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SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [_]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BANK OF GRANITE CORPORATION
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing feeis 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, NORTH CAROLINA 28630
(704) 496-2000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS - APRIL 26, 1999
TO OUR SHAREHOLDERS:
The Annual Meeting of Shareholders of Bank of Granite Corporation will be held
on Monday, April 26, 1999 at 10:30 a.m. The meeting will be held at the Holiday
Inn, 130 South Lenoir Rhyne Boulevard, S.E. (at Interstate 40, Exit #125),
Hickory, North Carolina for the following purposes:
1. To consider the election of seven persons named as director
nominees in the Proxy Statement dated March 22, 1999, which
accompanies the Notice;
2. To consider the ratification of the selection of Deloitte &
Touche LLP as Bank of Granite Corporation's independent
Certified Public Accountants for the fiscal year ending
December 31, 1999; and
3. To transact such other business as may properly be brought
before the meeting or any adjournment thereof.
Only shareholders of record at the close of business on March 8, 1999 are
entitled to receive notice of, and to vote at, this meeting.
Bank of Granite Corporation's 1999 Annual Shareholders Meeting proxy Ballot,
Proxy Statement and its 1998 Annual Report are enclosed with this Notice.
YOUR VOTE AND PROMPT RESPONSE IS IMPORTANT. TO ASSURE YOUR REPRESENTATION AT THE
MEETING, PLEASE MARK, SIGN, DATE AND PROMPTLY RETURN YOUR PROXY IN THE ENVELOPE
PROVIDED FOR THAT PURPOSE. IF YOU ATTEND THE MEETING, YOU MAY OF COURSE,
WITHDRAW YOUR PROXY AND VOTE IN PERSON. YOUR PROMPT RESPONSE WILL SAVE YOUR
COMPANY THE EXPENSES AND EXTRA WORK OF ADDITIONAL SOLICITATION.
By order of the Board of Directors
BANK OF GRANITE CORPORATION
/s/ John A. Forlines, Jr.
Granite Falls, North Carolina JOHN A. FORLINES, JR.
March 22, 1999 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 "Company") for use at the Annual Meeting of Shareholders to be
held on April 26, 1999, and any adjournment thereof. The time and place of the
meeting is set forth in the accompanying Notice of Meeting. The approximate date
on which this Proxy Statement and the accompanying Proxy are first being sent or
given to Shareholders of the Company is March 22, 1999
A copy of the Company's 1998 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 8, 1999. The Company
will also provide to any shareholder without charge a copy of the Annual Report
for 1998 filed on Form 10-K with the Securities and Exchange Commission (the
"SEC") upon written request to Kirby A. Tyndall, Secretary, Bank of Granite
Corporation, P.O. Box 128, Granite Falls, North Carolina, 28630. Shareholders
and other interested parties may also obtain the Company's recent filings with
the SEC through the SEC's internet site at www.sec.gov and search on the
Company's Central Index Key of 0000810689.
Solicitation
All expenses of preparing, printing, and mailing the Proxy and all material used
in the solicitation thereof will be borne by the Company. In addition to the use
of the mails, proxies may be solicited through personal interview and telephone
by directors, officers, and other employees of the Company, none of whom will
receive additional compensation for their services.
Revocability of Proxy
This proxy shall be revocable at any time prior to its exercise by filing a
written request with Kirby A. Tyndall, Secretary of the Company, by voting in
person at the Shareholders' Meeting, or by presenting a duly executed proxy
bearing a later date.
Voting Securities and Vote Required for Approval
At the close of business on March 8, 1999, the record date, the Company had
issued and outstanding 11,494,067 shares of Common Stock, par value $1.00 per
share, which is the only class of stock outstanding. Only the holders of record
of Common Stock of the Company at the close of business on March 8, 1999 are
entitled to receive notice of the Annual Meeting of Shareholders and to vote on
such matters to come before the Annual Meeting or any adjournment thereof.
Presence, in person or by proxy, of the holders of a majority of the outstanding
shares of Common Stock of the Company entitled to vote at the Annual Meeting is
necessary to constitute a quorum at the Annual Meeting and any adjournment
thereof.
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The approval of Proposal 1 (the Election of Directors), and Proposal 2 (the
Ratification of the Selection of the Company's Independent Accountants), and
approval of all other items which may be submitted to the shareholders for their
consideration at the Annual Meeting requires the affirmative vote of a majority
of shares present and voting. Each shareholder is entitled to one (1) vote for
each share of Common Stock held by him or her at the close of business on the
record date, March 8, 1999. Cumulative voting is not permitted.
On all proposals, an abstention will have the same effect as a negative vote
but, because shares held by brokers will not be considered entitled to vote on
matters as to which the brokers withhold authority, a broker non-vote will have
no effect on the outcome of the vote on such proposals.
The Board of Directors unanimously recommends a vote in favor of Proposals 1 and
2. Each Proxy, unless the shareholder otherwise specifies, will be voted in
favor of Proposals 1 and 2. In each case where the shareholder has appropriately
specified how the Proxy is to be voted, it will be voted in accordance with his
or her specifications. Executed but unmarked Proxies that are returned to the
Company will be voted (1) in favor of the proposed slate of directors and (2) in
favor of the ratification of Deloitte & Touche LLP as the Company's independent
accountants. Shareholders may designate a person or persons other than those
named in the enclosed Proxy to vote their shares at the Annual Meeting or any
adjournment thereof. As to any other matter or business which may be brought
before the Annual Meeting or any adjournment thereof, a vote may be cast
pursuant to the accompanying Proxy in accordance with the judgment of the person
or persons voting the same, but the management and Board of the Company do not
know or any other matter or business to come before the Annual Meeting.
PRINCIPAL HOLDERS OF VOTING SECURITIES
To the knowledge of the Company, no individual shareholder owned beneficially
more than five percent (5%) of Bank of Granite Corporation's outstanding Common
Stock on the record date. Company Common Stock is held by Cede & Co. as nominee
of securities depositories for various segments of the financial industry. As of
the record date, Cede & Co. held shares registered in street name for
approximately 2,500 individuals and organizations.
On the record date, the Company's Common Stock was owned by approximately 4,700
individuals and entities, holding Stock either as record holder or as beneficial
owner.
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INFORMATION ABOUT THE BOARD OF DIRECTORS
AND COMMITTEES OF THE BOARD
The Boards of Directors of both the Bank of Granite Corporation and its bank
subsidiary, Bank of Granite (the "Bank") are composed of the same persons. The
Board of Directors of the Company's mortgage bank subsidiary, GLL & Associates,
Inc. ("GLL") is composed of the Company's President, the Company's
Secretary/Treasurer and GLL's President.
During the fiscal year ended December 31, 1998, the Bank's Board of Directors
held 14 meetings, and the Company's Board of Directors held 8 meetings. All
members of both Boards of Directors attended more than 85% of the total number
of meetings of the Boards of Directors and the total number of meetings held by
committees of the Boards of which they are members. Overall attendance at both
Boards' meetings was approximately 90%.
Company and Bank directors, composed of the same persons, were paid an annual
retainer of $5,000 and fees of $200 for attendance at each monthly and special
meeting of the Board. GLL directors were paid $200 for attendance at each
quarterly meeting of GLL's Board. Directors received no additional compensation
for attending committee meetings. The Bank's Board of Directors supervises the
Bank's compensation matters and functions as the Bank's executive committee. The
Company's Board has standing audit and nominating committees. The functions,
composition and frequency of meetings for the audit and nominating committees in
fiscal year 1998 were as follows:
AUDIT COMMITTEE - The Audit Committee was composed of directors Paul M.
Fleetwood, III, Barbara F. Freiman and Boyd C. Wilson, Jr. The Committee, whose
members are neither officers nor employees of the Company or Bank, provides
general oversight of the internal audit function, reviews the findings of
external audits and examinations, evaluates the adequacy of the Bank's insurance
coverage, and reviews the activities of the Bank's regulatory compliance
efforts. During 1998, 10 meetings were held. All Committee members attended more
than 75% of the total number of Audit Committee meetings held during the fiscal
year 1998.
NOMINATING COMMITTEE - The Nominating Committee was composed of directors John
A. Forlines, Jr., Barbara F. Freiman, Hugh R. Gaither and Charles M. Snipes. The
Committee makes recommendations to the Board of Directors with respect to
nominees for election as directors. The Committee would consider shareholder
nominees for Company and Bank Board membership. Any shareholder wishing to
nominate a candidate for director must follow the procedures set forth in the
section of this Proxy Statement entitled "Proposals For 2000 Annual Shareholders
Meeting". During 1998, 2 meetings were held. All Committee members attended more
than 95% of the total number of Nominating Committee meetings held during the
fiscal year 1998.
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ELECTION OF DIRECTORS
(PROPOSAL 1)
Seven (7) directors are being considered for election at the Annual Meeting,
each to hold office for one year or until a successor is elected an qualified.
The Company Board's nominees are shown below along with biographical summaries
and beneficial ownership of Common Stock. The information is presented, unless
otherwise indicated, as of March 8, 1999.
All of the nominees shown below have been previously elected as directors by the
Company's shareholders and are currently serving on the Board of Directors.
In the event a director nominee declines or is unable to serve as director,
which is not anticipated, the shares represented by proxy will be voted for the
Board's substitute nominee.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS ELECT THE
DIRECTOR NOMINEES SHOWN IN THE FOLLOWING TABLE BY VOTING FOR PROPOSAL 1.
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DIRECTORS AND EXECUTIVE OFFICERS OF
BANK OF GRANITE CORPORATION
The number of shares of Bank of Granite Corporation stock beneficially owned by
the nominees are those owned as of March 8, 1999. Unless otherwise indicated,
each director has sole voting power (or shares such power with his or her
spouse) with respect to the shares set forth in the table on the following page.
The source of information provided in the table is the Company's shareholder
records.
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Name Principle Occupation Age on Director Amount and Nature Ownership
during last five years Dec. 31, Since (1) of Beneficial as % of
1998 Ownership Common
Stock
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John N. Bray President, Vanguard 56 Bank (1992) 3,990 direct 0.04%
Hickory, N.C. Furniture, Inc. Corp (1992) 1,175 indirect(2)
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Paul M. Fleetwood, President, Corporate 51 Bank (1998) 112,500 direct 0.98%
III, CPA Management Services, Inc. Corp (1998)
Hickory, N.C. and Catawba Valley
Building Supply, Inc.
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John A. Forlines, Jr. Chairman and Chief 80 Bank (1954) 531,305 direct 4.71%
Granite Falls, N.C. Executive Officer, Corp (1987) 10,574 indirect(3)
Bank of Granite
Corporation, since
June 1987; Chairman,
Bank of Granite, since
1972 (Chief Executive
Officer, 1954-94)
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Barbara F. Freiman Executive Director of the 64 Bank (1989) 6,442 direct 0.08%
Lenoir, N.C. Foundation of Caldwell Corp (1989) 2,234 indirect(2)
Community College and
Technical Institute
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Hugh R. Gaither President and Chief 48 Bank (1997) 216 direct --
Newton, N.C. Executive Officer, Corp (1997)
Ridgeview, Inc.
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Charles M. Snipes President, Bank of 65 Bank (1982) 133,050 direct 1.43%
Hickory, N.C. Granite Corporation; Corp (1987) 31,824 indirect(2,3)
President and Chief GLL (1997)
Executive Officer
Bank of Granite
(since 1994); GLL
Chairman; Director
Vanguard Furniture, Inc.
and Ridgeview, Inc.
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Boyd C. Wilson, Vice President and 46 Bank (1996) 4,945 direct 0.09%
Jr., CPA Controller, Kincaid Corp (1996) 5,089 indirect(2)
Hudson, N.C. Furniture Company
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Directors and Named Executive 821,668 direct 7.60%
Officers as a Group (9 Persons) 52,146 indirect
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Notes: (1) Bank of Granite Corporation, the holding company for Bank of
Granite, was organized on January 30, 1987.
(2) Shares of stock indirectly owned include those held in their
spouse's name or by corporations controlled by such
individuals.
(3) The indirect stock ownership shown for Messrs. Forlines and
Snipes and other named executive officers consists of those
shares of Company Common Stock obtainable by such individuals
within 60 days of March 8, 1999.
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SUMMARY COMPENSATION TABLE
The following table summarizes current and long-term compensation and provides
separate columns for stock- related compensation for each executive officer of
the Company and its subsidiaries, Bank of Granite ("Bank") and GLL & Associates,
Inc. ("GLL") whose total salary and bonus exceeded $100,000 for 1998.
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Compensation
------------------------------------
Annual Long-term
------------------------------------
Securities
Name and Base Underlying All
Principal Position Year Salary Bonus(1) Options(2) Other(3)
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John A. Forlines, Jr. 1998 $225,250 $ 45,800 4,375 $22,953
Company Chairman and Chief
Executive Officer; Bank Chairman 1997 $214,500 $ 46,020 4,375 $38,408
1996 $195,000 $ 34,380 3,375 $35,967
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Charles M. Snipes 1998 $180,250 $ 36,800 4,375 $19,483
Company President;
Bank President and Chief Executive 1997 $171,600 $ 36,820 4,375 $32,867
Officer; GLL Chairman
1996 $156,000 $ 25,713 3,375 $29,606
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Kirby A. Tyndall 1998 $ 85,000 $ 17,400 3,125 $ 8,295
Company, Bank and GLL
Secretary, Treasurer and Chief 1997 $ 41,706 $ 17,160 3,125 $ 5,950
Financial Officer
1996 $ -- $ -- -- $ --
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Gary L. Lackey 1998 $ 72,000 $ 80,606 1,250 $ 3,500
GLL President and Chief Executive
Officer 1997 $ 72,000 $161,081 -- $ 1,472
1996 $ 72,000 $ 40,224 -- $ 1,006
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Notes: (1) Figures shown represent actual incentive cash bonuses earned
and accrued during the year indicated. Mr. Lackey received an
additional $100,000 discretionary bonus from GLL in 1997
prior to merger.
(2) Figures shown represent number of shares of Company Common
Stock subject to options which were awarded to the named
executive officers shown during the years indicated.
(3) Figures shown include amounts contributed by the Bank to its
Profit-sharing Plan and by GLL to its 401(k) Plan (the
"Plans") and allocated to the indicated executive officer's
accounts. The plans are "tax qualified" under section 401(a)
of the Internal Revenue Code and cover all employees. The
following amounts were contributed to the indicated accounts:
Mr. Forlines $12,800 in 1998, $22,400 in 1997 and $22,500 in
1996; Mr. Snipes $12,800 in 1998, $22,400 in 1997 and $22,500
in 1996; Mr. Tyndall $8,173 in 1998, $5,902 in 1997 and $0 in
1996; and Mr. Lackey $3,500 in 1998, $1,472 in 1997 and $1,006
in 1996.
Figures shown also indicate amounts contributed by the Bank to the indicated
executive officer's Supplemental Executive Retirement Plan ("SERP") accounts.
Because of Internal Revenue Code limitations on amounts which can be contributed
to the named executive's Profit-sharing Plan accounts, the SERP was implemented
by the Bank during 1994 to help replace those contributions "lost" by the named
executives due to these limitations. Participation in the SERP is determined by
the Board of Directors. The SERP is not a qualified plan under the Internal
Revenue Code. Contribution earnings are tied to the 30 year US Treasury bond.
The following amounts were contributed to the indicated accounts: Mr. Forlines
$9,248 in 1998, $14,982 in 1997, and $12,470 in 1996; and Mr. Snipes $4,566 in
1998, $7,043 in 1997 and $4,757 in 1996.
The remaining amounts include (i) the value of certain life insurance premiums
paid for the indicated executives, based on the term insurance value of such
payments as calculated under the Internal Revenue Code P.S. 58 rates or those of
the insurer, if lower, and includable in the executive's taxable income for the
year and (ii) the value of the personal use portion of the Company's vehicles
provided to the executive.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information with respect to options granted
during 1998 to the named officers.
