
except for immaterial amounts of loan income and minor other fees which are
recorded as income when collected. Substantially all loans earn interest
on the level yield method based on the daily outstanding balance. The
accrual of interest is discontinued when, in management's judgment, the
interest may not be collected.
The Bank defers the recognition of the net amounts of certain loan
origination fees and certain loan origination costs and amortizes these
deferred amounts over the life of each related loan.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
NEW ACCOUNTING STANDARDS - In March 1995, the FASB issued Statement No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of. It requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the
review for recoverability, the entity should estimate the future cash flows
expected to result from the use of the asset and its eventual disposition,
and recognize an impairment loss if the expected future cash flows are less
than the carrying amount of the asset. It also requires that long-lived
assets and certain identifiable intangibles to be disposed of be reported
at the lower of carrying amount or fair value less cost to sell. This
Statement is effective for financial statements for fiscal years beginning
after December 15, 1995. Management believes that implementation of the
statement will not have any material impact on the Bank's financial
condition or results of operations.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which encourages companies to account for stock
compensation awards based on their fair value at the date the awards are
granted. The resulting compensation cost would be shown as an expense on
the income statement.
Companies can choose not to apply the new accounting method and continue to
apply current accounting requirements, which generally result in no
compensation cost for most fixed stock option plans. Those that do so,
however, will be required to disclose in the notes to the financial
statements what net income and earnings per share would have been if they
had followed the accounting treatment preferred under FASB Statement No.
123.
FASB Statement No. 123 is effective for calendar-year 1996; however,
companies will be required to include, in that year's financial statements,
information about options granted in 1995. Management believes that
implementation of the Statement will not have any material impact on the
Company's financial condition or results of operations.
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40
2. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1995 and 1994 are as follows
(dollars in thousands):
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
TYPE AND MATURITY GROUP COST GAINS LOSSES VALUE
AVAILABLE FOR SALE SECURITIES
CONSIST OF THE FOLLOWING:
At December 31, 1995:
U. S. Treasury due:
Within 1 year $ 6,004 $ 5,991
After 1 year but within 5 years 6,000 6,149
------- -------
Total U.S. Treasury 12,004 $ 163 $ (27) 12,140
------- ------ ------ -------
U. S. Government agencies due:
Within 1 year 12,000 11,970
After 1 year but within 5 years 14,491 14,556
After 5 years but within 10 years 2,000 2,047
------- ------ ------ -------
Total U.S. Government agencies 28,491 164 (82) 28,573
------- ------ ------ -------
Others due:
Within 1 year 100 101
After 1 year but within 5 years 5,342 5,569
After 5 years but within 10 years 2,891 3,094
After 10 years 560 653
------- ------ ------ -------
Total others 8,893 615 (91) 9,417
------- ------ ------ -------
Total at December 31, 1995 $49,388 $ 942 $ (200) $50,130
======= ====== ====== =======
HELD TO MATURITY SECURITIES CONSIST
OF THE FOLLOWING:
At December 31, 1995:
U. S. Treasury due:
Within 1 year $ 2,000 $ 2,011
After 1 year but within 5 years 1,502 1,510
------- -------
Total U.S. Treasury 3,502 $ 20 $ (1) 3,521
------- ------ ------ -------
U. S. Government agencies due:
Within 1 year 5,000 4,971
After 1 year but within 5 years 9,796 9,961
------- ------ ------ -------
Total U.S. Government agencies 14,796 165 (29) 14,932
------- ------ ------ -------
State and political subdivisions due:
Within 1 year 3,111 3,130
After 1 but within 5 years 17,355 17,957
After 5 years but within 10 years 27,282 28,460
