Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

Commission file number 0-15956

Bank of Granite Corporation

Securities registered pursuant to Section 12(b) of the Act:   None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     [X]

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes [X]      No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2).     Yes [X]      No [  ]

     As of March 10, 2003, 13,265,957 shares of common stock, $1 par value, were outstanding. As of June 28, 2002, the aggregate market value of voting stock held by non-affiliates was $245,665,967.

Documents Incorporated by Reference

     PART III: Definitive Proxy Statement dated March 21, 2003 as filed pursuant to Section 14 of the Securities Exchange Act of 1934 in connection with the 2003 Annual Meeting of Shareholders.

Exhibit Index begins on page 63

1

FORM 10-K CROSS-REFERENCE INDEX

*  Exhibits, Financial Statement Schedules and Reports on Forms 8-K, included in or incorporated by reference into this filing were filed with the Securities and Exchange Commission. Bank of Granite Corporation provides these documents through its Internet site at www.bankofgranite.com or by mail upon request.

2

PART I

ITEM 1 - BUSINESS

Bank of Granite Corporation (the “Company”) is a Delaware Corporation organized June 1, 1987 as a bank holding company. The Company currently engages in no operations other than ownership and operation of Bank of Granite (the “Bank”), a state bank chartered under the laws of North Carolina on August 2, 1906 and GLL & Associates, Inc. (“GLL”), a mortgage bank chartered under the laws of North Carolina on June 24, 1985. GLL was acquired by the Company on November 5, 1997. The Company conducts its banking business from 13 offices located in Caldwell, Catawba, and Burke counties in North Carolina. According to the Federal Deposit Insurance Corporation (the “FDIC”), the Bank ranked 16th in assets and 14th in deposits among North Carolina commercial banks as of September 30, 2002. The Company conducts its mortgage banking business from 7 offices in the Central and Southern Piedmont and Catawba Valley regions of North Carolina.

GENERAL BUSINESS

The Bank’s principal activities include the taking of demand and time deposits and the making of loans, secured and unsecured, to individuals, associations, partnerships and corporations. Bank of Granite is an independent community bank. The majority of its customers are individuals and small businesses. No material part of its business is dependent upon a single customer or a few customers whose loss would have an adverse effect on the business of the Bank. No material portion of the business of the Bank is seasonal.

GLL’s principal activities include the origination and underwriting of mortgage loans to individuals. GLL also sells mortgage servicing rights and appraisal services. GLL specializes in government guaranteed mortgage products. The majority of its customers are individuals. No material part of its business is dependent upon a single customer or a few customers whose loss would have an adverse effect on the business of GLL. The mortgage business is sensitive to changes in interest rates in the market. When rates decline, GLL experiences an increase in its mortgage business. When rates rise, GLL’s business declines.

TERRITORY SERVED AND COMPETITION

The Bank operates banking offices in Granite Falls and the Baton section of Granite Falls; Lenoir and the Hibriten and Whitnel sections of Lenoir; Hudson; Newton; Morganton; Hickory and the Springs Road, Viewmont, Long View and Mountain View sections of Hickory; for a total of 13 offices. The Bank has entered into an agreement to sell its banking office in Vale, North Carolina.

The FDIC collects deposit data from insured depository institutions as of June 30 of each year.

According to June 30, 2002 data provided by the FDIC, there were 15 other commercial banks and 2 savings institutions in the Bank’s Metropolitan Statistical Area (“MSA”). As of June 30, 2002, the Bank had $531.7 million, or 13.9%, of total MSA deposits of $3.8 billion, compared with $543.9 million, or 14.9%, of total MSA deposits of $3.6 billion as of June 30, 2001.

There were 7 other commercial banks in the Bank’s Caldwell County market. As of June 30, 2002, the Bank had $243.7 million, or 33.9%, of total county deposits of $719.9 million, compared with $244.1 million, or 34.4%, of total county deposits of $709.9 million as of June 30, 2001.

According to the FDIC data, in the Bank’s Catawba County market, there were 10 other commercial banks as of June 30, 2002. The Bank had $256.9 million, or 12%, of total county deposits of $2.1 billion, compared with $267 million, or 13.4%, of total county deposits of $2 billion as of June 30, 2001.