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Individual Grants Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation
for Option Term
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Number of % of Total
Securities Options Appreciation
Underlying Granted to Exercise or Assumed at
Name and Options Employees Base Price Expiration 5% 10%
Principal Position Granted(1) in 1998(2) ($/share)(3) Date(4) (5) (6)
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John A. Forlines, Jr. 4,375 10.0% $29.60 05/11/2003 $35,778 $79,061
Company Chairman and Chief
Executive Officer; Bank Chairman
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Charles M. Snipes 4,375 10.0% $29.60 05/11/2003 $35,778 $79,061
Company President;
Bank President and Chief Executive
Officer; GLL Chairman
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Kirby A. Tyndall 3,125 7.2% $29.60 05/11/2003 $25,556 $56,472
Company, Bank and GLL
Secretary, Treasurer and Chief
Financial Officer
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Gary L. Lackey 1,250 2.9% $29.60 05/11/2003 $10,222 $22,589
GLL President and Chief Executive
Officer
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Notes: (1) Figures indicate number of shares of stock with respect to
which options were granted under the Plan to the indicated
executive officer during 1998. The price at which shares of
Company Common Stock may be purchased upon the exercise of
options under the Plan is equal to 100% of the fair market
value of the Company's Common Stock on the date the options
are granted. All options granted pursuant to the Plan must be
exercised within 5 years from the date of grant. Outstanding
options must also be exercised during employment or within 3
months after a participating executive's termination of
service. If termination of service is by reason of death, an
option my be exercised by the executive's legal representative
or beneficiary within one year after the date of death.
Options granted under the plan are subject to applicable
income tax withholding requirements and are not transferable
by the holder except by will or by the laws of descent and
distribution, and shall be exercisable, during the
participating key executive's lifetime, only by the key
employee.
(2) Percent shown indicates options awarded to indicated executive
officer as a percentage of total options granted to all Plan
participants during 1998.
(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
appreciation rate in the price of Company Common Stock. The
potential realizable value is calculated under the following
formula: [(A x B) - A] x C, where A = $29.60, the exercise
price per share (which equals the market price at the time of
the grant), B = 1.2763, the assumed rate of stock price
appreciation (5%) compounded annually over the five-year term
of the option; and C = the number of securities underlying the
grant at year end 1998.
(6) The dollar values shown represent the potential realizable
value of the grant of options at an assumed 10% annualized
appreciation rate in the price of Company Common Stock. The
potential realizable value is calculated under the following
formula: [(A x B) - A] x C, where A = $29.60, the exercise
price per share (which equals the market price at the time of
the grant), B = 1.6105, the assumed rate of stock price
appreciation (10%) compounded annually over the five-year term
of the option; and C = the number of securities underlying the
grant at year end 1998.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
LAST FISCAL YEAR- END OPTION VALUES
The following table sets forth information with respect to the exercise of stock
options by the named officers during 1998 and unexercised options held as of
December 31, 1998.
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Shares Number of Securities Value of Unexercised
Acquired Value Underlying In-the-Money
Name and on Exercise Realized Unexercised Options Options
Principal Position (#)(1) ($)(2) at Fiscal Year-end (#) at Fiscal Year-end ($)(3)
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John A. Forlines, Jr. 7,031 $87,466 Exercisable - 14,882 Exercisable - $193,339
Company Chairman and Chief Unexercisable - 9,663 Unexercisable - 48,853
Executive Officer; Bank Chairman
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Charles M. Snipes 7,031 $86,059 Exercisable - 14,882 Exercisable - $193,339
Company President; Unexercisable - 9,663 Unexercisable - 48,853
Bank President and Chief Executive
Officer; GLL Chairman
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Kirby A. Tyndall -- -- Exercisable - 1,250 Exercisable - $5,781
Company, Bank and GLL Unexercisable - 5,000 Unexercisable - 8,671
Secretary, Treasurer and Chief
Financial Officer
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Gary L. Lackey -- -- Exercisable - -- Exercisable - --
GLL President and Chief Executive Unexercisable - 1,250 Unexercisable - --
Officer
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Notes: (1) Indicates number of shares acquired by indicated executive
officer through the exercise of options during 1998.
(2) Dollar amounts represent the aggregate dollar value realized
by the indicated executive officer upon the exercise of
options during 1998. The aggregate dollar value realized is
calculated based on the difference between the fair market
value of Company Common Stock on the date of exercise, less
the underlying option's exercise or base price.
(3) Dollar amounts shown represent the value of stock options held
by the indicated executive officers at year end 1998. Only
those options which are "in the money" are reported. An option
is considered to be "in the money" if the fair market value of
the Company's Common Stock exceeds the exercise or base price
of the shares subject to the options at year end 1998. For
those options "in the money", value is computed based on the
difference between fair market value of Company Common Stock
at year end 1998 and the exercise or base price of the shares
subject to the options. The value of options exercisable and
unexercisable at year end 1998 is also shown.
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BOARD REPORT ON EXECUTIVE OFFICER COMPENSATION
All compensation paid to the Company's executive officers is paid by the Bank to
such persons in their capacity as executive officers of the Bank. Accordingly,
the compensation of such executives is reviewed and approved annually by the
full Board of Directors of both the Bank and the Company, which consist of the
same persons. This report is furnished by the Company's Board of Directors,
which acts as the Company's Compensation Committee (the "Committee").
The fundamental philosophy of Bank of Granite Corporation's compensation program
is to offer competitive compensation opportunities for all executive officers
which are based both on the individual's contribution and on the Company's
performance. The compensation paid is designed to retain and reward executive
officers who are capable of leading the Company in achieving its business
objectives in an industry characterized by complexity, competitiveness, and
change. Annual compensation for the Company's CEO (and other executive officers)
consists of three elements:
- Base salary;
- An annual cash incentive that is directly and indirectly linked to
Company and individual performance (with Company performance measured
on the basis of Return on Assets); and
- Long-term equity participation, consisting of the issuance of stock
options, designed to better align the interests of executive officers
with those of the Company's shareholders.
For the Company's executives (and CEO), base salary is targeted to approximate
average salaries for individuals in similar positions with similar levels of
responsibilities who are employed by other banking organizations of similar
size. The Company frequently participates in local, state, and other salary /
compensation surveys and has access to other published salary / compensation
data. The results of such surveys are used by the Committee in helping to set
appropriate levels of Company CEO and other executive officer base salaries.
For 1998, the Committee increased the CEO's base salary by 5.0%. The Committee
determined that the 5.0% increase in the CEO base salary was appropriate in
light of two primary factors. The first factor was a desire by the Company to
provide the CEO with a base salary comparable to that paid by other banking
organizations of similar size and financial performance. The Company's Board of
Directors annually reviews national, regional, statewide and local peer group
salary data (to the extent available) in its determination of a comparable base
salary. A second factor considered by the Committee was that the Company's 2.81%
return on assets placed the Company among the banking industry's top performers
during 1997.
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For the Company's executives (and CEO), the annual cash incentive during the
years 1996, 1997 and 1998 ranged from 16.5% to 112.0% of base salary. For the
Bank's named executives, the annual cash incentive ranged from from 16.5% to
41.1% of base salary. For GLL's named executive, the annual cash incentive
ranged from 55.9% to 112.0% of base salary. For the Bank and GLL, this means
that up to approximately 41.1% and 112.0%, respectively, of executive annual
compensation was variable, could fluctuate significantly from year to year, and
was directly and indirectly tied to business and individual performance. The
CEO's percentage of annual cash incentive for 1998 was 20.3% of base salary. The
annual cash incentive for the Bank's named executives is based on the Bank's
return on assets (ROA). The Bank's Board of Directors, in its sole discretion,
sets the threshold ROA target, based in part on the Bank's financial performance
in prior years and the performance of banking organizations of similar size in
the Bank's general geographic region. If the threshold ROA target is achieved, a
stated dollar amount will be paid into an incentive compensation pool. The
incentive compensation pool amounts are then distributed among incentive plan
participants based on such participants' base salaries as a percentage of all
participants base salaries. If the Bank earns a ROA above the threshold level,
an increasing dollar incentive pool is created up to a maximum dollar amount at
a predetermined ROA level. The Company continued the incentive plan for GLL's
CEO that GLL had prior to the merger. The incentive plan for GLL's CEO is based
on a percentage of earnings before income taxes.
For the Company's CEO, executives (and other key employees), stock options may
be granted each year in the sole discretion of the Board of Directors. While no
formal system is employed in determining the number of stock options granted,
both in the aggregate and to any one individual, the Board does take into
account the Company's current financial performance and the number of stock
options previously granted.
This report is provided as a summary of current Board practice with regard to
annual compensation review and authorization of executive officer compensation
and with respect to specific action taken for the CEO.
Because executive officer and CEO salaries are not expected currently or in the
near future to exceed those limitations provided under Section 162(m) of the
Internal Revenue Code, the Board currently has no specific policy which
addresses the income tax deductibility of "qualifying compensation" under this
specific code section. However, the Company's 1997 Incentive Stock Option Plan
was designed to provide that compensation deductions, if any, available to the
Company with respect to remuneration under such plan are not subject to the
deduction limitations of Section 162(m).
BANK OF GRANITE CORPORATION
Compensation Committee
of the Board of Directors
John N. Bray
Paul M. Fleetwood, III, CPA
John A. Forlines, Jr.
Barbara F. Freiman
Hugh R. Gaither
Charles M. Snipes
Boyd C. Wilson, Jr., CPA
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION
The full Company Board of Directors serves as the Company's compensation
committee. John A. Forlines, Jr. and Charles M. Snipes both served as members of
the Company's and Bank's Board of Directors during 1998 and also served as
Company and Bank executive officers. Mr. Forlines is the Chairman and CEO of the
Company and Chairman of the Bank. Mr. Snipes is the President of the Company,
President and CEO of the Bank and Chairman of GLL. While Mr. Forlines and Mr.
Snipes specifically excluded themselves from any compensation committee
discussions concerning their own compensation, they did participate in
compensation committee discussions concerning the compensation of other
executive officers.
I - 10
13
SHAREHOLDER PERFORMANCE GRAPH
The performance graph shown on the following pages compares the Company's
cumulative total return over the most recent five year period with both the
Nasdaq Total Return Index and an Independent Bank Index (reflecting changes in
certain peer group bank stocks). The Independent Bank Index, purchased from an
investment banking firm, reflects the total return to shareholders of a group of
22 independent publicly owned community banks located in the southeastern states
of Florida, Georgia, North Carolina, South Carolina, Tennessee, Virginia and
West Virginia. The banks range in asset size from $169 million to $1.077
billion. Returns are shown on a total return basis which assumes the
reinvestment of dividends. Due to the trend of mergers and consolidation in the
banking industry, the investment banking firm changes the composition of the
Independent Bank Index from year to year to replace community banks that have
been acquired or otherwise changed their structure in such a way as to make them
unrepresentative of the community banks represented in the Index. The following
list contains the institutions included in the 1998 Independent Bank Index.
Assets
Name, City, State (millions)
TIB Financial Corporation, Key Largo, FL $ 320
Seacoast Banking Corporation, Stuart, FL 1,005
Capital City Bank Group, Inc., Tallahassee, FL 1,077
Fidelity National Corporation, Atlanta, GA 723
Southwest Georgia Financial Group, Moultrie, GA 211
First Banking Company of Southeast Georgia, Statesboro, GA 399
PAB Bankshares, Inc., Valdosta, GA 425
Carolina First BancShares, Inc., Lincolnton, NC 583
FNB Financial Services Corporation, Reidsville, NC 420
First Bancorp, Troy, NC 471
CNB Corporation, Conway, SC 418
Palmetto Bancshares, Inc., Laurens, SC 557
Carolina Southern Bank, Spartanburg, SC 187
First Pulaski National Corporation, Pulaski, TN 273
National Bankshares, Inc., Blackburg, VA 425
FNB Corporation, Christiansburg, VA 446
Virginia Commonwealth Financial Corporation, Culpeper, VA 239
Americal National Bankshares, Inc., Danville, VA 458
Central Virginia Bankshares, Inc., Powhatan, VA 169
Virginia Financial Corporation, Staunton, VA 419
C&F Financial Corporation, West Point, VA 301
Pocahontas Bankshares Corporation, Bluefield, WV 291
I - 11
14
BANK OF GRANITE CORPORATION
Five Year Performance Index
[Five Year Performance Graph Presented Here]
1993 1994 1995 1996 1997 1998
-------- -------- -------- --------- -------- --------
Bank of Granite Corporation 100 103 122 185 199 226
Independent Bank Index 100 119 151 191 280 296
Nasdaq Total Return Index 100 98 138 170 209 293
The average compound annual returns for the five-year period ended December 31,
1998 were 17.7% for the Company, 24.2% for the Independent Bank Index and 24.0%
for the Nasdaq Total Return Index. Returns by year for the Company and the two
indices are presented below.
1994 1995 1996 1997 1998
------ ------ ------ ------ ------
Bank of Granite Corporation 3.0% 18.4% 51.6% 7.6% 13.6%
Independent Bank Index 19.0% 26.9% 26.5% 46.6% 5.7%
Nasdaq Total Return Index -2.0% 40.8% 23.2% 22.9% 40.2%
I - 12
15
TRANSACTIONS WITH OFFICERS AND DIRECTORS
The Company has had, and expects to have in the future, banking transactions in
the ordinary course of its business with directors, officers and their
associates, on the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others;
and, in the opinion of Company management, these transactions do not and will
not involve more than the normal risk of collectibility or present other
unfavorable features.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission
initial reports of ownership of Company Common Stock and reports of changes in
ownership. Executive officer, directors and greater than 10% shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
To the Company's knowledge, all Section 16(a) filings required of its executive
officers and directors for 1998 were made in a timely manner.
RATIFICATION OF SELECTION OF ACCOUNTANTS
(Proposal 2)
The Board of Directors of the Company has selected the firm of Deloitte &
Touche, LLP as independent Certified Public Accountants to examine the financial
statements of the Company for the year ending December 31, 1999. The firm is to
report on the Company's consolidated balance sheets, and related consolidated
statements of income, comprehensive income, cash flows, and changes in
shareholders' equity, and to perform such other appropriate accounting services
as may be required by the Board of Directors. It is expected that
representatives of Deloitte & Touche LLP, who also served as the Company's
accounting firm for the past fiscal year, will be present at the shareholders'
meeting. They will be provided with any opportunity to make a statement if they
desire to do so and to answer appropriate questions which may be raised at the
meeting.
The fee arrangement between Deloitte & Touche LLP and Bank of Granite
Corporation is based on rates and terms customary for their practice.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE SHAREHOLDERS RATIFY THE
APPOINTMENT OF DELOITTE & TOUCHE AS THE COMPANY'S INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS FOR THE YEAR ENDED DECEMBER 31, 1999 BY VOTING FOR PROPOSAL 3.
I - 13
16
PROPOSALS FOR 2000 ANNUAL SHAREHOLDERS MEETING
From time to time, individual shareholders may wish to submit proposals which
they believe should be voted upon by the Company's shareholders. The Securities
and Exchange Commission has adopted regulations which govern the inclusion of
such proposals in the Company's annual proxy materials. No such proposals were
submitted for the 1999 Annual Meeting. Shareholder proposals intended to be
presented at the 2000 Annual Meeting of Shareholders must be received by the
Secretary of the Company at its executive office, 23 North Main Street, P.O. Box
128, Granite Falls, North Carolina 28630 no later than November 24, 1999 (which
is 120 days prior to the expected date of the 2000 Proxy Statement) in order to
be eligible for inclusion in the Company's Proxy Ballot and Proxy Statement for
the 2000 Annual Meeting.
While the Company's Nominating Committee normally recommends and nominates
individuals to serve as directors of the Company, shareholders may also nominate
candidates for director, provided that such nominations are made in writing and
a received by the Company at its executive offices not later than December 23,
1999 (which is 90 days prior to the expected date of the 2000 Proxy Statement).