After 10 years 8,095 8,414
------- ------ ------ -------
Total state and political
subdivisions 55,843 2,249 (131) 57,961
------- ------ ------ -------
Total at December 31, 1995 $74,141 $2,434 $ (161) $76,414
======= ====== ====== =======
II-22
41
GROSS UNREALIZED
AMORTIZED ----------------------- FAIR
TYPE AND MATURITY GROUP COST GAINS LOSSES VALUE
AVAILABLE FOR SALE SECURITIES
CONSIST OF THE FOLLOWING:
At December 31, 1994:
U. S. Treasury due:
Within 1 year $ 5,499 $ 5,427
After 1 year but within 5 years 8,521 8,291
------- -------
Total U.S. Treasury 14,020 $ (302) 13,718
------- -------- -------
U. S. Government agencies due:
Within 1 year 8,001 7,891
After 1 year but within 5 years 11,000 10,558
After 5 years but within 10 years 3,000 2,835
------- -------- -------
Total U.S. Government agencies 22,001 (717) 21,284
------- -------- -------
Others due:
After 1 year but within 5 years 3,272 3,293
After 5 years but within 10 years 1,962 1,997
After 10 years 2,507 2,275
------- -------
Total others 7,741 $ 135 (311) 7,565
------- ----- -------- -------
Total at December 31, 1994 $43,762 $ 135 $ (1,330) $42,567
======= ===== ======== =======
HELD TO MATURITY SECURITIES CONSIST
OF THE FOLLOWING:
At December 31, 1994:
U. S. Treasury due:
Within 1 year $ 1,000 $ 983
After 1 year but within 5 years 4,504 4,334
------- -------
Total U.S. Treasury 5,504 $ (187) 5,317
------- -------- -------
U. S. Government agencies due:
Within 1 year 4,000 3,942
After 1 year but within 5 years 9,498 9,077
After 5 years but within 10 years 1,000 915
------- -------
Total U.S. Government agencies 14,498 (564) 13,934
------- -------- -------
State and political subdivisions due:
Within 1 year 3,339 3,345
After 1 but within 5 years 12,954 13,051
After 5 years but within 10 years 26,070 25,431
After 10 years 7,994 7,666
------- -------
Total state and political
subdivisions 50,357 $ 719 (1,583) 49,493
------- ----- -------- -------
Total at December 31, 1994 $70,359 $ 719 $ (2,334) $68,744
======= ===== ======== =======
Sales of securities available for sale for the year ended December 31, 1995
resulted in realized gross losses of $56,190. Calls of securities available for
sale at a premium resulted in gross gains of $15,238 for the year ended December
31, 1995. Cost of securities sold were determined on the specific
identification method.
There were no sales of securities for the years ended December 31, 1994 and
1993.
II-23
42
Securities with an amortized cost of approximately $40,539,518 and
$32,604,663 were pledged as collateral for public deposits and for other
purposes as required by law at December 31, 1995 and 1994, respectively.
3. LOANS
Loans at December 31, 1995 and 1994, classified by type, are as follows:
1995 1994
Real estate:
Construction $ 27,108,399 $ 20,727,600
Mortgage 118,697,296 98,953,041
Commercial, financial and agricultural 120,536,374 117,001,581
Consumer 35,620,407 33,156,501
All other loans 241,127 419,509
------------ ------------
Subtotal 302,203,603 270,258,232
Net deferred origination fees (518,204) (406,773)
------------ ------------
Total $301,685,399 $269,851,459
============ ============
Nonperforming assets at December 31, 1995 and 1994 are as follows:
1995 1994
Restructed loans $ 253,369
Nonaccrual loans $231,654 743,515
Loans 90 days or more past due and still accruing 440,686 1,230,795
-------- ----------
Total $672,340 $2,227,679
======== ==========
If interest from restructured loans, foreclosed properties and nonaccrual
loans had been recognized in accordance with the original terms of the
loans, net income for 1995, 1994 and 1993 would not have been materially
different from the amounts reported.
Directors and officers of the Company and companies with which they are
affiliated are customers of and borrowers from the Bank in the ordinary
course of business. At December 31, 1995 and 1994, directors' and
principal officers' direct and indirect indebtedness to the Bank aggregated
$548,699 and $482,270, respectively. During 1995, additions to such loans
were $79,820 and repayments totaled $13,391. In the opinion of management,
these loans do not involve more than normal risk of collectibility, nor do
they present other unfavorable features.