3

In the Bank’s Burke County market, there were 7 other commercial banks and 1 savings institution as of June 30, 2002 according to the FDIC. The Bank had $31.2 million, or 4.8%, of total county deposits of of $650 million, compared with $32.8 million, or 5.2%, of $634.1 million in total Burke County deposits as of June 30, 2001.

The mortgage banking business is also highly competitive, with both bank and nonbank mortgage originators. GLL conducts its mortgage banking business from 7 offices in the North Carolina cities of Winston-Salem, Hickory, High Point, Lenoir, Morganton, Newton and Salisbury.

EMPLOYEES

As of December 31, 2002, the Bank had 191 and GLL had 40 full-time equivalent employees. Each of the Bank and GLL considers its relationship with its employees to be excellent.

SUPERVISION AND REGULATION

The following summaries of statutes and regulations affecting bank holding companies, banks and mortgage banks do not purport to be complete. Such summaries are qualified in their entirety by reference to such statutes and regulations.

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is required to register as such with the Board of Governors of the Federal Reserve System (the “Federal Reserve Board” or “FRB”).

A bank holding company is required to file with the FRB annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve Board and is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly, more than 5% of the voting stock of a bank, unless it already owns a majority of the voting stock of the bank. Furthermore, a bank holding company must only engage, with limited exceptions, in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares of a company the activities of which the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The FRB has cease-and-desist powers over parent bank holding companies and non-banking subsidiaries where their action would constitute a serious threat to the safety, soundness or stability of a subsidiary bank.

While the Company is not presently subject to any regulatory restrictions on dividends, the Company’s ability to pay dividends depends to a large extent on the amount of dividends paid by the Bank and any other subsidiaries. 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, 2002, the Bank had undivided profits of approximately $105.5 million. Additionally, current federal regulations require that the Bank maintain a ratio of total capital to assets, as defined by regulatory authorities, in excess of 6%. As of December 31, 2002, this ratio was 16.88% for the Bank, leaving approximately $75.2 million of the Bank’s undivided profits available for the payment of dividends.

4

In an effort to achieve a measurement of capital adequacy that is more sensitive to the individual risk profiles of financial institutions, the various financial institution regulators mandate minimum capital regulations and guidelines that categorize various components of capital and types of assets and measure capital adequacy in relation to a particular institution’s relative levels of those capital components and the level of risk associated with various types of assets of that financial institution. The FDIC and the FRB statements of policy on “risk-based capital” require the Company to maintain a level of capital commensurate with the risk profile assigned to its assets in accordance with the policy statements. The capital standards call for minimum total capital of 8 percent of risk-adjusted assets. At December 31, 2002, the Company’s tier 1 ratio and total capital ratio to risk-adjusted assets was 21.1% and 22.4% respectively. The Company’s leverage ratio at December 31, 2002 was 17.5%. The Company is in compliance with all regulatory capital requirements.

The Bank is subject to supervision and regulation, of which regular bank examinations are a part, by the FDIC and the North Carolina State Banking Commission (the “Banking Commission”). The Bank is a member of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each bank pays a semi-annual statutory assessment and is subject to the rules and regulations of the FDIC.

Federal banking laws applicable to all depository financial institutions, among other things, (i) afford federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict preferential loans by banks to “insiders” of banks; (iii) require banks to keep information on loans to major shareholders and executive officers, and (iv) bar certain director and officer interlocks between financial institutions. The prohibitions against preferential loans and certain director and officer interlocks may inhibit the ability of the Bank and the Company to obtain experienced and capable officers and directors, to replace presently proposed officers and directors, or to add to their number.

The Company is an “affiliate” of the Bank within the meaning of the Federal Reserve Act, which imposes restrictions on loans by the Bank to the Company and on investments by the Bank in the stock or securities of the Company, which serve as security for loans by the Bank to any borrower. The Company is also subject to certain restrictions with respect to engaging in the business of issuing, underwriting and distributing securities.

Shareholders of banks (including bank holding companies which own stock in banks) may be compelled by bank regulatory authorities to invest additional capital in the event their banks experience either significant loan losses or rapid growth of loans or deposits. In addition, the Company may also be required to provide additional capital to any additional banks which it acquires as a condition to obtaining the approvals and consents of regulatory authorities in connection with such acquisitions.