The nomination should be sent to the attention of the Company Secretary and must
include, concerning the director nominee, the following information: full name,
age, date of birth, educational background and business experience, including
positions held for at least the preceding five years. The nomination must also
include home and business addresses and telephone numbers and include a signed
representation by the nominee to timely provide all information requested by the
Company as part of its disclosure in regard to the solicitation of proxies for
the election of directors. The name of each such candidate for director must be
placed in nomination at the Annual Meeting by a shareholder present in person.
The nominee must also be present in person at the meeting. A vote for a person
who has not been duly nominated pursuant to these requirements is void.
OTHER BUSINESS
Management of the Company knows of no other business to be presented to the
meeting. If other matters should properly come before the Annual Meeting or any
adjournment thereof, a vote may be cast pursuant to the accompanying Proxy in
accordance with the judgment of the person or persons voting the same.
All shareholders are urged to attend the Annual Meeting of Shareholders on April
26, 1999 at 10:30 a.m., at Holiday Inn, 138 South Lenoir Rhyne Boulevard, S.E.
(at Interstate 40, Exit #125), Hickory, North Carolina, and to vote your shares
in person. Even if you plan to attend, please sign and return your Proxy
promptly. A Proxy may be revoked at any time before it is voted, and the giving
of a Proxy will not affect the right of a shareholder to attend the meeting and
vote in person.
By Order of the Board of Directors
BANK OF GRANITE CORPORATION
/s/ Kirby A. Tyndall
Granite Falls, North Carolina KIRBY A. TYNDALL
March 22, 1999 Secretary
I - 14
17
MANAGEMENT'S DISCUSSION
AND ANALYSIS, AND
AUDITED FINANCIAL
STATEMENTS
II - 1
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's Discussion and Analysis is provided to assist in understanding and
evaluating the Company's results of operations and financial condition. The
following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. In 1987, the
Bank of Granite Corporation (the Company") was formed under a plan whereby all
previously issued shares of Bank of Granite (the "Bank") stock were exchanged
for shares of the Company's stock. The Bank then became a wholly-owned
subsidiary of the Company. On November 5, 1997, the Company acquired GLL &
Associates, Inc. ("GLL"), a mortgage bank, through a merger in which the Company
exchanged its common stock for all of the shares of GLL. The merger was
accounted for as a pooling of interests. Therefore, amounts for all periods
include GLL as if GLL had been merged with the Company for all such periods.
Prior to the merger, GLL had elected to be taxed as a Subchapter S Corporation
under the Federal Internal Revenue Code, whereby GLL's earnings were taxable to
its owners. Because of this election, GLL did not provide for income taxes on
earnings taxable to its owners. Therefore, no income taxes have been provided on
earnings prior to the merger date. Income taxes have been provided on GLL's
earnings subsequent to the merger date. All information presented is
consolidated data unless otherwise specified. In addition, amounts per share
have been adjusted to reflect the 5-for-4 stock split paid May 29, 1998.
RESULTS OF OPERATIONS
The following discussion relates to operations for the year ended December 31,
1998 compared to the year ended December 31, 1997, the year ended December 31,
1997 compared to the year ended December 31, 1996, and the year ended December
31, 1996 compared to the year ended December 31, 1995.
1998 COMPARED TO 1997
In 1998, the Company produced strong earnings despite a significant third
quarter loan charge that ended the Company's record of successive earnings
increases. This unusual loan charge related to one borrower and is not believed
to be indicative of any pervasive problem within the loan portfolio. Despite the
loan charge of $1,882,995 after tax, the Company nevertheless managed to return
2.39% on average assets and 13.35% on average equity. However, net income for
1998 decreased to $13,448,435, or $1.17 per share, compared to $14,431,187, or
$1.26 per share, in 1997. Excluding the third quarter loan charge, net income
increased 6.2% primarily because of strong mortgage business and the Bank's
continued successful efforts to increase net interest income over the previous
period. Net interest income increased to $31,501,215 compared to $28,568,306 in
1997. Interest income increased $3,549,237 primarily due to increases in asset
volumes. Approximately $3,833,000 of the increase in interest income was
attributable to increases in asset volumes slightly offset by a decrease of
$284,000 attributable to lower rates. Gross loans increased $27,744,691 or 7.8%,
most of which were GLL's mortgage loans in process. Interest expense increased
$616,328 of which approximately $1,419,000 was attributable to deposit volume
growth partially offset by a decrease of approximately $803,000 attributable to
a lower rates. Other income increased 6.8% to $8,663,553 compared to $8,110,184
in 1997. Excluding 1997 nonrecurring gains from the sales of mortgage servicing
rights, other income increased 15.4%. The increase in service charges on deposit
accounts of $279,235 resulted from growth in transaction deposit accounts.
During 1998, the Company continued to place emphasis on nontraditional banking
services such as annuities, leasing, mortgage and small business administration
loan originations. In focusing on these products, the Company experienced
volatility in earnings commonly associated with such products. Other service
fees and commissions increased $669,248 which was primarily due to increases in
fees from mortgage originations and annuity sales, both of which tend to rise
during periods of falling interest rates. For the year ended December 31, 1998,
the Company earned $3,502,808 in fees from the origination of mortgage loans
compared to $2,863,942 in 1997. Other income decreased by $393,152 primarily
because 1997 included a $601,135 nonrecurring gain, before taxes, from the sale
of GLL's mortgage servicing rights. Another important source of nontraditional
income is gains from sales of the guaranteed portions of small business
administration ("SBA") loans. Such sales of SBA loans generated income of
$421,249 in 1998 compared to $242,898 in 1997. Other expenses, or overhead,
increased $1,716,754 or 12.2% over the previous year. Salaries increased
$1,265,467 or 18.3%. The Bank's salaries increased 5.4% while GLL's salaries
increased 54.8% because of increased mortgage origination activity. Occupancy
increased $153,358 primarily because of two new Bank offices and three new GLL
offices. Equipment expenses increased $220,553 primarily because of depreciation
of planned technology replacements and expenses related to year 2000 transition
(see "Year 2000 Readiness" below). The Company plans to complete its ATM network
upgrade and install a teller automation
II - 2
19
system in 1999. Other noninterest expenses increased $161,094, or 4%. Excluding
1997 nonrecurring GLL merger costs of $405,678, before taxes, other expenses
rose 15.5% in 1998, primarily because of expenses associated with two new
banking offices, a new cash flow manager product and increased mortgage loan
production.
1997 COMPARED TO 1996
Net income for 1997 was $14,431,187, or $1.26 per share, compared to
$13,365,872, or $1.17 per share, in 1996. This 8% increase in net income
resulted primarily from the Bank's continued successful efforts to increase net
interest income over the previous period. Net interest income increased to
$28,568,306 compared to $25,530,554 in 1996. The $3,363,791 increase in interest
income was attributable to increases in loan volume. Approximately $3,198,000 of
the increase in interest income was attributable to increases in volume and
$165,000 to increases in interest rates. Gross loans increased $28,101,441 or
8.5%. Interest expense increased $326,039 of which approximately $495,000 was
attributable to deposit growth partially offset by a decrease of approximately
$169,000 attributable to a lower cost of funds. Other income increased 12% to
$8,110,184 compared to $7,239,670 in 1996. The increase in service charges on
deposit accounts of $165,809 results from growth in deposit accounts. During
1997 the Company continued to place emphasis on nontraditional banking services
such as annuities, leasing, mortgage and small business administration loan
originations. In focusing on these products, the Company experienced volatility
in earnings commonly associated with such products. Other service fees and
commissions increased $393,984 which was primarily due to increases in fees from
annuity sales and mortgage originations, both of which tend to rise during
periods of falling interest rates. For the year ended December 31, 1997, the
Company earned $2,863,942 from the origination of mortgage loans compared to
$2,655,198 in 1996. Other income increased by $481,112 which was primarily
attributable to a $601,135 nonrecurring gain, before taxes, from the sale of
GLL's mortgage servicing portfolio. The gain was partially offset by a $194,465
decrease in fees from sales of the guaranteed portions of small business
administration ("SBA") loans. Such sales of SBA loans generated fees of $242,898
in 1997 compared to $437,363 in 1996. Other expenses, or overhead, increased
$1,755,055 or 14.2% over the previous year. Salaries increased $684,718 or 11%
as a result of general salary increases and the employment of additional staff
for a new office and to service a new loan product. Both the Bank and GLL each
plan to open two new offices in 1998. Equipment expenses increased $136,322
primarily because of depreciation of new digital imaging technology. The Company
plans to replace its ATM network and to install a teller automation system over
the next two years. Other noninterest expenses increased $869,700, or 27.2%,
including nonrecurring costs of $405,678, before taxes, in expenses related to
the merger of GLL.
1996 COMPARED TO 1995
Net income for 1996 was $13,365,872, or $1.17 per share, compared to
$12,044,972, or $1.06 per share, in 1995. This 11% increase in net income
resulted primarily from the Bank's continued successful efforts to increase net
interest income over the previous period. Net interest income increased to
$25,530,554 compared to $24,265,968 in 1995. The increase in interest income was
attributable to increases in loan volume. Approximately $2,748,000 of the
increase in interest income was attributable to increases in volume, which was
partially offset by a decrease in interest rates which amounted to approximately
$348,000. Gross loans increased $16,964,410 or 5.4%. Interest expense increased
$1,134,973 of which approximately $1,163,000 was attributable to deposit growth
slightly offset by a decrease in interest expense of approximately $28,000
attributable to a minor decline in the cost of funds. Other income increased
17.8% to $7,239,670 compared to $6,145,112 in 1995. The increase in service
charges on deposit accounts of $264,293 results from growth in deposit accounts.
During 1996 the Company continued to place emphasis on non-traditional banking
services such as annuities, leasing, originating mortgage loans and small
business administration loans. In focusing on these products the Company
experienced volatility in earnings commonly associated with such products. Other
service fees and commissions increased $294,865 which was primarily due to
increases in annuity sales and fees from mortgage originations. Annuity sales
and mortgage originations fluctuate with interest rate changes. For the year
ended December 31, 1996, the Company earned $2,655,198 from the origination of
mortgage loans compared to $2,430,472 in 1995. Other noninterest income
increased by $320,362 which was primarily attributable to increases in the sales
of the guaranteed portions of small business administration loans. Such sales
generated $437,363 in 1996 compared to $153,287 in 1995. Net gains on securities
of $215,038 resulted from securities being called at a premium as well as the
sale of equity investments at the holding company level. Other expenses
increased $713,419 or 6.1% over the previous year. Salaries and benefits
increased $864,653 or 13% as a result of general salary increases, the cost
II - 3
20
of providing related benefits, and the employment of additional staff for a new
office as well as additional staff to effectively service loan and deposit
growth. The Federal Deposit Insurance Corporation insurance premiums decreased
to $2,000. During 1996 the FDIC assessment rate was reduced from $0.04 per $100
of deposits to $0.00 per $100 of deposits. The reduction in rate reflects the
bank's strength and the Bank Insurance Fund reaching its recapitalization level
of 1.25% of insured deposits held in commercial banks. The $2,000 fee reflects a
minimum regulatory assessment.
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 $31,501,215, $28,568,306, and $25,530,554
for 1998, 1997 and 1996 respectively, representing an increase of 10.3% for 1998
over 1997, 11.9% for 1997 over 1996, and 5.2% for 1996 over 1995. 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
for the years ended December 31,
1998 1997 1996
------------------------------- ----------------------------- -----------------------------
INTEREST Interest Interest
AVERAGE AVERAGE INCOME/ Average Average Income/ Average Average Income/
dollars in thousands BALANCE RATE EXPENSE Balance Rate Expense Balance Rate Expense
ASSETS
Loans (1) $ 373,447 10.41% $ 38,894 $347,435 10.43% $ 36,246 $316,139 10.44% $ 33,007
Taxable securities 69,309 6.23% 4,318 66,986 6.47% 4,331 70,384 6.14% 4,323
Nontaxable securities (2) 65,506 8.02% 3,414 61,997 8.07% 3,253 57,063 8.15% 3,022
Federal funds sold 18,058 5.27% 951 3,516 5.63% 198 5,533 5.66% 313
--------- -------- -------- -------- -------- --------
Total interest-earning assets 526,320 9.04% 47,577 479,934 9.17% 44,028 449,119 9.05% 40,665
-------- -------- --------
Cash and due from banks 40,692 25,152 25,083
All other assets (4,098) 7,778 10,472
--------- -------- --------
Total assets $ 562,914 $512,864 $484,674
========= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Interest-bearing deposits $ 349,915 4.29% 15,018 $328,528 4.44% 14,598 $315,869 4.48% 14,166
Federal funds purchased and
securities sold under
agreements to repurchase 3,741 4.92% 184 4,298 5.07% 218 3,954 4.75% 188
Other borrowings 19,917 4.39% 874 10,289 6.26% 644 11,624 6.70% 779
--------- -------- -------- -------- -------- --------
Total interest-bearing liabilities 373,573 4.30% 16,076 343,115 4.51% 15,460 331,447 4.57% 15,133
-------- -------- --------
Noninterest-bearing deposits 84,596 77,240 70,014
Other liabilities 3,992 3,475 4,517
Shareholders' equity 100,753 89,034 78,696
--------- -------- --------
Total liabilities and
shareholders' equity $ 562,914 $512,864 $484,674
========= ======== ========
Net yield on earning assets and
net interest income (2)(3) 6.33% $ 31,501 6.32% $ 28,568 6.05% $ 25,532
======== ======== ========
Interest rate spread (4) 4.74% 4.66% 4.48%
- -------------------
(1) Non-accrual loans have been included.
(2) Yields on tax-exempt investments have been adjusted to tax equivalent basis
using 35% for 1998, 1997 and 1996.
(3) Net yield on earning assets is computed by dividing net interest earned by
average earning assets.
(4) The interest rate spread is the interest earning assets rate less the
interest earning liabilities rate.
II - 4
21
Changes in interest income and interest expense can result from changes in both
volume and rates. The following table sets 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.
INTEREST RATE AND VOLUME VARIANCE ANALYSIS
for the years ended December 31,
1998 COMPARED TO 1997 1997 compared to 1996
CHANGE Change
ATTRIBUTABLE TO Attributable to
---------------------- ----------------------
dollars in thousands VOLUME(1) RATE(1) TOTAL Volume(1) Rate(1) Total
Loans $ 2,711 $ (63) $ 2,648 $ 3,266 $ (27) $ 3,239
Taxable securities 147 (160) (13) (214) 222 8
Nontaxable securities 183 (22) 161 260 (29) 231
Federal funds sold 792 (39) 753 (114) (1) (115)
------- ----- ------- ------- ----- -------
Total interest-earning assets $ 3,833 $(284) $ 3,549 $ 3,198 $ 165 $ 3,363
======= ===== ======= ======= ===== =======
Interest-bearing deposits $ 934 $(514) $ 420 $ 565 $(133) $ 432
Federal funds purchased and
securities sold under
agreements to repurchase (28) (6) (34) 17 13 30
Other borrowings 513 (283) 230 (87) (48) (135)
------- ----- ------- ------- ----- -------
Total interest-bearing liabilities $ 1,419 $(803) $ 616 $ 495 $(168) $ 327
======= ===== ======= ======= ===== =======
- -------------------
(1) The rate/volume variance for each category has been allocated equally on a
consistent basis between rate and volume variances.
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISKS
The objectives of the Company's liquidity management policy include providing
adequate funds to meet the needs of depositors and borrowers at all times, as
well as providing funds to meet the basic needs for on-going operations of the
Company and regulatory requirements. Liquidity requirements of the Company are
met primarily through two categories of funds. The first is core deposits which
includes demand deposits, savings accounts and certificates of deposits. The
Company considers these to be a stable portion of the Company's liability mix
and the result of on-going stable consumer and commercial banking relationships.
At December 31, 1998 core deposits totaled $366,593,993 or 79.9% of the
Company's total deposits.