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4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 are as follows (dollars in thousands):
1995 1994 1993
Balance at beginning of year $3,996 $3,603 $3,391
------ ------ ------
Loans charged off:
Commercial, financial and agricultural 297 136 331
Credit cards and related plans 8 10 3
Installment loans to individuals 288 246 63
------ ------ ------
Total charge-offs 593 392 397
------ ------ ------
Recoveries of loans previously charged off:
Commercial, financial and agricultural 40 57 5
Credit cards and related plans 5 1 3
Installment loans to individuals 80 23 26
------ ------ ------
Total recoveries 125 81 34
------ ------ ------
Net charge-offs 468 311 363
------ ------ ------
Additions charged to operations 1,117 704 575
------ ------ ------
Balance at end of year $4,645 $3,996 $3,603
====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the period 0.16% 0.12% 0.15%
====== ====== ======
At December 31, 1995, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $516,887 ($228,729 of which is on a
nonaccrual basis). The average recorded balance of impaired loans during
1995 is not significantly different from the balance at December 31, 1995.
The related allowance for loan losses determined in accordance with SFAS
No. 114 for these loans is $284,444 at December 31, 1995. For the year
ended December 31, 1995, the Bank recognized interest income on those
impaired loans of approximately $27,085.
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5. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1995 and 1994 follow:
PREMISES AND
ACCUMULATED EQUIPMENT,
COST DEPRECIATION NET
December 31, 1995:
Land $ 1,312,029 $1,312,029
Buildings 6,222,995 $1,584,716 4,638,279
Furniture and equipment 4,909,605 3,048,902 1,860,703
Construction in progress 342,765 342,765
----------- ---------- ----------
Total $12,787,394 $4,633,618 $8,153,776
=========== ========== ==========
December 31, 1994:
Land $ 1,310,414 $1,310,414
Buildings 6,179,272 $1,389,884 4,789,388
Furniture and equipment 4,270,438 2,556,399 1,714,039
Construction in progress 418,700 418,700
----------- ---------- ----------
Total $12,178,824 $3,946,283 $8,232,541
=========== ========== ==========
6. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1995, 1994 and 1993 are as follows:
1995 1994 1993
Current $5,962,918 $4,700,133 $4,041,350
Deferred (364,386) (77,608) (56,818)
---------- ---------- ----------
Total $5,598,532 $4,622,525 $3,984,532
========== ========== ==========
Deferred taxes of $760,551 and deferred tax benefits of ($469,244) related
to unrealized gains and losses on securities available for sale were
allocated to shareholders' equity in the years ended December 31, 1995 and
1994, respectively.
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45
A reconciliation of reported income tax expense for the years ended
December 31, 1995, 1994 and 1993 to the amount of tax expense computed by
multiplying income before income taxes by the statutory federal income tax
rate of 35% for 1995, 35% for 1994 and 34% for 1993 follows:
1995 1994 1993
Tax provision at statutory rate $5,990,417 $5,062,679 $4,372,306
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income (907,226) (902,044) (841,789)
State income taxes net of federal tax benefit 592,397 518,154 401,712
Other (77,056) (56,264) 52,303
---------- ---------- ----------
Income taxes reported $5,598,532 $4,622,525 $3,984,532
========== ========== ==========
The tax effect of the cumulative temporary differences and carryforwards
that gave rise to the deferred tax assets and liabilities at December 31,
1995 and 1994 are as follows:
DECEMBER 31, 1995
--------------------------------------------
ASSETS LIABILITIES TOTAL
Excess book over tax bad debt expense $1,493,993 $1,493,993
Excess tax over book depreciation $ (373,600) (373,600)
Unrealized gain on securities
available for sale (291,307) (291,307)
Other, net 213,211 (238,735) (25,524)
---------- ---------- ----------
Total $1,707,204 $ (903,642) $ 803,562
========== ========== ==========
DECEMBER 31, 1995
--------------------------------------------
ASSETS LIABILITIES TOTAL
Excess book over tax bad debt expense $1,239,367 $1,239,367
Excess tax over book depreciation $ (372,219) (372,219)
Unrealized loss on securities
available for sale 469,244 469,244
Other, net 164,073 (300,738) (136,665)
---------- ---------- ----------
Total $1,872,684 $ (672,957) $1,199,727
========== ========== ==========
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.