GLL, as a mortgage bank, is regulated by the Banking Commission. Because GLL is a nonbank subsidiary of a bank holding company, it is also regulated by both the Banking Commission and the FRB. In addition, because GLL underwrites mortgages guaranteed by the government, it is subject to other audits and examinations as required by the government agencies or the investors who purchase the mortgages.

The Company cannot predict what other legislation might be enacted or what other regulation might be adopted or, if enacted or adopted, the effect thereof.

EFFECTS OF GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONTROLS

The Company is directly affected by governmental monetary policy and by regulatory measures affecting the banking industry in general. Of primary importance is the FRB, whose actions directly affect the money supply and, in general, affect banks’ lending abilities by increasing or decreasing the cost and availability of bank credit in order to combat recession and curb inflationary pressures in the economy by open market operations in the United States government securities, changes in the discount rate on member bank borrowings, and changes in reserve requirements against bank deposits.

5

Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks have eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts. The effect of these specific actions and, in general, the deregulation of deposit interest rates have increased banks’ costs of funds and made them more sensitive to fluctuations in money market rates.

In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the Company.

AVAILABLE INFORMATION

Additional information about the Company and its business is available at the Company’s website, at www.bankofgranite.com. The Company’s filings with the Securities and Exchange Commission, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports files or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, are available on the Company’s website under the heading “Investor Relations - SEC Filings.”

ITEM 2 - PROPERTIES

The Bank owns all of its facilities, except for the leased grocery store offices in Baton and Vale, which are listed in the table below. The Bank’s management considers its facilities well maintained and sufficiently suitable for present operations.

6

*   The Bank has entered into an agreement to sell its banking office in Vale, North Carolina.

GLL leases all of its facilities which are listed below. GLL’s management considers its facilities well maintained and sufficiently suitable for present operations.

7

ITEM 3 - LEGAL PROCEEDINGS

There were no significant legal proceedings as of December 31, 2002.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of shareholders in the fourth quarter of 2002.

PART II

ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company’s common stock, $1 par value, trades on The NASDAQ National Market^® tier of The NASDAQ Stock Market^® under the symbol GRAN. Price and volume information is contained in The Wall Street Journal^® and most major daily newspapers in the NASDAQ section under the National Market System listings.

During 2002, the investment firms making a market in the Company’s common stock with the highest volumes of Company shares traded were Wachovia Securities, Inc., Spear, Leeds & Kellogg, Knight Securities, LP, First Union Securities, Inc. and Herzog, Heine, Geduld, LLC.

As of December 31, 2002, there were 13,333,674 shares outstanding, owned by approximately 2,400 shareholders of record and an estimated 3,100 holders of shares registered in street name or as beneficial owners. The following table presents the quarterly market sales prices and dividend information for the two years in the period ended December 31, 2002.

Quarterly Common Stock Market Price Ranges and Dividends

•     Amounts for periods prior to May 31, 2002 have been restated to reflect the 5-for-4 stock split paid May 31, 2002.

The following table sets forth information as of December 31, 2002 regarding shares of the Company’s common stock that may be issued upon exercise of options previously granted and currently outstanding options under the Company’s stock option plans, as well as the number of shares available for the grant of options that had not been granted as of that date.

8

ITEM 6 — SELECTED FINANCIAL DATA

Bank of Granite Corporation and Subsidiaries

* Amounts for periods prior to May 31, 2002 have been restated to reflect the 5-for-4 stock split paid May 31, 2002.

9

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW

Management’s Discussion and Analysis is provided to assist in understanding and evaluating the Company’s results of operations and financial condition. The following discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere herein. In 1987, Bank of Granite Corporation (the “Company”) was formed under a plan whereby all previously issued shares of Bank of Granite (the “Bank”) stock were exchanged for shares of the Company’s stock. The Bank then became a wholly-owned subsidiary of the Company. In 1997, the Company acquired GLL & Associates, Inc. (“GLL”), a mortgage bank, through a merger, which was accounted for as a pooling of interests. 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 31, 2002.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include the Company’s accounting for securities, loans, the allowance for loan losses and income taxes. In particular, the Company’s accounting policies relating to the allowance for loan losses and income taxes involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations. Please see the discussions below under the captions “Loans,” “Provisions and Allowance for Loan Losses” and “Investment Securities.” Also, please refer to Note 1 in the “Notes to Consolidated Financial Statements” under Item 8, “Financial Statements & Supplementary Data” for additional information regarding all of the Company’s critical and significant accounting policies.