The other principal method of funding utilized by the Company is through large
denomination certificates of deposit, federal funds purchased, repurchase
agreements and other short-term borrowings. The Company's policy is to emphasize
core deposit growth rather than growth through purchased or brokered liabilities
as the cost of purchased or brokered liabilities are greater.
The majority of the Company's deposit mix are rate-sensitive instruments with
rates which tend to fluctuate with market rates. This, coupled with the
Company's short-term certificates of deposit, has increased the opportunities
for deposit repricing. The Company places great significance on monitoring and
managing the Company's asset/liability position. The Company's policy of
managing its interest margin (or net yield on interest-earning assets) is to
maximize net interest income while maintaining a stable deposit base. The
Company's deposit base is not generally subject to volatility experienced in
national financial markets in recent years; however, the Company does realize
the importance of minimizing such volatility while at the same time maintaining
and improving earnings. A common method used to manage interest rate sensitivity
is to measure, over various time periods, the difference or gap between the
volume of interest-earning assets and interest-bearing liabilities repricing
over a specific time period. However, this method addresses on the magnitude of
funding mismatches and does not address the magnitude or relative timing of rate
changes. Therefore, management prepares on a regular basis earnings projections
based on a range of interest rate scenarios of rising, flat and declining rates
in order to more accurately measure interest rate risk.
II - 5
22
Interest-bearing liabilities and the loan portfolio are generally repriced to
current market rates. The Company's balance sheet is asset-sensitive, meaning
that in a given period there will be more assets than liabilities subject to
immediate repricing as the market rates change. Because most of the Company's
loans are at variable rates, they reprice more rapidly than rate sensitive
interest-bearing deposits. During periods of rising rates, this results in
increased net interest income. The opposite occurs during periods of declining
rates.
INTEREST RATE SENSITIVITY (GAP ANALYSIS)
As of December 31, 1998
Interest Sensitive Within Non-sensitive
---------------------------------------- Total or Sensitive
1 to 91 to 181 to Within Beyond
dollars in thousands 90 Days 180 Days 365 Days 1 Year 1 Year Total
INTEREST-EARNING ASSETS
Interest-bearing due from banks $ 175 $ 175 $ 175
Federal funds sold 38,600 38,600 38,600
Securities (at amortized cost) (1):
U.S. Treasury 1,000 $ 1,998 2,998 $ 10,033 13,031
U.S. Government agencies -- 2,000 2,000 47,658 49,658
States and political subdivisions 945 $ 4,879 150 5,974 67,804 73,778
Other (including equity securities) 475 365 1,668 2,508 8,770 11,278
Loans (gross):
Real estate - Construction 31,235 -- 251 31,486 911 32,397
Real estate - Mortgage 164,051 364 2,155 166,570 21,597 188,167
Commercial, financial and agricultural 118,108 979 1,635 120,722 9,132 129,854
Consumer 10,519 841 1,650 13,010 22,724 35,734
All other 111 -- -- 111 6 117
-------- -------- -------- -------- -------- --------
Total interest-earning assets $365,219 $ 7,428 $ 11,507 $384,154 $188,635 $572,789
======== ======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Savings and NOW accounts $ 93,708 $ 93,708 $ 93,708
Money market accounts 29,970 29,970 29,970
Time deposits of $100,000 or more 60,203 $ 16,296 $ 10,054 86,553 $ 5,550 92,103
Other time deposits 47,845 51,129 34,164 133,138 17,810 150,948
Federal funds purchased and securities
sold under agreements to repurchase 1,538 1,538 1,538
Other borrowings 36,357 36,357 36,357
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities $269,621 $ 67,425 $ 44,218 $381,264 $ 23,360 $404,624
======== ======== ======== ======== ======== ========
Interest sensitivity gap $ 95,598 $(59,997) $(32,711) $ 2,890
Cumulative interest sensitivity gap $ 95,598 $ 35,601 $ 2,890 $ 2,890
Interest earning-assets as a percentage
of interest-bearing liabilities 135% 11% 26% 101%
======== ======== ======== ========
- ------------------
(1) Interest sensitivity periods for debt securities are based on contractual
maturities.
The Bank uses several modeling techniques to measure interest rate risk
including the gap analysis previously discussed, the simulation of net interest
income under varying interest rate scenarios and the theoretical impact of
immediate and sustained rate changes referred to as "rate shocks." The following
table summarizes the estimated theoretical impact on the Bank's tax equivalent
net interest income and market value of equity from hypothetical "rate shocks"
of plus and minus 1%, 2%, 3% and 4% as compared to the estimated theoretical
impact of rates remaining unchanged. The prospective effects of these
hypothetical interest rate changes, is based upon numerous assumptions including
relative and estimated levels of key interest rates. "Rate shock" modeling is of
limited usefulness because it does not take into account the pricing strategies
management would undertake in response to the depicted sudden and sustained rate
changes. Additionally, management does not believe rate changes of the magnitude
described are likely in the forecast period presented.
II - 6
23
dollars in thousands
Estimated Resulting Theoretical Estimated Resulting Theoretical
Hypothetical Immediate Tax Equivalent Net Interest Income Market Value of Equity
and Sustained Rate Change Amount % Change Amount % Change
+4% $36,269 9.6% $123,475 -4.2%
+3% 35,468 7.2% 124,748 -3.2%
+2% 34,673 4.7% 126,062 -2.2%
+1% 33,884 2.4% 127,422 -1.1%
0% 33,101 -- 128,837 --
-1% 32,325 -2.3% 130,314 1.1%
-2% 31,555 -4.7% 131,864 2.3%
-3% 30,790 -7.0% 133,500 3.6%
-4% 30,032 -9.3% 135,238 5.0%
The following table presents the maturity distribution of the Company's loans by
type, including fixed rate loans.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
As of December 31, 1998
Within One to Five
One Five Years or
dollars in thousands Year Years More Total
Real estate - Construction $ 14,552 $ 10,981 $ 6,864 $ 32,397
Real estate - Mortgage 55,846 55,643 76,678 188,167
Commercial, financial and agricultural 75,778 47,341 6,735 129,854
Consumer 9,147 25,506 1,081 35,734
All other 84 18 15 117
-------- -------- ------- --------
Total $155,407 $139,489 $91,373 $386,269
======== ======== ======= ========
Predetermined rate, maturity
greater than one year $ 40,502 $ 12,619 $ 53,121
Variable rate or maturing within
one year $155,407 98,987 78,754 333,148
-------- -------- ------- --------
Total $155,407 $139,489 $91,373 $386,269
======== ======== ======= ========
The Company's rate paid on interest-bearing deposits declined to 4.29% in 1998
compared to 4.44% in 1997. The Company's deposit growth was primarily reflected
in time deposits, which increased $21,936,195. Rate sensitive consumers chose to
place funds in higher yielding time deposit accounts in anticipation of stable
to falling rates. Increased customer awareness of interest rates increases the
importance of rate management by the Company. The Company's management
continuously monitors market pricing, competitor rates, and internal interest
rate spreads to maintain the Company's growth and profitability. Deposits
continue to be the principal source of funds for continued growth, so the
Company attempts to structure its rates so as to promote deposit and asset
growth while at the same time increasing the overall profitability of the
Company. The daily average amounts of deposits of the Bank are summarized below.
AVERAGE DEPOSITS
for the years ended December 31,
dollars in thousands 1998 1997 1996
Non-interest-bearing deposits $ 84,596 $ 77,240 $ 70,014
Interest-bearing deposits 349,915 328,528 315,869
-------- -------- --------
Total $434,511 $405,768 $385,883
======== ======== ========
The preceding table includes certificates of deposits $100,000 and over which at
December 31, 1998 totaled approximately $92,103,000. The following table
presents the maturities of these time deposits of $100,000 or more.
II - 7
24
MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
As of December 31, 1998
Within Three to Six to Within One to
Three Six Twelve One Five
dollars in thousands Months Months Months Year Years Total
Time deposits of $100,000 or more $60,203 $16,296 $10,054 $86,553 $5,550 $92,103
======= ======= ======= ======= ====== =======
CAPITAL RESOURCES
Funding for the future growth and expansion of the Company is dependent upon
earnings of the subsidiaries. As of December 31, 1998, the Company's ratio of
total capital to risk-adjusted assets was 26.2%. The Company is one of the
soundest and most strongly capitalized in the nation, and fully expects to be
able to meet future capital needs caused by growth and expansion as well as
regulatory capital requirements. The Company is not aware of any current
recommendation by regulatory authorities which if implemented would materially
affect the Company's liquidity, capital resources or operations.
LOANS
Historically, the Company makes loans within its market area. It makes consumer
and commercial loans through the Bank and mortgage loans through GLL. The Bank
generally considers its market to be Caldwell, Catawba and Burke counties of
North Carolina. GLL considers its market area to be the central and southern
Piedmont and Catawba Valley regions of North Carolina. Total loans at December
31, 1998 were $385,590,204. This compares compares with $357,845,513 at December
31, 1997, an increase of $27,744,691 or 7.75%. The Company places emphasis on
consumer based installment loans and commercial loans to small and medium sized
business. The Company has a diversified loan portfolio with no concentrations to
any one borrower, industry or market region. The amounts and types of loans
outstanding for the past five years ended December 31 are shown on the following
table.
LOANS
As of December 31,
1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------- -------------------
% OF % of % of % of % of
TOTAL Total Total Total Total
dollars in thousands AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
LOANS
Real estate -
Construction $ 32,397 8.4% $ 37,227 10.4% $ 32,234 9.8% $ 27,108 8.7% $ 20,728 7.4%
Mortgage 188,167 48.7% 155,805 43.5% 143,243 43.3% 129,791 41.3% 109,044 38.9%
Commercial,
financial and
agricultural 129,854 33.6% 126,524 35.3% 116,469 35.2% 120,537 38.5% 117,002 41.8%
Consumer 35,734 9.3% 38,523 10.7% 38,214 11.6% 35,620 11.4% 33,156 11.8%
All other 117 -- 460 0.1% 194 0.1% 241 0.1% 419 0.1%
-------- -------- -------- -------- --------
Total loans 386,269 100.0% 358,539 100.0% 330,354 100.0% 313,297 100.0% 280,349 100.0%
-------- -------- -------- -------- --------
Deferred origination
fees, net (679) (693) (610) (518) (407)
-------- -------- -------- -------- --------
Total loans, net of
deferred fees $385,590 $357,846 $329,744 $312,779 $279,942
======== ======== ======== ======== ========
II - 8
25
LOANS AND NONPERFORMING ASSETS
As of December 31,
dollars in thousands 1998 1997 1996 1995 1994
NONPERFORMING ASSETS
Nonaccrual loans $ 639 $ 728 $ 409 $231 $ 744
Loans past due 90 days or more
and still accruing interest 2,955 1,899 649 441 1,231
Restructured loans -- -- -- -- 253
Foreclosed properties 290 79 -- -- --
------ ------ ------ ---- ------
Total $3,884 $2,706 $1,058 $672 $2,228
====== ====== ====== ==== ======
Any loans classified by regulatory examiners as loss, doubtful, substandard or
special mention that have not been disclosed hereunder, or under "Loans" or
"Asset Quality" narrative discussions do not (i) represent or result from trends
or uncertainties that management expects will materially impact future operating
results, liquidity or capital resources, or (ii) represent material credits
about which management is aware of any information that causes management to
have serious doubts as to the ability of such borrowers to comply with the loan
repayment terms.
Real estate loans comprised 57.1% of the portfolio in 1998 compared to 53.9% in
1997. Commercial loans comprised 33.6% of the portfolio in 1998 compared to
35.3% in 1997, while consumer loans comprised 9.3% in 1998 compared to 10.7% in
1997. Commercial loans of $129,854,299, consumer loans of $35,734,161 and real
estate mortgage loans of $188,166,947 are loans for which the principal source
of repayment is derived from the ongoing cash flow of the business. Real estate
construction loans of $32,397,016 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.
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or, as a practical
matter, at the loan's observable market value or fair value of the collateral if
the loan is collateral dependent. Most of the loans measured by fair value of
the underlying collateral are commercial loans others consists of small balance
homogenous loans and are measured collectively. The Bank classifies a loan
impaired when, based on current information and events, it is probable that a
creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. At December 31, 1998 and 1997, the recorded
investment in loans that are considered to be impaired was $826,806 ($636,041 of
which was on a nonaccrual basis) and $866,837 ($728,308 of which was on a
nonaccrual basis), respectively. The average recorded balance of impaired loans
during 1998 and 1997 was not significantly different from the respective ending
balances at December 31, 1998 and 1997. The related allowance for loan losses
for these loans was $250,979 and $560,132 at December 31, 1998 and 1997,
respectively. For the years ended December 31, 1998 and 1997, the Bank
recognized interest income on those impaired loans of approximately $16,467 and
$19,012, respectively.
II - 9
26
Management realizes that general economic trends greatly affect loan losses and
no assurances can be made that further charges to the loan loss allowance may
not be significant in relation to the amount provided during a particular period
or that further evaluation of the loan portfolio based on conditions then
prevailing may not require sizable additions to the allowance, thus
necessitating similarly sizable charges to operations. The allowance for loan
losses was 1.21%, 1.48% and 1.48% of net loans outstanding at December 31, 1998,
1997 and 1996, respectively, which was consistent with both management's desire
for strong reserves and the credit quality ratings of the loan portfolio. The
ratio of net charge-offs during the year to average loans outstanding during the
period were 1.31%, 0.22% and 0.21% at December 31, 1998, 1997 and 1996,
respectively. These ratios reflect management's conservative lending, and
effective efforts to recover credit losses.
The following table presents and an analysis of the allowance for loan losses.
CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
for the years ended December 31,
dollars in thousands 1998 1997 1996 1995 1994
Balance at beginning of year $5,203 $4,794 $4,645 $3,996 $3,603
Loans charged off:
Real estate 228 70 -- -- --
Commercial, financial and agricultural 4,458 452 533 297 136
Credit cards and related plans 20 19 17 8 10
Installment loans to individuals 382 308 192 288 246
------ ------ ------ ------ ------
Total charge-offs 5,088 849 742 593 392
------ ------ ------ ------ ------
Recoveries of loans previously charged off:
Real estate 5 4 -- -- --
Commercial, financial and agricultural 119 3 27 40 57
Credit cards and related plans 5 3 5 5 1
Installment loans to individuals 54 73 39 80 23
------ ------ ------ ------ ------
Total recoveries 183 83 71 125 81
------ ------ ------ ------ ------
Net charge-offs 4,905 766 671 468 311
------ ------ ------ ------ ------
Additions charged to operations 4,322 1,175 820 1,117 704
------ ------ ------ ------ ------
Balance at end of year $4,620 $5,203 $4,794 $4,645 $3,996
====== ====== ====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year 1.31% 0.22% 0.21% 0.16% 0.12%
In the third quarter of 1998, the Company announced that one of the Bank's
borrowers, a textile related plant and its owners, was unable to repay loans
which the Bank had made for a period extending over several years. The Bank had
hoped that this borrower's business would improve. The borrower managed to
generate positive cash flows in mid-summer, but the positive cash flows proved
to be short-lived. The Bank increased its loan loss reserves by $3,046,425 and
wrote off related accrued interest of $91,900 resulting in an aggregate charge
to earnings of $3,138,325 before tax, or $1,882,995 after tax, or 16.4 cents per
share. The Bank also charged off its estimated loss on the loans to this
borrower. The textile plant's assets were sold in the fourth quarter. Management
assesses the likelihood of any further recovery of this loss as remote. Because
this loan charge was related to one borrower and its financial circumstances,
management does not believe the charge is indicative of any pervasive problem
within the loan portfolio.