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46
7. STOCK OPTIONS
At December 31, 1995, 1994 and 1993, 91,044, 109,106 and 110,508 shares of
common stock were reserved for stock options granted under the Company's
employee stock option plan, respectively, and 13,436, 21,769 and 69,838
shares of common stock were reserved for stock options not granted,
respectively. Option prices are established at market value on the dates
granted by the Board of Directors. Certain option information for the
years ended December 31, 1995, 1994 and 1993 follows:
OPTION PRICE
SHARES PER SHARE TOTAL
Outstanding at December 31, 1995 91,044 $12.96 - $28.00 $1,888,505
Outstanding at December 31, 1994 109,106 $10.88 - $28.00 $2,000,203
Granted:
1995 18,250 $26.00 - $26.25 $ 474,688
1994 24,188 $23.60 - $28.00 $ 584,025
1993 26,687 $22.80 $ 608,464
Exercised:
1995 26,395 $10.88 - $23.60 $ 388,138
1994 24,602 $14.08 - $22.80 $ 284,394
1993 39,230 $11.26 - $22.80 $ 543,695
Expired:
1995 9,917 $12.96 - $23.60 $ 198,248
1994 988 $13.12 - $23.60 $ 20,430
1993 1,818 $11.26 - $22.80 $ 36,024
Options granted become exercisable as to one-fifth of the grant per year
over a five-year period commencing one year from the date of grant. No
option may be exercisable more than five years after the date of grant.
Options outstanding at December 31, 1995 are exercisable as follows:
YEAR SHARES
1995 65,181
1996 13,600
1997 8,613
1998 3,650
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47
8. EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan covering substantially all employees.
Contributions to the plan are made at the discretion of the Board of
Directors but may not exceed the maximum amount allowable for federal
income tax purposes. Contributions totaled $515,718, $501,955 and $462,179
for the years ended December 31, 1995, 1994 and 1993, respectively.
In 1994, the Company adopted a Supplemental Executive Retirement Plan
("SERP"). The SERP allows the Company to supplement the level of certain
executives' retirement income over that which is obtainable through the
tax-qualified retirement plan sponsored by the Company. Contributions
totaled $13,665 and $10,929 for the years ended December 31, 1995 and 1994,
respectively.
9. LEASES
LESSEE - OPERATING - The Company leases certain premises and equipment
under operating lease agreements. As of December 31, 1995, there are no
operating leases having noncancelable lease terms in excess of one year.
Rental expense charged to operations under all operating lease agreements
was $32,496, $47,775 and $47,509 for the years ended December 31, 1995,
1994 and 1993, respectively.
LESSOR - OPERATING - The Company leases certain office space to others
under operating lease agreements. Future minimum rental receipts under
operating leases having noncancelable lease terms in excess of one year as
of December 31, 1995 are $169,956 (1996 - $56,652, 1997 - $56,652 and 1998
- $56,652).
Rental income received under all operating lease agreements was $75,652,
$77,500 and $76,905 for the years ended December 31, 1995, 1994 and 1993,
respectively.