LOANS - Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances adjusted for any deferred fees or costs. Substantially all loans earn interest on the level yield method based on the daily outstanding balance.

Loans that are deemed to be impaired (i.e., probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement) are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical matter, at the loan’s observable market value or fair value of the collateral if the loan is collateral dependent. A valuation reserve is established to record the difference between the stated loan amount and the present value or market value of the impaired loan. Impaired loans may be valued on a loan-by-loan basis (e.g., loans with risk characteristics unique to an individual borrower) or on an aggregate basis (e.g., loans with similar risk characteristics). The Company’s policy for recognition of interest income on impaired loans is the same as its interest income recognition policy for non-impaired loans. The Company discontinues the accrual of interest when the collectibility of such interest becomes doubtful.

PROVISIONS AND 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.

10

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. The fair values of marketable securities is based on quoted market prices, dealer quotes and prices obtained from independent pricing services. 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.

PENDING ACQUISITION

On December 18, 2002, the Company announced a definitive agreement to acquire First Commerce Corporation (“First Commerce”) of Charlotte, North Carolina. As of December 31, 2002, First Commerce had total assets of $172,172,000 and operated three banking offices in the Charlotte-Gastonia-Rock Hill metropolitan statistical area. Under the terms of the merger agreement, as amended on January 22, 2003, the Company will issue 529,301 shares and $9,562,611 cash to First Commerce shareholders. For each share owned, First Commerce shareholders may select either (i) $18.73 cash; (ii) a combination of cash and stock; or (iii) 100% stock, subject to the pro rata allocations described in the agreement. The transaction, which will be accounted for as a purchase, is expected to close in the second quarter of 2003, subject to approval by the First Commerce shareholders and bank regulators.

11

RESULTS OF OPERATIONS

The following discussion relates to operations for the year ended December 31, 2002 compared to the year ended December 31, 2001, the year ended December 31, 2001 compared to the year ended December 31, 2000, and the year ended December 31, 2000 compared to the year ended December 31, 1999.

2002 COMPARED TO 2001

In 2002, the Company earned $15,102,300, or $1.11 per share, compared to $13,808,555, or $0.99 per share, in 2001. The earnings provided returns on average assets of 2.13% in 2002 compared to 2.00% in 2001 and returns on average equity of 11.98% in 2002 compared to 11.29% in 2001. The earnings increase was primarily attributable to higher net interest income, lower loan loss provisions and increased income from mortgage originations, partially offset by increases in operating costs.

Net interest income, the Company’s largest source of revenues, increased 6.3% to $34,908,104 in 2002 from $32,840,650 in 2001. Interest income was $45,710,526 in 2002, down 12.6% from $52,284,219 in 2001, primarily due to lower interest rates from the previous year. The average yield on interest-earning assets was 7.12% in 2002 compared with 8.27% in 2001. Average interest-earning assets grew by $12,288,466, or 1.9%, primarily because average loans, the highest yielding asset category, grew by $47,027,071, or 9.8%. Interest expense decreased 44.4% to $10,802,422 in 2002 compared to $19,443,569 in 2001. The average cost of funds was 2.23% in 2001 compared with 4.11% in 2001. Lower rates on time deposits resulted in the significantly lower interest expense. Average balances in transaction accounts, such as noninterest-bearing demand accounts and interest-bearing savings, NOW and money market accounts, increased $30,090,980, or 13.3%, to $256,945,371 in 2002 from $226,854,391 in 2001. Average balances in time deposits decreased $35,338,224, or 11.7%, to $266,835,606 in 2002 from $302,173,830 in 2001. Average overnight borrowings, principally commercial account balances which are swept into the Company’s commercial paper overnight, grew by $19,238,103, or 135.6%, to $33,426,013 in 2002 from $14,187,910 in 2001. Average other borrowings, which are principally used to fund mortgage banking activities, increased $1,276,667, or 6.6%, to $20,554,913 in 2002 from $16,278,246 in 2001. Such other borrowings had maturities of less than one year.