II - 10
27
The following table presents the allocation of the allowance for loan losses by
category.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31, 1998
1998 1997 1996 1995 1994
----------------- ----------------- ------------------ ------------------ ------------------
% OF % of % of % of % of
TOTAL Total Total Total Total
dollars in thousands AMOUNT LOANS Amount Loans Amount Loans Amount Loans Amount Loans
Real estate $ 913 57.1% $1,115 53.9% $1,378 53.1% $1,259 50.0% $1,106 46.3%
Commercial,
financial and
agricultural 3,058 33.6% 3,241 35.3% 2,718 35.2% 2,717 38.5% 2,398 41.8%
Consumer 451 9.3% 615 10.7% 518 11.6% 498 11.4% 400 11.8%
All other -- -- -- 0.1% -- 0.1% -- 0.1% -- 0.1%
Unallocated 198 N/A 232 n/a 180 n/a 171 n/a 92 n/a
------ ------ ------ ------ ------
Total loans $4,620 100.0% $5,203 100.0% $4,794 100.0% $4,645 100.0% $3,996 100.0%
====== ====== ====== ====== ======
INVESTMENT SECURITIES
At December 31, 1998, the securities classified as available for sale, carried
at market value, totaled $61,954,639 with an amortized cost of $60,690,796.
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 1.89 years, U.S.
Government Agencies with an average life of 3.94 years, and other bonds, notes
and debentures with an average life of 4.32 years. There have been no transfers
or sales of securities classified as held to maturity. Securities classified as
held to maturity totaled $87,053,892 with a market value of $89,541,513 at
December 31, 1998. Management determined that it has both the ability and intent
to hold those securities classified as investment securities until maturity.
Securities held to maturity consist of U.S. Treasury Notes with an average life
of 1.98 years, U.S. Government Agencies with an average life of 4.14 years, and
municipal bonds with an average life of 5.37 years. During 1998, $29,748,782 in
securities matured and $300,000 in proceeds were collected from securities sold.
The proceeds from maturities were reinvested along with funds in excess of loan
demand.
CONTRACTUAL MATURITIES AND YIELDS OF DEBT SECURITIES
As of December 31, 1998
After One Year but After Five Years but
Within One Year Within Five Years Within Ten Years After Ten Years
---------------- ------------------ -------------------- -----------------
dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield
Available for sale: (1)
U.S. Treasury $1,999 6.63% $ 8,520 6.20%
U.S. government agency 1,000 5.89% 24,791 5.83% $13,103 6.07%
Other 2,508 7.10% 3,528 8.09% 578 9.23% $ 949 7.34%
------ ------- ------- -------
Total $5,507 6.71% $36,839 6.13% $13,681 6.20% $ 949 7.34%
====== ======= ======= =======
Held to maturity:
U.S. Treasury $ 999 5.34% $ 1,513 6.00%
U.S. government agency 1,000 7.01% 4,489 5.81% $ 5,275 6.05%
State and political subdivisions(2) 5,974 8.47% 32,080 8.32% 24,531 8.25% $11,193 7.68%
------ ------- ------- -------
Total $7,973 7.89% $38,082 7.93% $29,806 7.86% $11,193 7.68%
====== ======= ======= =======
- ----------------
(1) Securities available for sale are stated at amortized cost.
(2) Yields on tax-exempt investments have been adjusted to tax equivalent basis
using 35% for 1998.
II - 11
28
YEAR 2000 READINESS
The Year 2000 issue is the result of computer programs that were written to
limit data indicating "years" to two, rather than four, digits. For example,
such programs may mathematically recognize the year 1900 and the year 2000 as
the same "00" year. If left unaddressed, this condition could possibly result in
program failures or miscalculations, and could potentially cause disruptions of
operations, including, among other things, temporary inabilities to process
transactions, send statements or engage in similar normal business activities.
All levels of the Company's management and its Board of Directors are aware of
the technology challenges presented by the Year 2000 century change and, if
neglected, the potentially serious effects on the technologies of the Company
and its customers. The Company has an active Year 2000 project team under the
guidance of an independent technology consulting firm. The Company's Year 2000
readiness plan includes steps to (1) identify, assess, evaluate, test and
validate its own date-sensitive systems, including the development of
contingency and remediation plans, (2) amend its loan underwriting policies to
include assessments, as appropriate, regarding Year 2000 readiness by commercial
loan customers, (3) offer education to customers regarding Year 2000 issues in
their own lives and businesses, and (4) inform the Company's customers as to the
Company's Year 2000 compliance process. Although the Company relies entirely
upon outside vendors for its computer software, hardware and its security and
environmental equipment, all of the Company's systems identified as being
date-sensitive are being or will be evaluated for Year 2000 compliance.
During 1998, the Company substantially completed the successful testing of its
significant systems identified as "mission critical" or critical to conducting
its day-to-day banking businesses. The term "systems" includes both hardware and
software. Examples of the mission critical hardware systems identified and
successfully tested include mainframe computers, imaging and item processing
equipment, personal computers, network file servers, automated teller machines
or ATM's and security systems. Examples of the mission critical software systems
(or applications) identified and successfully tested include operating software
for the mainframe and network computers, software related to loans, deposits,
general ledger, ATM network and wire transfer, and third-party software used for
various purposes. Testing of systems with lower priorities is planned for early
1999, which should allow ample time in 1999 for validation and follow-up. The
Company is also developing contingency plans for certain computer processes,
including the use of alternative systems, the extension of operating hours and
the manual processing of certain operations.
To inform and educate customers about the status of its Year 2000 readiness, the
Company hosted two Year 2000 seminars in March 1998 and plans to host two
additional seminars in February 1999. The seminars provide an opportunity not
only for the Company to share information about its Year 2000 readiness, but
also to share general information about the banking industry and ideas to help
customers in their efforts to make their businesses ready for the Year 2000. In
1998, the Bank mailed its deposit customers a summary of its Year 2000 readiness
status. The Bank also posted this summary in its office lobbies and on its
internet web site. The Bank plans to provide similar updates during 1999.
Also during 1998, the Bank made progress in its assessments of the Year 2000
readiness of its significant commercial loan customers. These assessments will
continue to be performed and monitored throughout 1999. The Bank includes these
assessments as a part of its analysis of the adequacy of its loan loss reserves
and may determine that additional reserves in 1999 are prudent based upon
changes in these assessments.
During 1998, the Company spent approximately $86,000 on its Year 2000
preparations, of which approximately $22,000 were capitalized new equipment and
software and approximately $64,000 were expensed against 1998 earnings. The
Company estimates that its total costs of Year 2000 compliance will be
approximately $125,000 to $175,000, of which an estimated $37,000 will be
capitalized in 1999 and an estimated $28,000 will be charged to operations in
1999. In providing these amounts, the Company has excluded the technology
upgrade costs that were planned in the normal course of business and not
necessarily in response to its Year 2000 compliance plan. For example, the
Company's routine technology upgrades for 1997, 1998 and 1999 included a new
imaging system to replace its aging item processing system, new ATM's and
personal computer file servers throughout those respective networks, a new
teller automation system throughout its offices, and numerous personal computer
hardware and software systems previously scheduled for replacement. The Company
routinely makes investments in technology in its efforts to improve customer
service and to efficiently manage its product and service delivery systems.
II - 12
29
INFLATION
Since the assets and liabilities of a bank are primarily monetary in nature
(payable in fixed, determinable amounts), the performance of a bank is affected
more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in
rates may not be the same.
While the effect of inflation is normally not as significant as is the influence
on those businesses which have large investments in plant and inventories, it
does have an effect. There are normally corresponding increases in the money
supply, and banks will normally experience above average growth in assets, loans
and deposits. Also, general increases in the prices of goods and services will
result in increased operating expenses.
DISCLOSURES ABOUT YEAR 2000 READINESS AND FORWARD LOOKING STATEMENTS
The discussions included in this document contain year 2000 readiness
disclosures within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998 and forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. For the purposes of these
discussions, any statements that are not statements of historical fact may be
deemed to be forward looking statements. The accuracy of such year 2000
readiness disclosures and forward looking statements could be affected by such
factors as, including but not limited to, the financial success or changing
strategies of the Company's customers or vendors, actions of government
regulators, or general economic conditions.
II - 13
30
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders of Bank of Granite Corporation:
We have audited the accompanying consolidated balance sheets of Bank of Granite
Corporation and its subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, comprehensive income,
changes in shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1998
and 1997, and the results of its operations and its cash flows for the each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Hickory, North Carolina
January 22, 1999
================================================================================
STATEMENT OF MANAGEMENT RESPONSIBILITY
Management of Bank of Granite Corporation and its subsidiaries has prepared the
consolidated financial statements and other information contained herein in
accordance with generally accepted accounting principles and is responsible for
its accuracy.
In meeting its responsibility, management relies on internal accounting and
related control systems, which include selection and training of qualified
personnel, establishment and communication of accounting and administrative
policies and procedures, appropriate segregation of responsibilities and
programs of internal audits. These systems are designed to provide reasonable
assurance that financial records are reliable for preparing financial statements
and maintaining accountability for assets, and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute
because of inherent limitations in any internal control system.
Management also recognizes its responsibility to foster a climate in which
corporate affairs are conducted with the highest ethical standards. Bank of
Granite Corporation's policies, furnished to each employee and director,
addresses the importance of open internal communications, potential conflicts of
interest, compliance with applicable laws, including those related to financial
disclosure, the confidentiality of proprietary information and other items.
There is an ongoing program to assess compliance with these policies.
The Audit Committee of Bank of Granite Corporation's Board of Directors consists
solely of outside directors. The Audit Committee meets periodically with
management and the independent auditors to discuss audit, financial reporting
and related matters. Deloitte & Touche LLP and Bank of Granite Corporation's
internal auditors have direct access to the Audit Committee.
JOHN A. FORLINES, JR. KIRBY A. TYNDALL
Chairman and Chief Executive Officer Chief Financial Officer
January 22, 1999 January 22, 1999
II - 14
31
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
ASSETS:
Cash and cash equivalents (Notes 1 and 18):
Cash and due from banks $ 19,518,740 $ 27,707,850
Interest-bearing deposits 175,437 157,507
Federal funds sold 38,600,000 --
------------- -------------
Total cash and cash equivalents 58,294,177 27,865,357
------------- -------------
Investment securities (Notes 1, 3 and 18):
Available for sale, at fair value (amortized cost of $60,690,796 and
$51,285,077 at December 31, 1998 and 1997, respectively) 61,954,639 52,072,834
------------- -------------
Held to maturity, at amortized cost (fair value of $89,541,513 and
$80,733,959 at December 31, 1998 and 1997, respectively) 87,053,892 79,036,384
------------- -------------
Loans (Notes 4 and 18) 385,590,204 357,845,513
Allowance for loan losses (Notes 1 and 5) (4,619,586) (5,202,578)
------------- -------------
Net loans 380,970,618 352,642,935
------------- -------------
Premises and equipment, net (Notes 1, 6 and 11) 10,095,628 9,583,429
Accrued interest receivable 5,104,174 4,972,654
Other assets 2,701,914 2,806,140
------------- -------------
Total assets $ 606,175,042 $ 528,979,733
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits (Note 18):
Demand $ 91,967,287 $ 80,637,746
NOW accounts 69,804,107 62,792,730
Money market accounts 29,970,288 25,697,397
Savings 23,904,317 23,848,043
Time deposits of $100,000 or more 92,103,176 92,588,469
Other time deposits 150,947,994 129,011,799
------------- -------------
Total deposits 458,697,169 414,576,184
------------- -------------
Federal funds purchased and securities sold
under agreements to repurchase (Notes 12 and 18) 1,538,350 8,882,016
Other borrowings (Notes 13 and 18) 36,357,016 6,287,700
Accrued interest payable 2,220,988 2,138,430
Other liabilities 1,919,548 1,878,680
------------- -------------
Total liabilities 500,733,071 433,763,010
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 11 and 17)
SHAREHOLDERS' EQUITY (Notes 1, 8, 9 and 15):
Common stock, $1.00 par value, authorized - 25,000,000 shares;
issued and outstanding - 11,464,913 shares and 9,146,272 shares
at December 31, 1998 and 1997, respectively 11,464,913 9,146,272
Capital surplus 22,615,559 22,234,753
Retained earnings 70,601,642 63,362,060
Accumulated other comprehensive income,
net of deferred income taxes of
$503,986 and $314,119 at December 31,
1998 and 1997, respectively 759,857 473,638
------------- -------------
Total shareholders' equity 105,441,971 95,216,723
------------- -------------
Total liabilities and shareholders' equity $ 606,175,042 $ 528,979,733
============= =============
See notes to consolidated financial statements.
II - 15
32
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
INTEREST INCOME:
Interest and fees on loans $38,894,447 $36,246,226 $33,006,697
Federal funds sold 950,669 197,939 312,516
Interest-bearing deposits 12,652 10,766 6,732
Investments:
U.S. Treasury 1,095,055 1,208,692 1,144,098
U.S. Government agencies 2,384,251 2,200,475 2,442,745
States and political subdivisions 3,414,134 3,253,315 3,022,204
Other 825,883 910,441 729,071
----------- ----------- -----------
Total interest income 47,577,091 44,027,854 40,664,063
----------- ----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000 or more 5,247,018 5,132,118 4,973,875
Other time and savings deposits 9,771,008 9,465,803 9,192,464
Federal funds purchased and securities
sold under agreements to repurchase 183,525 217,916 188,176
Other borrowed funds 874,325 643,711 778,994
----------- ----------- -----------
Total interest expense 16,075,876 15,459,548 15,133,509
----------- ----------- -----------
NET INTEREST INCOME 31,501,215 28,568,306 25,530,554
PROVISION FOR LOAN LOSSES (Notes 1 and 5) 4,321,740 1,175,000 820,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 27,179,475 27,393,306 24,710,554
----------- ----------- -----------
OTHER INCOME:
Service charges on deposit accounts 3,552,422 3,273,187 3,107,378
Other service charges, fees and commissions 4,359,295 3,690,047 3,296,063
Securities gains 1,733 3,695 174,086
Other (Note 7) 750,103 1,143,255 662,143
----------- ----------- -----------
Total other income 8,663,553 8,110,184 7,239,670
----------- ----------- -----------
OTHER EXPENSES:
Salaries and wages 8,181,895 6,916,428 6,231,710
Employee benefits (Note 10) 1,261,228 1,344,946 1,273,246
Occupancy expense, net 756,656 603,298 610,683
Equipment rentals, depreciation and maintenance 1,407,846 1,187,293 1,050,971
Other (Note 7) 4,228,179 4,067,085 3,197,385
----------- ----------- -----------
Total other expenses 15,835,804 14,119,050 12,363,995
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 20,007,224 21,384,440 19,586,229
INCOME TAXES (Note 1 and 8) 6,558,789 6,953,253 6,220,357
----------- ----------- -----------
NET INCOME $13,448,435 $14,431,187 $13,365,872
=========== =========== ===========
PER SHARE AMOUNTS (Notes 1 and 14):
Net income - Basic $ 1.17 $ 1.26 $ 1.17
- Diluted 1.17 1.26 1.17
Cash dividends 0.34 0.30 0.28
Book value 9.20 8.33 7.38
See notes to consolidated financial statements.
II - 16
33
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
NET INCOME $13,448,435 $14,431,187 $ 13,365,872
----------- ----------- ------------
ITEMS OF OTHER COMPREHENSIVE INCOME:
Items of other comprehensive income,
before tax:
Unrealized gains (losses) on securities
available for sale 477,819 485,705 (267,760)
Less: Reclassification adjustment for
gains included in net income 1,733 3,695 174,086
----------- ----------- ------------
Items of other comprehensive income,
before tax 476,086 482,010 (441,846)
Less: Income taxes related to items
of other comprehensive income 189,867 195,828 (173,016)
----------- ----------- ------------
Items of other comprehensive income,
net of tax 286,219 286,182 (268,830)
----------- ----------- ------------
COMPREHENSIVE INCOME $13,734,654 $14,717,369 $ 13,097,042
=========== =========== ============
See notes to consolidated financial statements.