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48
10. FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO
REPURCHASE
Federal funds purchased generally represent overnight borrowings by the
Bank for temporary funding requirements. Securities sold under agreements
to repurchase represent short-term borrowings by the Bank collateralized by
U.S. Treasury and U.S. Government agency securities. Following is a
summary of these borrowings:
1995 1994 1993
Federal funds purchased:
Maximum amount outstanding at any month-end
during the year $3,500,000 $5,000,000
Average daily balance outstanding during the year 389,372 492,204
Average annual interest rate paid during the year 5.9% 3.8%
Securities sold under agreements to repurchase:
Balance at December 31 $2,982,870 $3,280,855 $2,707,585
Weighted average interest rate at December 31 4.8% 4.9% 2.3%
Maximum amount outstanding at any month-end
during the year $3,196,222 $3,395,055 $3,250,765
Average daily balance outstanding during the year $2,933,733 $2,998,020 $2,667,334
Average annual interest rate paid during the year 5.2% 3.6% 2.5%
11. REGULATION AND REGULATORY RESTRICTIONS
The holding company is regulated by the Board of Governors of the Federal
Reserve System (FRB) and is subject to securities registration and public
reporting regulations of the Securities and Exchange Commission. The Bank
is regulated by the Federal Deposit Insurance Corporation (FDIC), the North
Carolina State Banking Commission and the FRB.
The primary source of funds for the payment of dividends by Bank of Granite
Corporation is dividends received from its subsidiary, Bank of Granite.
The Bank, as a North Carolina banking corporation, may pay dividends only
out of undivided profits as determined pursuant to North Carolina General
Statutes Section 53-87. As of December 31, 1995, the Bank had undivided
profits, as defined, of $59,972,554.
II-30
49
In an effort to achieve a measurement of capital adequacy that is sensitive
to the individual risk profiles of financial institutions, the various
financial institution regulators mandate minimum capital regulations and
guidelines that categorize various components of capital and types of
assets and measure capital adequacy in relation to a particular
institution's relative levels of those capital components and the level of
risk associated with various types of assets of that financial institution.
The FDIC and the FRB statements of policy on "risk-based capital" require
the Company to maintain a level of capital commensurate with the risk
profile assigned to its assets in accordance with the policy statement.
At December 31, 1995, the Company is required to have minimum Tier 1 and
leverage capital ratios of 4% and a total capital ratio of 8%. The
Company's actual ratios at that date were 21.3%, 16.9% and 22.7%,
respectively.
The average reserve balance required to be maintained under the
requirements of the Federal Reserve was approximately $7,884,000 for the
year ended December 31, 1995. The bank maintained average reserve balances
in excess of the requirements.
12. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial data for Bank of Granite Corporation (parent company
only) follows:
DECEMBER 31,
-------------------------------------
CONDENSED BALANCE SHEETS 1995 1994
Assets:
Cash on deposit with bank subsidiary $ 190,357 $ 466,647
Investment in subsidiary bank at equity 71,930,488 62,083,296
Other investments 1,487,552 559,695
Other 97,118 80,900
----------- -----------
Total $73,705,515 $63,190,538
=========== ===========
Liabilities and Shareholders' Equity:
Other liabilities $ 85,264 $ 22,664
Shareholders' equity 73,620,251 63,167,874
----------- -----------
Total $73,705,515 $63,190,538
=========== ===========
FOR THE YEARS ENDED
DECEMBER 31,
------------------------------------------------
CONDENSED RESULTS OF OPERATIONS 1995 1994 1993
Equity in earnings of subsidiary bank:
Dividends $ 2,672,759 $2,286,694 $2,019,418
Undistributed 8,766,424 7,536,874 6,765,134
Income (expenses), net 77,761 18,705 (35,286)
----------- ---------- ----------
Net income $11,516,944 $9,842,273 $8,749,266
=========== ========== ==========
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50
YEAR ENDED DECEMBER 31,
---------------------------------------------------
CONDENSED CASH FLOW 1995 1994 1993
Increase (decrease) in cash
Cash flows from operating activities:
Interest received $ 40,107 $ 27,839 $ 9,322
Dividends received from subsidiary bank 2,672,759 2,286,694 2,019,418
Net cash provided by (used in) other
operating activities 6,687 (57,744) (80,234)
----------- ----------- -----------
Net cash provided by operating activities 2,719,553 2,256,789 1,948,506
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities available for sale 86,063