Primarily because of a recessionary economy, which was particularly severe in the Company’s local banking markets, the Company provided $3,492,382 for possible loan losses in 2002 compared with $4,216,772 in 2001. Although the 2002 provision was lower than the 2001 provision, it increased the Company’s allowance or reserve for loan losses to 1.59% of net loans outstanding at December 31, 2002 compared to 1.28% at December 31, 2001. Charge-offs, net of recoveries totaled $1,084,248 for 2002 compared with $4,142,051 for 2001. Nonperforming loans totaled $4,417,845 at the end of 2002 compared with $4,713,204 at the end of 2001.

Other income was $11,397,705 in 2002, an increase of $1,257,645, or 12.4%, from such revenues of $10,140,060 in 2001. Continued low interest rates resulted in increases in fees from both mortgage originations and annuity sales. Fee income from mortgage originations increased $827,202, or 26.5%, to $3,949,354 in 2002 from $3,122,152 in 2001. Also contributing to the increase in fee income was an increase of $214,140 in deposit fees. Mortgage origination activities have a tendency to increase during periods of sustained low interest rates, as was the case during 2002.

Other expenses, or overhead, increased $1,973,955, or 10.8%, to $20,316,234 in 2002 from $18,342,279 in 2001, primarily due to increased costs associated with higher mortgage origination activity. Personnel expenses, the largest component of overhead, increased to $12,900,749 in 2002 from $11,408,477 in 2001, primarily due to increases in expenses related to profit sharing, healthcare and increased mortgage origination activity.

12

2001 COMPARED TO 2000

In 2001, the Company earned $13,808,555, or $0.99 per share, compared to $15,574,583, or $1.10 per share, in 2000. The earnings provided returns on average assets of 2.00% in 2001 compared to 2.45% in 2000 and returns on average equity of 11.29% in 2001 compared to 13.41% in 2000. The earnings decrease was primarily attributable to lower net interest income, which resulted from 11 successive short-term interest rate reductions by the Federal Reserve Bank.

Net interest income, the Company’s largest source of revenues, decreased 9% to $32,840,650 in 2001 from $36,097,440 in 2000. Interest income was $52,284,219 in 2001, down 5.4% from $55,269,464 in 2000, primarily due to 11 successive reductions in short-term interest rates. The average yield on interest-earning assets was 8.27% in 2001 compared with 9.51% in 2000. Average interest-earning assets grew by $54,275,383, or 9%, primarily because average loans, the highest yielding asset category, grew by $58,478,916, or 13.9%. Interest expense increased 1.4% to $19,443,569 in 2001 compared to $19,172,024 in 2000. The average cost of funds was 4.11% in 2001 compared with 4.57% in 2000. Higher volumes in time deposits resulted in the slightly higher interest expense. Average balances in transaction accounts, such as noninterest-bearing demand accounts and interest-bearing savings, NOW and money market accounts, decreased $1,594,954, or 0.7%, to $226,854,391 in 2001 from $228,449,345 in 2000. Average balances in time deposits grew $38,650,985, or 14.7%, to $302,173,830 in 2001 from $263,522,845 in 2000. Average overnight borrowings, principally commercial account balances which are swept into the Company’s commercial paper overnight, grew by $1,658,656, or 13.2%, to $14,187,910 in 2001 from $12,529,254 in 2000. Average other borrowings, which are used to fund mortgage banking activities, increased $10,255,661, or 113.7%, due to significantly higher mortgage originations resulting from lower mortgage interest rates.

Because of both the growth in loans and higher levels of charge-offs and nonperforming loans, the Company provided $4,216,772 for possible loan losses in 2001 compared with $3,893,585 in 2000. Charge-offs, net of recoveries totaled $4,142,051 for 2001 compared with $2,288,521 for 2000. Nonperforming loans totaled $4,713,204 at the end of 2001 compared with $3,484,945 at the end of 2000.

Other income was $10,140,060 in 2001, an increase of $2,106,380, or 26.2%, from such revenues of $8,033,680 in 2000. Lower interest rates resulted in increase in fees from both mortgage originations and annuity sales. Fee income from mortgage originations increased $1,061,123, or 51.5%, to $3,122,152 in 2001 from $2,061,029 in 2000. Also contributing to the increase in fee income were increases of $362,996 in deposit fees and $246,633 in fees from annuity sales. Mortgage origination and annuity activity have a tendency to increase during periods of lower interest rates, as was the case during 2001.

Other expenses, or overhead, increased $1,563,864, or 9.3%, to $18,342,279 in 2001 from $16,778,415 in 2000, primarily due to increased costs associated with higher mortgage origination activity. Personnel expenses, the largest component of overhead, increased to $11,408,477 in 2001 from $9,914,791 in 2000. There were very slight increases in the other categories of overhead expenses.

13

2000 COMPARED TO 1999

In 2000, the Company earned $15,574,583, or $1.10 per share, compared to $14,736,792, or $1.02 per share, in 1999. The earnings provided returns on average assets of 2.45% in 2000 compared to 2.46% in 1999 and returns on average equity of 13.41% in 2000 compared to 13.42% in 1999. The earnings increase was primarily attributable to higher net interest income, which resulted from loan growth that out-paced the growth in both deposits and the costs of deposits.

Net interest income, the Company’s largest source of revenues, increased 11.9% to $36,097,440 in 2000 from $32,253,067 in 1999. Interest income was $55,269,464 in 2000, up 15.1% from $48,005,534 in 1999, primarily due to increases in loan volumes and further boosted by higher loan interest rates. Average interest-earning assets grew by $38,182,783, or 6.8%, primarily because average loans, the highest yielding asset category, grew by $40,559,606, or 10.7%. Interest expense increased 21.7% to $19,172,024 in 2000 compared to $15,752,467 in 1999. Higher interest rates and volumes in time deposits resulted in the higher interest expense. Average balances in transaction accounts, such as noninterest-bearing demand accounts and interest-bearing savings, NOW and money market accounts, grew $10,305,910, or 4.7%, to $228,449,345 in 2000 from $218,143,435 in 1999. Average balances in time deposits grew $23,311,462, or 9.7%, to $263,522,845 in 2000 from $240,211,383 in 1999. Average overnight borrowings, principally commercial account balances which are swept into the Company’s commercial paper overnight, grew by $1,238,677, or 11%, to $12,529,254 in 2000 from $11,290,577 in 1999. Average other borrowings, which are used to fund mortgage banking activities, decreased $5,979,688, or 39.9%, due to fewer mortgage originations resulting from higher mortgage interest rates.

Because of both the growth in loans and higher levels of charge-offs and nonperforming loans, the Company provided $3,893,585 for possible loan losses in 2000 compared with $1,862,585 in 1999.

Other income was $8,033,680 in 2000, a decrease of $175,862, or 2.1%, from such revenues of $8,209,542 in 1999. In April of 2000, the Bank introduced a new demand deposit overdraft program designed for retail customers. The new program increased the Bank’s fee income from overdrafts by $1,222,897. This increase in deposit fees was offset by declines in fees from mortgage originations and sales of the guaranteed portions of small business administration (“SBA”) loans. Higher mortgage interest rates resulted in a decrease of $1,029,791, or 33.3%, in fees from mortgage originations to $2,061,029 in 2000 from $3,090,820 in 1999. In addition, management decided to retain the guaranteed portions of SBA loans, which lowered fee income from such activity by $312,502, but contributed to the increase in interest income from loans. Both mortgage and SBA lending activities often decline during periods of rising rates.

Other expenses, or overhead, increased $242,340, or 1.5%, to $16,778,415 in 2000 from $16,536,075 in 1999. Personnel expenses, the largest component of overhead, increased slightly to $9,914,791 in 2000 from $9,904,199 in 1999. Occupancy and equipment expenses increased $174,670, or 8.3% to $2,280,903 in 2000 compared with $2,106,233 in 1999. In addition, other noninterest expenses increased 1.3%.

14

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 Bank) represents the most significant portion of the Company’s earnings. It is management’s on-going policy to optimize net interest income. Net interest income totaled $34,908,104, $32,840,650, and $36,097,440 for 2002, 2001 and 2000 respectively, representing an increase of 6.3% for 2002 over 2001, a decrease of 9% for 2001 from 2000, and an increase of 11.9% for 2000 over 1999. Interest rate spreads have been at least 4.00% over the last three years, and the Company continues efforts to maximize these favorable spreads by managing both loan and deposit rates in order to support the overall earnings growth. The following table presents the daily average balances, interest income and 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,