II - 17
34
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
COMMON STOCK, $1.00 par value
At beginning of year $ 9,146,272 $ 9,116,552 $ 6,092,586
Shares issued under stock option plan 26,786 29,720 23,139
Stock split shares issued 2,291,855 -- 3,000,827
------------- ------------ ------------
At end of year 11,464,913 9,146,272 9,116,552
------------- ------------ ------------
CAPITAL SURPLUS
At beginning of year 22,234,753 21,913,629 21,602,301
Shares issued under stock option plan 380,806 321,124 311,328
------------- ------------ ------------
At end of year 22,615,559 22,234,753 21,913,629
------------- ------------ ------------
RETAINED EARNINGS
At beginning of year 63,362,060 52,800,932 46,220,157
Net income 13,448,435 14,431,187 13,365,872
Cash dividends (3,895,419) (3,340,932) (3,058,856)
GLL's premerger distributions of income
as a Subchapter S corporation -- (529,127) (708,000)
Stock split shares issued (2,291,855) -- (3,000,827)
Cash paid for fractional shares (21,579) -- (17,414)
------------- ------------ ------------
At end of year 70,601,642 63,362,060 52,800,932
------------- ------------ ------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES
At beginning of year 473,638 187,456 456,286
Net change in unrealized gains or losses
on securities available for sale,
net of deferred income taxes 286,219 286,182 (268,830)
------------- ------------ ------------
At end of year 759,857 473,638 187,456
------------- ------------ ------------
Total shareholders' equity (Notes 1, 8 and 15) $ 105,441,971 $ 95,216,723 $ 84,018,569
============= ============ ============
See notes to consolidated financial statements.
II - 18
35
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
Cash flows from operating activities:
Interest received $ 47,553,685 $ 43,502,445 $ 40,767,433
Fees and commissions received 8,661,820 8,106,489 7,019,784
Interest paid (15,993,318) (15,299,830) (15,027,561)
Cash paid to suppliers and employees (15,052,782) (13,634,214) (11,253,751)
Income taxes paid (6,431,963) (7,117,782) (6,260,371)
------------ ------------ ------------
Net cash provided by operating activities 18,737,442 15,557,108 15,245,534
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 16,385,000 20,952,023 19,300,000
Proceeds from maturities and/or calls of
securities held to maturity 13,363,782 9,449,238 14,877,779
Proceeds from sales of securities
available for sale 300,000 275,000 311,205
Purchases of securities available for sale (26,117,501) (21,613,206) (20,975,780)
Purchases of securities held to maturity (21,460,889) (11,182,401) (18,320,710)
Net increase in loans (32,649,423) (28,867,752) (17,635,246)
Capital expenditures (1,563,295) (2,307,031) (889,605)
Proceeds from sales of fixed assets 27,980 20,000 154,840
Proceeds from sales of other real estate 68,495 -- --
------------ ------------ ------------
Net cash used by investing activities (51,645,851) (33,274,129) (23,177,517)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW
accounts and savings accounts 22,670,083 4,828,655 10,717,233
Net increase in certificates of deposit 21,450,902 12,049,538 9,937,614
Net increase (decrease) in federal
funds purchased and securities sold
under agreements to repurchase (7,343,666) 5,926,782 (27,636)
Net increase (decrease) in other borrowings 30,069,316 (3,348,559) (845,920)
Net proceeds from issuance of common stock 407,592 350,844 334,467
Cash paid for fractional shares (21,579) -- (17,414)
Dividends paid (3,895,419) (3,340,932) (3,058,856)
GLL's premerger distributions of income
as a Subchapter S corporation -- (529,127) (708,000)
------------ ------------ ------------
Net cash provided by financing activities 63,337,229 15,937,201 16,331,488
------------ ------------ ------------
NET INCREASE (DECREASE) IN
CASH EQUIVALENTS 30,428,820 (1,779,820) 8,399,505
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 27,865,357 29,645,177 21,245,672
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 58,294,177 $ 27,865,357 $ 29,645,177
============ ============ ============
See notes to consolidated financial statements. (continued on next page)
II - 19
36
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (concluded from previous page)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 13,448,435 $ 14,431,187 $ 13,365,872
------------ ------------ ------------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 1,025,541 958,413 841,464
Provision for loan loss 4,321,740 1,175,000 820,000
Premium amortization, net 108,114 156,895 162,133
Deferred income taxes 225,722 (230,850) (18,722)
Gains on sales or calls of
securities available for sale (1,733) (2,933) (159,049)
Gains on calls of securities
held to maturity -- (762) (15,039)
Gains on disposal or sale
of equipment (2,395) (99) (3,597)
Loss on sale of other real estate 10,569 -- --
Increase (decrease) in taxes payable (98,896) 66,321 (21,292)
Increase in interest receivable (131,520) (682,304) (58,761)
Increase in interest payable 82,558 159,718 105,948
Increase in other assets (390,457) (380,223) (313,241)
Increase (decrease) in other liabilities 139,764 (93,255) 539,818
------------ ------------ ------------
Net adjustments to reconcile net
income to net cash provided by
operating activities 5,289,007 1,125,921 1,879,662
------------ ------------ ------------
Net cash provided by
operating activities $ 18,737,442 $ 15,557,108 $ 15,245,534
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS:
Increase (decrease) in unrealized
gains or losses on securities
available for sale $ 476,086 $ 482,010 $ (441,846)
Increase (decrease) in deferred income
taxes on unrealized gains or losses
on securities available for sale 189,867 195,828 (173,016)
Transfer from retained earnings to
common stock for stock split 2,291,855 -- 3,000,827
Transfer from loans to other real
estate owned 289,928 79,063 --
See notes to consolidated financial statements.
II - 20
37
BANK OF GRANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Bank of Granite Corporation (the "Company") is a bank holding
company with two subsidiaries, Bank of Granite (the "Bank"), a state chartered
commercial bank incorporated in North Carolina on August 2, 1906 and GLL &
Associates, Inc. ("GLL"), a mortgage banking company incorporated in North
Carolina on June 24, 1985. The Bank is headquartered in Granite Falls, North
Carolina and provides consumer and commercial banking services in the Blue Ridge
foothills and Catawba River Valley areas of North Carolina through fourteen
banking offices. GLL is headquartered in Winston-Salem, North Carolina and
provides mortgage origination services in the Central and Southern Piedmont
areas of North Carolina through eight mortgage offices. GLL merged with the
Company on November 5, 1997.
BASIS OF PRESENTATION - The consolidated financial statements include the
accounts of Bank of Granite Corporation and its wholly owned subsidiaries, Bank
of Granite and GLL & Associates, Inc. (referred to herein collectively as the
"Company"). All significant intercompany accounts and transactions have been
eliminated. All amounts reflect the November 5, 1997 merger of GLL, which was
accounted for as a pooling of interests and is discussed in Note 2 below.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand,
amounts due from banks, short-term interest bearing deposits, and federal funds
sold. Generally, federal funds are purchased and sold for one-day periods.
INVESTMENT SECURITIES - Debt securities that the Company has the positive intent
and ability to hold to maturity are classified as "held to maturity securities"
and reported at amortized cost. Debt and equity securities that are bought and
held principally for the purpose of selling in the near term are classified as
"trading securities" and reported at fair value, with unrealized gains and
losses included in consolidated earnings. Debt securities not classified as
either held to maturity securities or trading securities, and equity securities
not classified as trading securities, are classified as "available for sale
securities" and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of consolidated
shareholders' equity and as an item of other comprehensive income. Gains and
losses on held for investment securities are recognized at the time of sale
based upon the specific identification method. Declines in the fair value of
individual held to maturity and available for sale securities below their cost
that are other than temporary result in write-downs of the individual securities
to their fair value. The related write-downs are included in consolidated
earnings as realized losses. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity. Transfers of
securities between classifications are accounted for at fair value. No
securities have been classified as trading securities.
PREMISES AND EQUIPMENT AND OTHER LONG-LIVED ASSETS - Premises and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation and
amortization, computed by the straight-line method, are charged to operations
over the properties' estimated useful lives, which range from 25 to 50 years for
buildings and 5 to 15 years for furniture and equipment or, in the case of
leasehold improvements, the term of the lease if shorter. Maintenance and
repairs are charged to operations in the year incurred. Gains and losses on
dispositions are included in current operations.
On January 1, 1996, the Company adopted Financial Accounting Standard ("FAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles to be held and used, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows is less
than the stated amount of the asset, an impairment loss is recognized. The
adoption of FAS No. 121 had no material effect on the Company's financial
statements.
II - 21
38
ALLOWANCE FOR LOAN LOSSES - The provision for loan losses charged to operations
is an amount sufficient to bring the allowance for loan losses to an estimated
balance considered adequate to absorb potential losses in the portfolio.
Management's determination of the adequacy of the allowance is based on an
evaluation of the portfolio, current economic conditions, historical loan loss
experience and other risk factors. Recovery of the carrying value of loans is
dependent to some extent on future economic, operating and other conditions that
may be beyond the Company's control. Unanticipated future adverse changes in
such conditions could result in material adjustments to the allowance for loan
losses.
Loans that are deemed to be impaired (i.e., probable that the Company will be
unable to collect all amounts due according to the terms of the loan agreement)
are measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate or, as a practical matter, at the loan's
observable market value or fair value of the collateral if the loan is
collateral dependent. A valuation reserve is established to record the
difference between the stated loan amount and the present value or market value
of the impaired loan. Impaired loans may be valued on a loan-by-loan basis
(e.g., loans with risk characteristics unique to an individual borrower) or on
an aggregate basis (e.g., loans with similar risk characteristics). The
Company's policy for recognition of interest income on impaired loans is the
same as its interest income recognition policy for non-impaired loans. The total
of impaired loans, impaired loans on a nonaccrual basis, the related allowance
for loan losses and interest income recognized on impaired loans is disclosed in
Note 5.
REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate acquired by foreclosure is
stated at the lower of cost or fair value. Any initial losses at the time of
foreclosure are charged against the allowance for loan losses with any
subsequent losses or write-downs included in the consolidated statements of
income as a component of other expenses.
INCOME TAXES - Provisions for income taxes are based on amounts reported in the
consolidated statements of income (after exclusion of non-taxable income such as
interest on state and municipal securities) and include changes in deferred
income taxes. Deferred taxes are computed using the asset and liability
approach. The tax effects of differences between the tax and financial
accounting basis of assets and liabilities are reflected in the balance sheets
at the tax rates expected to be in effect when the differences reverse.
PER SHARE AMOUNTS - Per share amounts have been computed using both the weighted
average number of shares outstanding of common stock for the purposes of
computing basic earnings per share and the weighted average number of shares
outstanding of common stock plus dilutive common stock equivalents for the
purpose of computing diluted earnings per share. See Note 14 for further
information regarding the computation of earnings per share. Dividends per share
represent amounts declared by the Board of Directors.
During 1998, the Company declared a 5-for-4 stock split effected in the form of
a stock dividend payable May 29, 1998 to shareholders of record on May 8, 1998.
All share and per share amounts reflect the split.
INCOME AND EXPENSES - The Company uses the accrual method of accounting, except
for immaterial amounts of loan income and other fees which are recorded as
income when collected. Substantially all loans earn interest on the level yield
method based on the daily outstanding balance. The accrual of interest is
discontinued when, in management's judgment, the interest may not be collected.
The Bank defers the immediate recognition of certain loan origination fees and
certain loan origination costs when new loans are originated and amortizes these
deferred amounts over the life of each related loan.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
II - 22
39
STOCK-BASED COMPENSATION - The Company measures compensation costs related to
employee stock options using the intrinsic value of the equity instrument
granted (i.e., the excess of the market price of the stock to be issued over the
exercise price of the equity instrument at the date of grant) in accordance with
Accounting Principles Board Opinion No. 25 rather than the fair value of the
equity instrument granted in accordance with FAS No. 123. See Note 9 for further
information regarding FAS 123 disclosures.
NEW ACCOUNTING STANDARDS - On January 1, 1998, the Company adopted FAS No. 130,
"Reporting Comprehensive Income," which requires disclosure of comprehensive
income (which is defined as "the change in equity during a period excluding
changes resulting from investments by shareholders and distributions to
shareholders") and its components. The adoption of FAS No. 130 had no material
effect on the Company's financial statements other than the manner of
presentation.
Also on January 1, 1998, the Company adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. The adoption of
FAS No. 131 had no material effect on the Company's financial statements in that
management believes that the Company has no reportable operating segments.
In June 1998, the Financial Accounting Standards Board issued FAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". FAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. FAS 133 is effective for fiscal all fiscal quarters of fiscal
years beginning after June 15, 1999. FAS 133 will be applied retroactively to
financial statements of prior periods. Management has not evaluated the impact
that the adoption of FAS 133 will have on the Company's financial statements.
2. COMPLETED ACQUISITION
On November 5, 1997, the Company acquired all of the common stock of GLL &
Associates, Inc. in a merger accounted for as a pooling of interests. As a
result, all amounts for prior periods have been restated to include amounts for
GLL as if GLL had been a part of the Company for such periods. Prior to the
merger, GLL had elected to be taxed as a Subchapter S corporation for income tax
purposes. Therefore, no income taxes were provided on premerger taxable income
that was taxable to the former owners. Income taxes have been provided on income
earned after the date of merger. In the fourth quarter of 1997, the Company and
GLL incurred nonrecurring merger related expenses of $405,678, before tax, which
were included in other expenses in the 1997 income statement. In December 1997,
GLL sold mortgage servicing rights resulting in a nonrecurring gain of $601,135,
before tax. On an after-tax basis, the aggregate net effect of both nonrecurring
transactions was $102,519.
II - 23
40
3. INVESTMENT SECURITIES
The amortized cost, gross unrealized gains and losses and fair values of
investment securities at December 31, 1998 and 1997 are as follows (dollars in
thousands):
Gross Unrealized
Amortized -------------------- Fair
Type and Contractual Maturity Cost Gains Losses Value
AVAILABLE FOR SALE
AT DECEMBER 31, 1998:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 1,999 $ 2,026
AFTER 1 YEAR BUT WITHIN 5 YEARS 8,520 8,789
------- -------
TOTAL U.S. TREASURY 10,519 $ 296 $ -- 10,815
------- ------- ------- -------
U. S. GOVERNMENT AGENCIES DUE:
WITHIN 1 YEAR 1,000 1,005
AFTER 1 YEAR BUT WITHIN 5 YEARS 24,791 25,221
AFTER 5 YEARS BUT WITHIN 10 YEARS 13,103 13,217
------- -------
TOTAL U.S. GOVERNMENT AGENCIES 38,894 593 44 39,443
------- ------- ------- -------
OTHERS DUE:
WITHIN 1 YEAR 2,508 2,536
AFTER 1 YEAR BUT WITHIN 5 YEARS 3,528 3,739
AFTER 5 YEARS BUT WITHIN 10 YEARS 578 616
AFTER 10 YEARS 949 957
EQUITY SECURITIES 3,715 3,849
------- -------
TOTAL OTHERS 11,278 521 102 11,697
------- ------- ------- -------
TOTAL AVAILABLE FOR SALE $60,691 $ 1,410 $ 146 $61,955
======= ======= ======= =======
HELD TO MATURITY
AT DECEMBER 31, 1998:
U. S. TREASURY DUE:
WITHIN 1 YEAR $ 999 $ 1,000
AFTER 1 YEAR BUT WITHIN 5 YEARS 1,513 1,569
------- -------
TOTAL U.S. TREASURY 2,512 $ 57 $ -- $ 2,569
------- ------- ------- -------
U. S. GOVERNMENT AGENCIES DUE:
WITHIN 1 YEAR 1,000 1,010
AFTER 1 YEAR BUT WITHIN 5 YEARS 4,489 4,562
AFTER 5 YEARS BUT WITHIN 10 YEARS 5,275 5,487
------- -------
TOTAL U.S. GOVERNMENT AGENCIES 10,764 295 -- 11,059
------- ------- ------- -------
STATE AND POLITICAL SUBDIVISIONS DUE:
WITHIN 1 YEAR 5,974 6,013
AFTER 1 YEAR BUT WITHIN 5 YEARS 32,080 32,952
AFTER 5 YEARS BUT WITHIN 10 YEARS 24,531 25,616
AFTER 10 YEARS 11,193 11,333
------- -------
TOTAL STATE AND POLITICAL SUBDIVISIONS 73,778 2,218 82 75,914
------- ------- ------- -------
TOTAL HELD TO MATURITY $87,054 $ 2,570 $ 82 $89,542
======= ======= ======= =======
Sales of securities available for sale for the year ended December 31, 1998
resulted in realized gross gains of $1,733. Calls of securities held to maturity
did not result any gains or losses in 1998. Cost of securities sold were
determined by the specific identification method.