Purchases of securities available for sale (841,656) (223,357)
Purchases of securities held for sale (158,058)
----------- ----------- -----------
Net cash used in investing activities (755,593) (223,357) (158,058)
----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 388,138 284,394 534,694
Net dividends paid (2,628,388) (2,237,479) (1,988,807)
Cash paid for fractional shares (14,953)
----------- ----------- -----------
Net cash used in financing activities (2,240,250) (1,968,038) (1,454,113)
----------- ----------- -----------
Net increase (decrease) in cash (276,290) 65,394 336,335
Cash at beginning of year 466,647 401,253 64,918
----------- ----------- -----------
Cash at end of year $ 190,357 $ 466,647 $ 401,253
=========== =========== ===========
Reconciliation of net income to net cash provided by
operating activities:
Net income $11,516,944 $ 9,842,273 $ 8,749,266
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (8,766,424) (7,536,874) (6,765,134)
Premium amortization and discount accretion, net (711)
Gain on sale of securities available for sale (15,238)
Increase in accrued interest receivable (17,118)
(Increase) decrease in other assets 900 (55,450) (24,586)
Increase (decrease) in other liabilities 1,200 6,840 (11,040)
----------- ----------- -----------
Total adjustments (8,797,391) (7,585,484) (6,800,760)
----------- ----------- -----------
Net cash provided by operating activities $ 2,719,553 $ 2,256,789 $ 1,948,506
=========== =========== ===========
Supplemental disclosure of non-cash transactions:
Transfer from capital surplus to common stock $ 1,190,958
Unrealized (gain) loss on investment
in bank at equity $(1,080,768) 743,711
Unrealized gain on other investments available for sale (156,315) (30,203)
Deferred income tax provision on net unrealized
gain on securities available for sale 61,400 11,864
II-32
51
13. COMMITMENTS AND CONTINGENCIES
The Bank has various financial instruments (outstanding commitments) with
off-balance sheet risk that are issued in the normal course of business to
meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit.
Commitments to extend credit are legally binding agreements to lend to a
customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts outstanding do not
necessarily represent future cash requirements. Standby letters of credit
represent conditional commitments issued by the Bank to assure the
performance of a customer to a third party. The unused portion of
commitments to extend credit at December 31, 1995 and 1994 was $50,275,525
and $50,229,879, respectively. Additionally, standby letters of credit of
$3,567,898 and $2,938,253 were outstanding at December 31, 1995 and 1994,
respectively.
The Bank's exposure to credit loss for commitments to extend credit and
standby letters of credit is the contractual amount of those financial
instruments. The Bank uses the same credit policies for making commitments
and issuing standby letters of credit as it does for on-balance sheet
financial instruments. Each customer's creditworthiness is evaluated on an
individual case-by-case basis. The amount and type of collateral, if
deemed necessary by management, is based upon this evaluation of
creditworthiness. Collateral held varies, but may include marketable
securities, deposits, property, plant and equipment, investment assets,
inventories and accounts receivable. Management does not anticipate any
significant losses as a result of these financial instruments.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The estimated fair
value amounts have been determined by the Bank, using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Bank could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
value amounts (dollars in thousands).
II-33
52
DECEMBER 31, 1995
---------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
Assets:
Cash and cash equivalents $ 21,121 $ 21,121
Marketable securities 124,271 126,544
Loans 297,040 297,658
Liabilities:
Demand deposits 177,430 177,430
Time deposits 199,613 196,437
Off-balance-sheet unrealized gains (losses) -
Commitments 77
DECEMBER 31, 1994
---------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
Assets:
Cash and cash equivalents $ 19,491 $ 19,491
Marketable securities 112,926 111,312
Loans 265,855 266,290
Liabilities:
Demand deposits 173,192 173,192
Time deposits 170,138 165,846
Off-balance-sheet unrealized gains (losses) -
Commitments 71
The fair value of marketable securities is based on quoted market prices,
dealer quotes and prices obtained from independent pricing services. The
fair value of loans, time deposits, commitments and guarantees is estimated
based on present values using applicable risk-adjusted spreads to the U.S.
Treasury curve to approximate current entry-value interest rates applicable
to each category of such financial instruments.
No adjustment was made to the entry-value interest rates for changes in
credit of loans for which there are no known credit concerns. Management
segregates loans in appropriate risk categories. Management believes that
the risk factor embedded in the entry-value interest rates, along with the
general reserves applicable to the loan portfolio for which there are no
known credit concerns, result in a fair valuation of such loans on an
entry-value basis.
As required by the Statement, demand deposits are shown at face value.
The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these financial statements since that date and,
therefore, current estimates of fair value may differ significantly from
the amounts presented herein.
II-34
53
APPENDIX A
/X/ PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE BANK OF GRANITE CORPORATION
This Proxy is Solicited on Behalf of the Board of The Board of Directors unanimously recommends a vote
Directors. The undersigned hereby appoints John A. FOR the following:
Forlines, Jr., Myron L. Moore, Jr., and Robert E.
Cline, or each of them, as Proxies, each with the power 1. APPROVING THE AMENDING OF THE CERTIFICATE OF
to appoint his or her substitute and hereby authorizes INCORPORATION OF BANK OF GRANITE CORPORATION TO
each of them to represent and to vote as designated INCREASE THE AUTHORIZED COMMON SHARES FROM
below all the shares of Common Stock held on record by 10,000,000 TO 15,000,000 SHARES.
the undersigned on March 14, 1996, at the Annual
Meeting of Shareholders to be held on April 22, 1996, FOR AGAINST ABSTAIN
or any adjournment thereof. / / / / / /
2. ELECTION OF DIRECTORS:
John N. Bray, Robert E. Cline, John A. Forlines,
Jr., Barbara F. Freiman, Myron L. Moore, Jr.,
Charles M. Snipes, Boyd C. Wilson, Jr.
/ / / / / /
INSTRUCTIONS: To withhold authority to vote for any
individual nominee, mark "Except" and write that
-------------------------- nominee's name in the space provided below:
Please be sure to sign and date | Date |
this Proxy in the box below. | | 3. THE RATIFICATION OF THE ACCOUNTING FIRM DELOITTE &
- -------------------------------------------------------------| TOUCHE LLP as a Corporation's independent Certified
| | Public Accountants for the year ending December 31,
| | 1996.
| |
--Stockholder sign above --- Co-holder (if any) sign above -- / / / / / /
4. In their discretion, the Proxies are authorized to
vote upon other such business as may properly come
before the meeting.
- --------------------------------------------------------------------------------
DETACH ABOVE CARD, SIGN, DATE AND MAIL IN THE POSTAGE PAID ENVELOPE PROVIDED.
BANK OF GRANITE CORPORATION
- --------------------------------------------------------------------------------
Shares of Common Stock of the Company will be voted as specified. If no
specification is made, shares will be voted FOR Proposal 1, amending the
certificate of incorporation of Bank of Granite Corporation to increase the
authorized common stock from 10,000,000 shares to 15,000,000 shares, for
Proposal 2 the Board of Directors' nominees to the Board of Directors, FOR
Proposal 3, the ratification of the accounting firm Deloitte & Touche LLP, and
otherwise at the discretion of the proxies.
The above signed hereby acknowledges receipt of the Notice of Annual Meeting of
Shareholders of the Company called for April 22, 1996, a Proxy Statement for
the Annual Meeting and the 1995 Annual Report to Shareholders.
Please sign exactly as your name(s) appear(s) on this proxy card. When shares
are held jointly, each holder should sign. When signing in a representative
capacity, please give title.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
- --------------------------------------------------------------------------------