II - 24
41
Gross Unrealized
Amortized -------------------- Fair
Type and Contractual Maturity Cost Gains Losses Value
AVAILABLE FOR SALE
At December 31, 1997:
U. S. Treasury due:
Within 1 year $ 4,497 $ 4,504
After 1 year but within 5 years 10,521 10,663
------- -------
Total U.S. Treasury 15,018 $ 149 $ -- 15,167
------- ------- ------- -------
U. S. Government agencies due:
Within 1 year 6,000 5,996
After 1 year but within 5 years 15,496 15,560
After 5 years but within 10 years 3,111 3,158
------- -------
Total U.S. Government agencies 24,607 133 26 24,714
------- ------- ------- -------
Others due:
Within 1 year 585 594
After 1 year but within 5 years 7,820 8,069
After 5 years but within 10 years 768 804
After 10 years 749 760
Equity securities 1,738 1,965
------- -------
Total others 11,660 621 89 12,192
------- ------- ------- -------
Total available for sale $51,285 $ 903 $ 115 $52,073
======= ======= ======= =======
HELD TO MATURITY
At December 31, 1997:
U. S. Treasury due:
Within 1 year $ 3,500 $ 3,502
After 1 year but within 5 years 2,513 2,523
------- -------
Total U.S. Treasury 6,013 $ 17 $ 5 6,025
------- ------- ------- -------
U. S. Government agencies due:
After 1 year but within 5 years 5,918 5,925
After 5 years but within 10 years 2,562 2,613
------- -------
Total U.S. Government agencies 8,480 71 13 8,538
------- ------- ------- -------
State and political subdivisions due:
Within 1 year 5,860 5,904
After 1 year but within 5 years 29,505 30,054
After 5 years but within 10 years 25,654 26,560
After 10 years 3,524 3,653
------- -------
Total state and political subdivisions 64,543 1,675 47 66,171
------- ------- ------- -------
Total held to maturity $79,036 $ 1,763 $ 65 $80,734
======= ======= ======= =======
Sales of securities available for sale for the year ended December 31, 1997
resulted in realized gross gains of $2,933. Calls of securities held to maturity
resulted in gross gains of $3,012 and gross losses of $2,250. Cost of securities
sold were determined on the specific identification method.
Sales of securities available for sale for the year ended December 31, 1996
resulted in realized gross gains of $159,790 and calls of a security at a
discount resulted in a realized gross loss of $743. Calls of securities held to
maturity resulted in gross gains of $15,075 and gross losses of $36. Cost of
securities sold were determined on the specific identification method.
Securities with an amortized cost of $32,559,307 and $34,215,209 were pledged as
collateral for public deposits and for other purposes as required by law at
December 31, 1998 and 1997, respectively.
II - 25
42
4. LOANS
Loans at December 31, 1998 and 1997, classified by type, are as follows:
1998 1997
Real estate:
Construction $ 32,397,016 $ 37,227,380
Mortgage 188,166,947 155,805,410
Commercial, financial and agricultural 129,854,299 126,524,467
Consumer 35,734,161 38,522,537
All other loans 117,113 458,883
------------- -------------
386,269,536 358,538,677
Deferred origination fees, net (679,332) (693,164)
------------- -------------
Total $ 385,590,204 $ 357,845,513
============= =============
Nonperforming assets at December 31, 1998 and 1997 are as follows:
1998 1997
Nonaccrual loans $ 639,041 $ 728,308
Loans 90 days or more and still
accruing interest 2,955,113 1,898,362
Foreclosed properties 289,928 79,063
------------- -------------
Total $ 3,884,082 $ 2,705,733
============= =============
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 1998, 1997 and 1996 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, 1998 and 1997, directors' and principal officers'
direct and indirect indebtedness to the Bank aggregated $2,329,753 and $370,775,
respectively. During 1998, additions to such loans were $3,429,507 and
repayments totaled $1,470,529. Of the additions, $2,815,047 was related to the
borrowings of a newly elected director. Of the repayments, $389,183 was related
to the borrowings of a retiring director. In the opinion of management, these
loans do not involve more than normal risk of collectibility, nor do they
present other unfavorable features.
II - 26
43
5. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses for the years ended December 31, 1998,
1997 and 1996 are as follows (dollars in thousands):
1998 1997 1996
Balance at beginning of year $5,203 $4,794 $4,645
Loans charged off:
Real estate 228 70 --
Commercial, financial and agricultural 4,458 452 533
Credit cards and related plans 20 19 17
Installment loans to individuals 382 308 192
------ ------ ------
Total charge-offs 5,088 849 742
------ ------ ------
Recoveries of loans previously charged off:
Real estate 5 4 --
Commercial, financial and agricultural 119 3 27
Credit cards and related plans 5 3 5
Installment loans to individuals 54 73 39
------ ------ ------
Total recoveries 183 83 71
------ ------ ------
Net charge-offs 4,905 766 671
Additions charged to operations 4,322 1,175 820
------ ------ ------
Balance at end of year $4,620 $5,203 $4,794
====== ====== ======
Ratio of net charge-offs during the year to
average loans outstanding during the year 1.31% 0.22% 0.21%
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired was $826,806 ($639,041 of which is on a nonaccrual
basis) and $866,837 ($728,308 of which is on a nonaccrual basis), respectively.
The average recorded balance of impaired loans during 1998 and 1997 is not
significantly different from the balance at December 31, 1998 and 1997. The
related allowance for loan losses for these loans is $250,979 and $560,132 at
December 31, 1998 and 1997, respectively. For the years ended December 31, 1998,
1997 and 1996, the Bank recognized interest income on those impaired loans of
approximately $16,467, $19,012 and $26,102, respectively.
II - 27
44
6. PREMISES AND EQUIPMENT
Summaries of premises and equipment at December 31, 1998 and 1997 follow:
Premises and
Accumulated Equipment,
Cost Depreciation Net
AT DECEMBER 31, 1998:
LAND $ 1,753,559 $1,753,559
BUILDINGS 7,653,443 $2,145,124 5,508,319
LEASEHOLD IMPROVEMENTS 50,324 29,908 20,416
FURNITURE, EQUIPMENT AND VEHICLES 7,039,110 4,415,509 2,623,601
CONSTRUCTION IN PROGRESS 189,733 189,733
----------- ---------- -----------
TOTAL $16,686,169 $6,590,541 $10,095,628
=========== ========== ===========
At December 31, 1997:
Land $ 1,508,662 $1,508,662
Buildings 6,764,460 $1,931,969 4,832,491
Leasehold improvements 47,348 27,754 19,594
Furniture, equipment and vehicles 6,898,184 4,287,751 2,610,433
Construction in progress 612,249 612,249
----------- ---------- -----------
Total $15,830,903 $6,247,474 $ 9,583,429
=========== ========== ===========
7. OTHER INCOME AND EXPENSES
For the years ended December 31, 1998, 1997 and 1996, items included in other
income that exceeded 1% of total revenues are set forth below. There were no
items included in other expenses that exceeded 1% of total revenues for the
years indicated.
1998 1997 1996
Items included in other income
Gains on sales of mortgage servicing rights $ -- $601,135 $ --
8. INCOME TAXES
The components of the income tax provision for the years ended December 31,
1998, 1997 and 1996 follow:
1998 1997 1996
Income tax provision
Current $6,333,067 $ 7,184,103 $ 6,239,079
Deferred 225,722 (230,850) (18,722)
---------- ----------- -----------
Total $6,558,789 $ 6,953,253 $ 6,220,357
========== =========== ===========
Changes in deferred taxes of $189,867 and $195,828 related to unrealized gains
and losses on securities available for sale during 1998 and 1997, respectively,
were allocated to shareholders' equity in the respective years.
II - 28
45
A reconciliation of reported income tax expense for the years ended December 31,
1998, 1997 and 1996 to the amount of tax expense computed by multiplying income
before income taxes by the statutory federal income tax rate follows.
1998 1997 1996
Statutory federal income tax rate 35% 35% 35%
=========== =========== ===========
Tax provision at statutory rate $ 7,002,528 $ 7,484,554 $ 6,855,180
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (1,184,198) (1,134,464) (984,222)
State income taxes net of federal tax benefit 678,163 728,035 645,091
GLL's pre-merger earnings taxable to
GLL's former owners -- (188,145) (232,763)
Other 62,296 63,273 (62,929)
----------- ----------- -----------
Income tax provision $ 6,558,789 $ 6,953,253 $ 6,220,357
=========== =========== ===========
The tax effect of the cumulative temporary differences and carryforwards that
gave rise to the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows:
DECEMBER 31, 1998
-----------------------------------------------
ASSETS LIABILITIES TOTAL
EXCESS BOOK OVER TAX BAD DEBT EXPENSE $ 1,586,042 $ 1,586,042
EXCESS TAX OVER BOOK DEPRECIATION $ (472,145) (472,145)
UNREALIZED GAINS ON SECURITIES
AVAILABLE FOR SALE (503,986) (503,986)
OTHER, NET 338,051 (333,229) 4,822
----------- ----------- -----------
TOTAL $ 1,924,093 $(1,309,360) $ 614,733
=========== =========== ===========
December 31, 1997
------------------------------------------------
Assets Liabilities Total
Excess book over tax bad debt expense $ 1,772,614 $ 1,772,614
Excess tax over book depreciation $ (419,729) (419,729)
Unrealized gains on securities
available for sale (314,119) (314,119)
Other, net 321,462 (329,906) (8,444)
----------- ----------- -----------
Total $ 2,094,076 $(1,063,754) $ 1,030,322
=========== =========== ===========
The net deferred tax asset is included in "other assets" on the balance sheet.
Although realization of the deferred tax assets is not assured, management
believes it is more likely than not that all of the deferred tax assets will be
realized.
9. STOCK OPTIONS
At December 31, 1998, 1997 and 1996, 149,529, 142,102 and 147,258 shares of
common stock, respectively, were reserved for stock options outstanding under
the Company's stock option plans, and 52,860, 93,072 and 59 shares of common
stock, respectively, were reserved for stock options not yet granted. Option
prices are established at market value on the dates granted by the Board of
Directors.
II - 29
46
Certain option information for the years ended December 31, 1998, 1997 and 1996
follows:
Exercise Price Per Share
---------------------------------
Range
--------------------- Weighted
Shares From To Average
Outstanding, December 31, 1995 172,040 $ 6.91 $ 14.94 $ 11.09
Granted 28,465 16.54 16.54 16.54
Exercised 40,125 6.91 14.94 8.33
Expired and canceled 13,122 12.16 16.54 14.27
-------
Outstanding, December 31, 1996 147,258 8.36 16.54 12.61
Granted 40,558 21.60 23.00 21.73
Exercised 37,143 8.36 16.54 9.44
Expired and canceled 8,571 12.58 21.60 18.13
-------
Outstanding, December 31, 1997 142,102 12.16 23.00 15.70
GRANTED 43,562 24.40 32.75 29.59
EXERCISED 32,785 12.16 22.40 12.43
EXPIRED AND CANCELED 3,350 16.54 29.60 24.01
-------
OUTSTANDING, DECEMBER 31, 1998 149,529 12.58 32.75 20.28
=======
For various price ranges, weighted average characteristics of outstanding stock
options at December 31, 1998 follow:
Outstanding Options Exercisable Options
------------------------------------- ------------------------
Range of Remaining Weighted Weighted
Exercise Prices Shares Life (years) Average Price Shares Average Price
$ 12.58 - $14.50 50,204 0.8 $ 13.14 45,514 $ 13.07
14.51 - 16.75 22,954 2.3 16.54 13,814 16.54
16.76 - 21.75 30,809 3.3 21.60 12,318 21.60
21.76 - 28.75 3,750 3.6 23.23 1,375 23.13
28.76 - 32.75 41,812 4.3 29.67 -- --
------- -----
12.58 - 32.75 149,529 2.6 20.28 73,021 15.35
======= =====
Options granted become exercisable in accordance with the vesting schedule
specified by the Board of Directors in the grant. Options granted prior to
January 1, 1997 and after December 31, 1997 become exercisable over a five-year
period at the rate of 20% per year beginning one-year from the date of grant.
Options granted during 1997 become exercisable over a five-year period at the
rate of 20% after six-months from the date of grant and 20% per year beginning
one-year from the date of grant. No option may be exercisable more than
five-years after the date of grant.
The Company accounts for compensation costs related to the Company's employee
stock option plan in accordance with Accounting Principles Board Opinion No. 25.
Therefore, no compensation cost has been recognized for stock option awards
because the options are granted at exercise prices based on the market value of
the Company's stock on the date of grant. Had compensation cost for the
Company's employee stock option plan been determined consistent with FAS No.
123, the Company's pro forma net income and earnings per share for the years
ended December 31, 1998, 1997 and 1996 would have been as follows:
1998 1997 1996
Net income
As reported $13,448,435 $14,431,187 $13,365,872
Pro forma $13,183,494 $14,269,300 $13,152,038
Net income per share
As reported - Basic $ 1.17 $ 1.26 $ 1.17
- Diluted $ 1.17 $ 1.26 $ 1.17
Pro forma - Basic $ 1.15 $ 1.25 $ 1.16
- Diluted $ 1.15 $ 1.24 $ 1.15
II - 30
47
In estimating the compensation expense associated with FAS No. 123, using The
Black Scholes Method, the following assumptions were used:
1998 1997 1996
Option value, aggregate $10.61 $ 8.65 $ 5.94
Risk-free rate 5.09% 5.92% 6.11%
Average expected term (years) 4.5 YEARS 5 years 5 years
Expected volatility 38.75% 31.29% 33.41%
Expected dividend yield 1.30% 1.30% 1.20%
10. EMPLOYEE BENEFIT PLANS
The Bank has a profit-sharing plan covering substantially all employees.
Contributions to the plan are made at the discretion of the Board of Directors
but may not exceed the maximum amount allowable for federal income tax purposes.
Contributions totaled $361,927, $608,899 and $564,016 for the years ended
December 31, 1998, 1997 and 1996, respectively.
In 1994, the Bank adopted a Supplemental Executive Retirement Plan ("SERP"). The
SERP allows the Bank to supplement the level of certain executives' retirement
income over that which is obtainable through the tax-qualified retirement plan
sponsored by the Bank. Contributions totaled $13,814, $22,025 and $17,226 for
the years ended December 31, 1998, 1997 and 1996, respectively.
GLL sponsors a retirement plan for its employees under Section 401(k) of the
Internal Revenue Code. The plan covers all employees over 21 years of age who
have completed 1,000 hours of service. At it discretion, GLL may make matching
contributions to the plan. Contributions totaled $88,680, $14,092 and $13,576
for the years ended December 31, 1998, 1997 and 1996, respectively.
11. LEASES
LESSEE - OPERATING - The Company's subsidiaries lease certain premises and
equipment under operating lease agreements. As of December 31, 1998, future
minimum lease payments under noncancelable operating leases are as follows:
Year Payments
1999 $106,123
2000 77,330
2001 71,621
2002 53,900
2003 60,400
thereafter 597,400
--------
Total $966,774
========
Rental expense charged to operations under all operating lease agreements was
$257,652, $187,778 and $225,320 for the years ended December 31, 1998, 1997 and
1996, respectively.
LESSOR - OPERATING - The Company leases one small office space to an
unaffiliated lessee. In 1997 and earlier years, the Company leased certain
additional office space to others under longer term operating lease agreements
which ended in 1997. The Company now uses the previously leased space for its
own use.
Rental income received under all operating lease agreements was $3,600, $42,168
and $67,252 for the years ended December 31, 1998, 1997 and 1996, respectively.
II - 31
48
12. 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:
1998 1997 1996
Federal funds purchased:
Maximum amount outstanding at any
month-end during the year $ -- $5,000,000 $2,000,000
Weighted average interest rate at end of year -- 6.1% 5.9%
Average daily balance outstanding
during the year $ 71,233 $ 634,426 $ 121,813
Average annual interest rate paid
during the year 5.9% 5.6% 5.8%
Securities sold under agreements to repurchase:
Balance at end of year $1,538,350 $3,882,016 $2,955,234
Weighted average interest rate at end of year 4.2% 5.0% 4.7%
Maximum amount outstanding at any
month-end during the year $4,188,622 $3,982,784 $4,803,891
Average daily balance outstanding
during the year $3,669,825 $3,712,406 $3,832,580
Average annual interest rate paid
during the year 4.9% 4.9% 4.7%
13. OTHER BORROWINGS
GLL temporarily funds its mortgages, from the time of origination until the time
of sale, through the use of lines of credit from one of the Company's
correspondent financial institutions. For the years ended December 31, 1998,
1997 and 1996 such lines of credit totaled $20,000,000, $15,000,000 and
$12,000,000, respectively. Prior to GLL's merger on November 5, 1997,
outstanding balances under the lines of credit incurred interest costs at the
lender's prime to prime-plus-one percent rate per annum. Subsequent to November
5, 1997, outstanding balances under the lines of credit incurred interest costs
at the 30-day LIBOR plus 50 basis points to 30-day LIBOR plus 75 basis points.
These lines of credit are secured by the mortgage loans originated. In addition,
the Company serves as guarantor on borrowings under these arrangements occurring
after the merger date.
In 1998, the Bank began selling a commercial sweep product whereby qualifying
amounts are swept overnight from a commercial deposit account into commercial
paper issued by the Company. During 1998, most of the Bank's qualifying
commercial customers who were buying securities overnight under agreements by
the Bank to repurchase such securities converted to the commercial paper sweep
account product.
1998 1997 1996
Commercial deposits swept into commercial paper:
Balance at end of year $6,352,611 $ n/a $ n/a
Weighted average interest rate at end of year 4.3% n/a n/a
Maximum amount outstanding at any
month-end during the year $6,352,611 $ n/a $ n/a
Average daily balance outstanding
during the year $1,826,915 $ n/a $ n/a
Average annual interest rate paid
during the year 4.3% n/a n/a
II - 32
49
14. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
FAS No. 128, "Earnings Per Share," requires the presentation of the basic
earnings per share ("EPS") on the face of the income statement with dual
presentation of basic and diluted EPS with complex capital structures. Basic EPS
is computed by dividing net income by the weighted average number of common
shares outstanding for the period. Basic EPS excludes the dilutive effect that
could occur if any securities or other contracts to issue common stock were
exercised or converted into or resulted in the issuance of common stock. Diluted
EPS is computed by dividing net income by the sum of the weighted average number
of common shares outstanding for the period plus the number of additional common
shares that would have been outstanding if the potentially dilutive common
shares had been issued. Following is the reconciliation of EPS for the years
ended December 31, 1998, 1997 and 1996.
Basic and diluted earnings per share and weighted average shares outstanding for
1997 and 1996 have been restated to reflect the 5-for-4 stock split effected in
the form of a stock dividend paid May 29, 1998 to shareholders of record on May
8, 1998.
1998 1997 1996
BASIC EARNINGS PER SHARE
Net income $13,448,435 $14,431,187 $13,365,872
----------- ----------- -----------
Divide by: Weighted average
shares outstanding 11,461,685 11,426,660 11,381,040
----------- ----------- -----------
Basic earnings per share $ 1.17 $ 1.26 $ 1.17
=========== =========== ===========
DILUTED EARNINGS PER SHARE
Net income $13,448,435 $14,431,187 $13,365,872
----------- ----------- -----------
Divide by: Weighted average
shares outstanding 11,461,685 11,426,660 11,381,040
Potentially dilutive effect of
stock options 47,960 53,022 59,665
----------- ----------- -----------
Weighted average shares outstanding,
including potentially dilutive effect
of stock options 11,509,645 11,479,682 11,440,705
----------- ----------- -----------
Diluted earnings per share $ 1.17 $ 1.26 $ 1.17
=========== =========== ===========
15. 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 subsidiaries, the Bank and GLL. The
Bank, as a North Carolina banking corporation, may pay dividends only out of
undivided profits as determined pursuant to North Carolina General Statutes
Section 53-87. As of December 31, 1998, the Bank had undivided profits, as
defined, of $88,512,925.
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's assets, liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
II - 33
50
Quantitative measures established by regulation to ensure capital adequacy
require the Company (set forth in the table below) and the Bank to maintain
minimum amounts and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1998, that the Company and the Bank meet all capital adequacy requirements to
which it is subject.
As of December 31, 1998, the most recent regulatory notifications categorized
both the Company and the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Company
and the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table. Management is not aware of
conditions or events subsequent to such notifications that would cause a change
in the Company's or the Bank's capital categories.
The Company's actual capital amounts and ratios are also presented in the table
(dollars in thousands):
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------------- ----------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
AS OF DECEMBER 31, 1998
TOTAL CAPITAL TO RISK WEIGHTED ASSETS $109,362 26.20% $33,394 8.00% $41,742 10.00%
TIER I CAPITAL TO RISK WEIGHTED ASSETS $104,682 25.08% $16,697 4.00% $25,045 6.00%
TIER I CAPITAL TO AVERAGE ASSETS $104,682 17.77% $23,566 4.00% $29,457 5.00%
As of December 31, 1997
Total capital to risk weighted assets $ 99,611 25.60% $31,128 8.00% $38,910 10.00%
Tier I capital to risk weighted assets $ 94,743 24.35% $15,564 4.00% $23,346 6.00%
Tier I capital to average assets $ 94,743 17.93% $21,135 4.00% $26,419 5.00%
The average reserve balance required to be maintained under the requirements of
the Federal Reserve was approximately $10,163,000 for the year ended December
31, 1998. The Bank maintained average reserve balances in excess of the
requirements.
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Condensed financial data for Bank of Granite Corporation (parent company only)
follows:
December 31,
------------------------------
CONDENSED BALANCE SHEETS 1998 1997
Assets:
Cash on deposit with bank subsidiary $ 6,399,611 $ 92,101
Investment in subsidiary bank at equity 100,755,309 91,815,602
Investment in subsidiary mortgage bank at equity 2,007,661 977,161
Other investments 2,382,306 2,437,108
Other assets 262,516 (92,428)
------------ ------------
Total $111,807,403 $ 95,229,544
============ ============
Liabilities and Shareholders' Equity:
Other borrowings $ 6,352,611 $ --
Other liabilities 12,821 12,821
Shareholders' equity 105,441,971 95,216,723
------------ ------------
Total $111,807,403 $ 95,229,544
============ ============
II - 34
51
For the Years Ended December 31,
-------------------------------------------------
CONDENSED RESULTS OF OPERATIONS 1998 1997 1996
Equity in earnings of subsidiary bank:
Dividends $ 3,949,744 $ 3,355,797 $ 3,073,673
Earnings retained 8,594,848 10,373,222 9,572,301
Equity in earnings of subsidiary mortgage bank:
Premerger earnings distributed to former owners -- 529,127 708,000
Earnings retained 1,025,273 265,733 (42,962)
Income (expenses), net (121,430) (92,692) 54,860
----------- ------------ ------------
Net income $ 3,448,435 $ 14,431,187 $ 13,365,872
=========== ============ ============
For the Years Ended December 31,
-------------------------------------------------
CONDENSED CASH FLOW 1998 1997 1996
Cash flows from operating activities:
Interest received $ 136,548 $ 126,757 $ 107,219
Interest paid (79,563) -- --
Dividends received from subsidiary bank 3,949,744 3,355,797 3,073,673
Net cash provided (used) by other
operating activities (492,435) (403,337) 36,677
----------- ----------- -----------
Net cash provided by operating activities 3,514,294 3,079,217 3,217,569
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities of securities
available for sale 300,000 -- 200,000
Proceeds from sales of securities
available for sale 300,000 275,000 311,205
Purchases of securities available for sale (649,989) (826,907) (622,449)
----------- ----------- -----------
Net cash used by investing activities (49,989) (551,907) (111,244)
----------- ----------- -----------
Cash flows from financing activities:
Net increase in other borrowings 6,352,611 -- --
Net proceeds from issuance of common stock 407,592 350,844 334,467
Net dividends paid 3,895,419) (3,340,932) (3,058,856)
Cash paid for fractional shares (21,579) -- (17,414)
----------- ----------- -----------
Net cash provided (used) by financing activities 2,843,205 (2,990,088) (2,741,803)
----------- ----------- -----------
Net increase (decrease) in cash 6,307,510 (462,778) 364,522
Cash at beginning of year 92,101 554,879 190,357
----------- ----------- -----------
Cash at end of year $ 6,399,611 $ 92,101 $ 554,879
=========== =========== ===========
II - 35
52
(table concluded from previous page)
For the Years Ended December 31,
--------------------------------------------------
CONDENSED CASH FLOW 1998 1997 1996
Reconciliation of net income to net cash
provided by operating activities:
Net income $ 13,448,435 $ 14,431,187 $ 13,365,872
------------ ------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (9,620,121) (10,638,955) (9,529,339)
Premerger earnings distributed to former owners -- (529,127) (708,000)
Premium amortization and discount
accretion, net 298 1,154 (722)
Gains on sales or calls of
securities available for sale (1,733) -- (159,047)
Decrease (increase) in interest receivable 6,072 (13,754) 4,169
Decrease (increase) in other assets (318,657) 28,087 44,442
Increase (decrease) in other liabilities -- (199,375) 200,194
------------ ------------ ------------
Total adjustments (9,934,141) (11,351,970) (10,148,303)
------------ ------------ ------------
Net cash provided by operating activities $ 3,514,294 $ 3,079,217 $ 3,217,569
============ ============ ============
Supplemental disclosure of non-cash transactions:
Transfer from retained earnings to common stock $ 2,291,855 $ -- $ 3,000,827
Increase (decrease) in unrealized
gains or losses on securities
available for sale (106,226) 197,804 72,130
Increase (decrease) in deferred income
taxes on unrealized gains or losses
on securities available for sale 42,359 (78,687) (27,464)
17. COMMITMENTS AND CONTINGENCIES
The Bank has various financial instruments (outstanding commitments) with
off-balance sheet risk that are issued in the normal course of business to meet
the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Commitments to
extend credit are legally binding agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts outstanding do not necessarily represent future cash
requirements. Standby letters of credit represent conditional commitments issued
by the Bank to assure the performance of a customer to a third party. The unused
portion of commitments to extend credit at December 31, 1998 and 1997 was
$60,929,611 and $57,413,413, respectively. Additionally, standby letters of
credit of $3,901,923 and $3,773,055 were outstanding at December 31, 1998 and
1997, respectively.
The Bank's exposure to credit loss for commitments to extend credit and standby
letters of credit is the contractual amount of those financial instruments. The
Bank uses the same credit policies for making commitments and issuing standby
letters of credit as it does for on-balance sheet financial instruments. Each
customer's creditworthiness is evaluated on an individual case-by-case basis.
The amount and type of collateral, if deemed necessary by management, is based
upon this evaluation of creditworthiness. Collateral held varies, but may
include marketable securities, deposits, property, plant and equipment,
investment assets, inventories and accounts receivable. Management does not
anticipate any significant losses as a result of these financial instruments.
II - 36
53
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of FAS No. 107, "Disclosures about Fair
Value of Financial Instruments." The estimated fair value amounts have been
determined by the Company, using available market information and appropriate
valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts (dollars in thousands):
DECEMBER 31, 1998 December 31, 1997
----------------------- -----------------------
ESTIMATED Estimated
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
Assets:
Cash and cash equivalents $ 58,294 $ 58,294 $ 27,865 $ 27,865
Marketable securities 149,009 151,497 131,109 132,807
Loans 385,590 387,910 357,846 359,051
Liabilities:
Demand deposits 215,646 215,646 192,976 192,976
Time deposits 243,051 240,316 221,600 218,665
Federal funds purchased and
securities sold under agreements
to repurchase 1,538 1,538 8,882 8,882
Other borrowings 36,357 36,357 6,288 6,288
The fair value of marketable securities is based on quoted market prices, dealer
quotes and prices obtained from independent pricing services. The fair value of
loans, time deposits, commitments and guarantees is estimated based on present
values using applicable risk-adjusted spreads to the U.S. Treasury curve to
approximate current entry-value interest rates applicable to each category of
such financial instruments.
No adjustment was made to the entry-value interest rates for changes in credit
of loans for which there are no known credit concerns. Management segregates
loans in appropriate risk categories. Management believes that the risk factor
embedded in the entry-value interest rates, along with the general reserves
applicable to the loan portfolio for which there are no known credit concerns,
result in a fair valuation of such loans on an entry-value basis.
As required by the Statement, demand deposits are shown at their face value.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1998. 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 - 37
54
***** SAMPLE BALLOT *****
REVOCABLE PROXY
BANK OF GRANITE CORPORATION
[X] PLEASE MARK VOTES With- For All
AS IN THIS EXAMPLE For hold Except
This Proxy is Solicited on 1. ELECTION OF DIRECTORS [_] [_] [_]
Behalf of the Board of Directors. John N Bray
The undersigned hereby appoints Paul M. Fleetwood, III, CPA
John A. Forlines, Jr., John N. John A. Forlines, Jr.
Bray, and Barbara F. Freiman, Barbara F. Freiman
or each of them, as Proxies, Hugh R. Gaither
each with the power to appoint Charles M. Snipes
his or her substitute and hereby Boyd C. Wilson, Jr., CPA
authorizes each of them to INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE
represent and to vote as FOR ANY INDIVIDUAL NOMINEE, MARK "FOR ALL
designated below all the shares EXCEPT" AND WRITE THAT NOMINEE'S NAME IN
of Common Stock held on record THE SPACE PROVIDED BELOW.
by the undersigned on March 8, ____________________________________________
1999, at the Annual Meeting For Against Abstain
of Shareholders to be held on 2. THE RATIFICATION OF [_] [_] [_]
April 26, 1999, or any THE ACCOUNTING FIRM DELOITTE &
adjournment thereof. TOUCHE, LLP as the Corporation's
Independent Certified Public
Accountants for the year ending
December 31, 1999.
3. In their discretion, the Proxies are
authorized to vote upon other such
business as may properly come before
the meeting.
Shares of Common Stock of the Corporation
will be voted as specified. If no
specification is made, shares will be voted
FOR Proposal 1 to Elect the Board of
Directors' nominees to the Board of
Directors and FOR Proposal 2 to Ratify the
Accounting Firm of Deloitte & Touche, LLP as
the Corporation's Auditors, and otherwise at
the discretion of the Proxies.
The above signed hereby acknowledges
receipt of the Notice of Annual Meeting
of the Shareholders of the Corporation
Please be sure called for April 26, 1999, a Proxy
to sign and Statement for the Annual Meeting and the
date this Proxy 1998 Annual Report to Shareholders.
in the space Date
below. _________________ Please sign EXACTLY as your name(s)
appear(s) on this proxy card. When shares
____________ _____________________ are held jointly, each holder should sign.
Shareholder Co-holder(if any) When signing in a representative
sign above sign above capacity, please give title.
- --------------------------------------------------------------------------------------
Detach above card, sign, date and mail in postage paid envelope provided.
BANK OF GRANITE CORPORATION
YOUR VOTE IS IMPORTANT TO US!
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY