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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
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FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended JUNE 30, 2000
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OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 0-15956
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BANK OF GRANITE CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 56-1550545
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
POST OFFICE BOX 128, GRANITE FALLS, N.C. 28630
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(Address of principal executive offices) (Zip Code)
(828) 496-2000
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year, if changed since last report)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
COMMON STOCK, $1 PAR VALUE
11,296,062 SHARES OUTSTANDING AS OF JULY 31, 2000
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Exhibit Index begins on page 17
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 1 of 18
2
BANK OF GRANITE CORPORATION
Index
Begins
on Page
-------
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Statements of Consolidated Income
Three Months Ended June 30, 2000 and 1999
And Six Months Ended June 30, 2000 and 1999 4
Statements of Consolidated Comprehensive Income
Three Months Ended June 30, 2000 and 1999
And Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION 15
Signatures 16
Exhibit Index 17
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 2 of 18
3
BANK OF GRANITE CORPORATION
Consolidated Balance Sheets
(unaudited)
JUNE 30, December 31,
2000 1999
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 30,474,026 $ 23,219,670
Interest-bearing deposits 344,181 268,826
Federal funds sold -- 27,650,000
-------------- --------------
Total cash and cash equivalents 30,818,207 51,138,496
-------------- --------------
Investment securities:
Available for sale, at fair value 86,080,318 70,205,689
Held to maturity, at amortized cost 82,581,056 85,139,790
Loans 422,630,825 390,189,234
Allowance for loan losses (5,721,018) (4,746,692)
-------------- --------------
Net loans 416,909,807 385,442,542
-------------- --------------
Premises and equipment, net 9,555,435 9,673,010
Accrued interest receivable 5,988,163 5,456,567
Other assets 4,792,201 3,670,505
-------------- --------------
Total assets $ 636,725,187 $ 610,726,599
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 99,697,268 $ 91,100,910
NOW accounts 76,881,266 73,907,404
Money market accounts 31,753,460 33,663,278
Savings 25,497,194 24,399,214
Time deposits of $100,000 or more 108,735,354 110,041,565
Other time deposits 147,453,559 138,546,827
-------------- --------------
Total deposits 490,018,101 471,659,198
Overnight borrowings 17,187,279 13,461,774
Other borrowings 9,756,271 8,626,481
Accrued interest payable 2,098,272 2,031,605
Other liabilities 1,533,203 1,496,432
-------------- --------------
Total liabilities 520,593,126 497,275,490
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Shareholders' equity:
Common stock, $1 par value
Authorized - 25,000,000 shares
Issued - 11,495,897 shares in 2000 and 11,495,897 shares in 1999
Outstanding - 11,314,062 shares in 2000 and 11,439,201 shares in 1999 11,495,897 11,495,897
Capital surplus 22,987,562 22,987,562
Retained earnings 86,443,428 80,976,641
Accumulated other comprehensive loss,
net of deferred income taxes (1,050,030) (746,948)
Less: Cost of common shares in treasury;
Held - 181,835 shares in 2000 and 56,696 shares in 1999 (3,744,796) (1,262,043)
-------------- --------------
Total shareholders' equity 116,132,061 113,451,109
-------------- --------------
Total liabilities and shareholders' equity $ 636,725,187 $ 610,726,599
============== ==============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 3 of 18
4
BANK OF GRANITE CORPORATION
Statements of Consolidated
Income (unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
INTEREST INCOME:
Interest and fees on loans $ 11,125,482 $ 9,362,515 $ 21,294,192 $ 18,831,283
Federal funds sold 241,071 400,648 636,316 639,034
Interest-bearing deposits 6,641 3,894 12,110 7,447
Investments:
U.S. Treasury 121,318 186,234 263,949 379,517
U.S. Government agencies 1,283,141 736,178 2,312,123 1,467,931
States and political subdivisions 814,414 884,336 1,670,371 1,806,225
Other 157,470 179,501 340,617 412,318
------------ ------------ ------------ ------------
Total interest income 13,749,537 11,753,306 26,529,678 23,543,755
------------ ------------ ------------ ------------
INTEREST EXPENSE:
Time deposits of $100,000 or more 1,584,194 1,225,808 3,120,830 2,507,762
Other deposits 2,623,185 2,337,571 5,068,774 4,735,555
Overnight borrowings 162,772 117,834 308,506 218,227
Other borrowings 117,038 186,484 200,540 414,940
------------ ------------ ------------ ------------
Total interest expense 4,487,189 3,867,697 8,698,650 7,876,484
------------ ------------ ------------ ------------
Net interest income 9,262,348 7,885,609 17,831,028 15,667,271
Provision for loan losses 788,427 316,002 1,433,427 480,581
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 8,473,921 7,569,607 16,397,601 15,186,690
------------ ------------ ------------ ------------
OTHER INCOME:
Service charges on deposit accounts 1,278,950 862,598 2,161,113 1,676,266
Other service charges, fees and commissions 747,062 997,194 1,380,339 2,399,612
Securities gains -- 675 -- 675
Other 22,960 161,361 167,201 377,661
------------ ------------ ------------ ------------
Total other income 2,048,972 2,021,828 3,708,653 4,454,214
------------ ------------ ------------ ------------
OTHER EXPENSES:
Salaries and wages 2,098,179 2,138,382 4,098,232 4,418,285
Employee benefits 449,107 418,974 882,780 848,755
Occupancy expense, net 209,254 197,381 417,434 394,645
Equipment expense 360,624 336,740 689,882 681,212
Other 1,159,022 1,241,259 2,296,299 2,404,529
------------ ------------ ------------ ------------
Total other expenses 4,276,186 4,332,736 8,384,627 8,747,426
------------ ------------ ------------ ------------
Income before income taxes 6,246,707 5,258,699 11,721,627 10,893,478
Income taxes 2,159,277 1,730,579 3,972,721 3,600,094
------------ ------------ ------------ ------------
Net income $ 4,087,430 $ 3,528,120 $ 7,748,906 $ 7,293,384
============ ============ ============ ============
PER SHARE AMOUNTS:
Net income - Basic $ 0.36 $ 0.31 $ 0.68 $ 0.64
Net income - Diluted 0.36 0.31 0.68 0.63
Cash dividends 0.10 0.09 0.20 0.18
Book value 10.26 9.56
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 4 of 18
5
BANK OF GRANITE CORPORATION
Statements of Consolidated
Comprehensive Income
(unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
Net income $ 4,087,430 $ 3,528,120 $ 7,748,906 $ 7,293,384
------------ ------------ ------------ ------------
ITEMS OF OTHER COMPREHENSIVE
INCOME:
Items of other comprehensive
losses, before tax:
Unrealized losses on
securities available for sale (52,121) (967,438) (504,099) (1,627,176)
Less: Reclassification
adjustments for gains
included in net income -- 675 -- 675
------------ ------------ ------------ ------------
Items of other comprehensive
losses, before tax (52,121) (968,113) (504,099) (1,627,851)
Less: Change in deferred income
taxes related to change in
unrealized gains or losses on
securities available for sale (20,784) (385,765) (201,017) (648,835)
------------ ------------ ------------ ------------
Other comprehensive
losses, net of tax (31,337) (582,348) (303,082) (979,016)
------------ ------------ ------------ ------------
Comprehensive income $ 4,056,093 $ 2,945,772 $ 7,445,824 $ 6,314,368
============ ============ ============ ============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 5 of 18
6
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited)
Six Months
Ended June 30,
2000 1999
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 26,096,856 $ 23,904,065
Fees and commissions received 3,708,653 4,453,539
Interest paid (8,631,983) (8,263,246)
Cash paid to suppliers and employees (8,823,805) (7,067,124)
Income taxes paid (4,000,017) (4,169,598)
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Net cash provided by operating activities 8,349,704 8,857,636
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 7,725,000 2,487,800
Proceeds from maturities and/or calls of
securities held to maturity 7,876,750 11,744,800
Purchase of securities available for sale (24,112,660) (4,441,316)
Purchase of securities held to maturity (5,407,858) (9,467,719)
Net decrease (increase) in loans (32,900,692) 3,413,672
Capital expenditures (389,368) (485,184)
Proceeds from sale of fixed assets 750 15,530
Proceeds from sale of other real estate 88,759 240,306
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Net cash provided (used) by investing activities (47,119,319) 3,507,889
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 10,758,382 4,769,353
Net decrease (increase) in certificates of deposit 7,600,521 (5,483,746)
Net increase in overnight borrowings 3,725,505 508,911
Net decrease (increase) in other borrowings 1,129,790 (12,111,764)
Net proceeds from issuance of common stock -- 394,501
Dividend paid (2,282,119) (2,066,097)
Purchases of common stock for treasury (2,482,753) (219,876)
------------ ------------
Net cash provided (used) by financing activities 18,449,326 (14,208,718)
------------ ------------
Net decrease in cash equivalents (20,320,289) (1,843,193)
Cash and cash equivalents at beginning of period 51,138,496 58,294,177
------------ ------------
Cash and cash equivalents at end of period $ 30,818,207 $ 56,450,984
============ ============
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 6 of 18
7
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited) - (concluded)
Six Months
Ended June 30,
2000 1999
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 7,748,906 $ 7,293,384
------------ ------------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 506,943 510,605
Provision for loan loss 1,433,427 480,581
Premium amortization, net 98,774 110,492
Deferred income taxes (373,079) (101,567)
Gains on calls of securities
held to maturity -- (675)
Gain on disposal or sale of equipment (750) (10,660)
Gain on disposal or sale of other real estate -- (26,457)
Increase (decrease) in taxes payable 345,783 (467,937)
Increase (decrease) in accrued interest receivable (531,596) 249,818
Increase (decrease) in interest payable 66,667 (386,762)
Increase in other assets (636,359) (577,938)
Increase (decrease) in other liabilities (309,012) 1,784,752
------------ ------------
Net adjustments to reconcile net income to
net cash provided by operating activities 600,798 1,564,252
------------ ------------
Net cash provided by operating activities $ 8,349,704 $ 8,857,636
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Decrease in unrealized gains or
losses on securities available for sale $ (504,099) $ (1,627,176)
Increase in deferred income taxes
on unrealized gains or losses on
securities available for sale (201,017) (648,835)
Transfer from loans to other real estate owned 170,626 91,148
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 7 of 18
8
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements
June 30, 2000
1. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary to present fairly the financial
position of Bank of Granite Corporation (the "Company") as of June 30, 2000 and
December 31, 1999, and the results of its operations for the three and six month
periods ended June 30, 2000 and 1999, and its cash flows for the six month
periods ended June 30, 2000 and 1999.
The consolidated financial statements include the Company's two wholly-owned
subsidiaries, the Bank of Granite (the "Bank"), a full service commercial bank,
and GLL & Associates, Inc. ("GLL"), a mortgage bank.
The accounting policies followed are set forth in Note 1 to the Company's 1999
Annual Report to Shareholders on file with the Securities and Exchange
Commission.
2. Earnings per share have been computed using the weighted average number of
shares of common stock and potentially dilutive common stock equivalents
outstanding as follows:
Three Months Six Months
Ended June 30, Ended June 30,
(in shares) 2000 1999 2000 1999
Weighted average shares outstanding 11,350,996 11,486,667 11,385,111 11,484,914
Potentially dilutive effect of stock options 10,185 19,581 9,710 25,905
---------- ---------- ---------- ----------
Weighted average shares outstanding,
including potentially dilutive effect of
stock options 11,361,181 11,506,248 11,394,821 11,510,819
========== ========== ========== ==========
3. In the normal course of business there are various commitments and contingent
liabilities such as commitments to extend credit, which are not reflected on the
financial statements. Management does not anticipate any significant losses to
result from these transactions. The unfunded portion of loan commitments and
standby letters of credit as of June 30, 2000 and December 31, 1999 were as
follows:
JUNE 30, December 31,
2000 1999
Unfunded commitments $ 82,913,867 $ 74,923,283
Letters of credit 2,413,691 3,188,371
4. New Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. SFAS 133 will not be applied
retroactively to financial statements of prior periods. Management has not
evaluated the impact that the adoption of SFAS 133 will have on the Company's
financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 8 of 18
9
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION
JUNE 30, 2000 COMPARED WITH DECEMBER 31, 1999
Total assets increased $25,998,588, or 4.26%, from December 31, 1999 to
June 30, 2000. Earning assets increased $18,182,841, or 3.17%, over the same six
month period. Loans, the largest earning asset, increased $32,441,591, or 8.31%,
over the same period, primarily because of a $31,071,019, or 8.18%, increase as
of June 30, 2000 in loans of the Company's bank subsidiary. Also during the
first six months of 2000, investment securities increased $13,315,895, or 8.57%.
The increases in loans and investment securities were partially funded with
federal funds sold overnight, which decreased $27,650,000, or 100.00%, during
the period as the Company redeployed lower yielding overnight investments into
higher yielding loans and debt securities. The decrease in federal funds sold
overnight was partially offset by a $7,254,356, or 31.24%, increase in cash and
due from banks, which accounts for the $20,320,289, or 39.74%, decrease in cash
and cash equivalents.
Funding the asset growth was a combination of deposit growth, growth in
overnight and other borrowings and earnings retained. Deposits increased
$18,358,903, or 3.89%, from December 31, 1999 to June 30, 2000.
Noninterest-bearing demand deposits increased $8,596,358, or 9.44%, over the
same six month period. Savings, NOW and money market deposits increased
$2,162,024, or 1.64%, while total time deposits increased $7,600,521, or 3.06%,
over the same period. The loan to deposit ratio was 86.25% as of June 30, 2000
compared to 82.73% as of December 31, 1999, while the bank subsidiary's loan to
deposit ratio was 81.25% compared to 78.41% when comparing the same periods. The
Company has sources of funding, in addition to deposits, in the form of
overnight and other short-term borrowings as well as longer-term borrowings.
Overnight borrowings are primarily in the form of federal funds purchased and
commercial deposit products that sweep balances overnight into securities sold
under agreements to repurchase or commercial paper issued by the Company. From
December 31, 1999 to June 30, 2000, such overnight borrowings increased
$3,725,505, or 27.67%. Other borrowings increased $1,129,790, or 13.10%,
reflecting an increase in temporary borrowings by the mortgage subsidiary
primarily due to slightly higher mortgage origination activity.
Common stock outstanding decreased 125,139 shares, or 1.09%, from
December 31, 1999 to June 30, 2000, primarily due to shares repurchased under
the Company's current stock repurchase plan. From December 31, 1999 through June
30, 2000, the Company repurchased 125,139 shares of its common stock at an
average price of $19.84. Earnings retained were $5,466,787 for the first six
months of 2000, after paying cash dividends of $2,282,119. Accumulated other
comprehensive loss, net of deferred income taxes increased $303,082, or 40.58%,
from December 31, 1999 to June 30, 2000, primarily because the value of
securities available for sale declined when interest rates rose during the
period.
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. The Company's liquidity
position remained strong.
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
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 9 of 18
10
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION - (continued)
years; however, the Company does realize the importance of minimizing such
volatility while at the same time maintaining and improving earnings. A common
method used to manage interest rate sensitivity is to measure, over various time
periods, the difference or gap between the volume of interest-earning assets and
interest-bearing liabilities repricing over a specific time period. However,
this method addresses only the magnitude of funding mismatches and does not
address the magnitude or relative timing of rate changes. Therefore, management
prepares on a regular basis earnings projections based on a range of interest
rate scenarios of rising, flat and declining rates in order to more accurately
measure interest rate risk.
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.
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." "Rate shocks"
measure the estimated theoretical impact on the Bank's tax equivalent net
interest income and market value of equity from hypothetical immediate changes
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 foreseeable future.
The Company has not experienced a material change in the mix of its
rate-sensitive assets and liabilities or in interest rates in the market that it
believes would result in a material change in its interest rate sensitivity
since reported at December 31, 1999.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2000 COMPARED WITH
THE SAME PERIOD IN 1999 AND FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 2000 COMPARED WITH THE SAME PERIOD IN 1999
During the three month period ended June 30, 2000, interest income
increased $1,996,231, or 16.98%, from the same period last year. The increase is
primarily attributable to increases in the volumes of loan and investment assets
as well as higher yields on such assets. Interest and fees on loans increased
$1,762,967, or 18.83%, due to both higher average volumes and rates during the
quarter. Yields on loans averaged 10.71% for the quarter, up from 9.84% for the
same quarter last year. The prime lending rate during the three month period
averaged 9.14% compared to 7.75% during the same period in 1999. Gross loans
averaged $415,395,605 compared to $380,607,352 last year, an increase of
$34,788,253, or 9.14%. Average loans of the bank subsidiary were $403,868,857
compared to $362,401,760 last year, an increase of $41,467,097, or 11.44%, while
average loans of the mortgage subsidiary were $11,526,748 compared to
$18,205,592 last year, a decrease of $6,678,844, or 36.69%. Interest on
securities and overnight investments increased $233,264, or 9.76%, primarily due
to higher rates during the quarter. Average securities and overnight investments
increased slightly.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 10 of 18
11
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
Interest expense increased $619,492, or 16.02%, primarily because
higher interest rates on interest-bearing deposits outpaced the growth in the
average balances of such deposits. Rates on interest-bearing deposits averaged
4.31% for the quarter, up from 3.90% for the same quarter last year. Total
interest-bearing deposits averaged $390,337,630 compared to $365,321,297 last
year, an increase of $25,016,333, or 6.85%. Savings, NOW and money market
deposits averaged $137,997,700 compared to $127,611,621 last year, an increase
of $10,386,079, or 8.14%. Time deposits averaged $252,339,930 compared to
$237,709,676 last year, an increase of $14,630,254, or 6.15%. Overnight
borrowings averaged $14,180,572 compared to $10,845,064 last year, an increase
of $3,335,508, or 30.76%, reflecting an increase of $3,263,936, or 38.35%, in
average overnight borrowings in the form of commercial paper related to the
commercial deposit sweep arrangements of the banking subsidiary. Other
borrowings averaged $9,770,351 compared to $16,658,265 last year, a decrease of
$6,887,914, or 41.35%, in temporary borrowings on the mortgage subsidiary
primarily due to lower mortgage origination activity. Other borrowings were the
principal source of funding for the mortgage origination activities of the
mortgage subsidiary.
For substantially the same reasons of both higher volumes and higher
rates, interest income and expense were higher for the six month period ended
June 30, 2000. During the first six months of 2000, interest income increased
$2,985,923, or 12.68%, from the same period last year, primarily because growth
in interest income due to higher volumes of interest-earning assets outpaced
increases in interest income due to higher rates. Interest and fees on loans
increased $2,462,909, or 13.08%, due to both higher average volumes and rates
during the year-to-date period. Yields on loans averaged 10.49% for the
year-to-date period, up from 9.95% for the same period last year. The prime rate
during the six month period averaged 8.90% compared to 7.75% during the same
period in 1999. Gross loans averaged $406,008,376 compared to $378,707,602 last
year, an increase of $27,300,774, or 7.21%. Average loans of the bank subsidiary
were $395,687,627 compared to $358,370,387 last year, an increase of
$37,317,240, or 10.41%. The Bank's loan growth was partially offset by a decline
in the average loans of the mortgage subsidiary, which were $10,320,749 compared
to $20,337,215 last year, a decrease of $10,016,466, or 49.25%. Interest on
securities and overnight investments increased $523,014, or 11.10%, primarily
due to higher average volumes invested during the period. Average securities and
overnight investments were $184,694,748 compared to $176,499,063 last year, an
increase of $8,195,685, or 4.64%.
Interest expense increased $822,166, or 10.44%, primarily because
growth in interest expense due to higher rates slightly outpaced increases in
interest expense resulting from growth in volumes of interest-bearing deposits
and other borrowings. Rates on interest-bearing deposits averaged 4.22% for the
year-to-date period, up from 3.98% for the same period last year.
Interest-bearing deposits averaged $388,433,980 compared to $364,192,706 last
year, an increase of $24,241,274, or 6.66%. Overnight borrowings averaged
$13,633,041 compared to $10,058,933 last year, an increase of $3,574,108, or
35.53%, reflecting an increase of $3,851,884, or 50.21%, in average overnight
borrowings in the form of commercial paper related to the commercial deposit
sweep arrangements of the banking subsidiary. Other borrowings averaged
$8,635,515 compared to $18,729,308 last year, reflecting a decrease of
$10,093,793, or 53.89%, in temporary borrowings on the mortgage subsidiary
primarily due to lower mortgage origination activity. Other borrowings were the
principal source of funding for the mortgage origination activities of the
mortgage subsidiary.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 11 of 18
12
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
Management determines the allowance for loan 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 loan portfolio as well as current and projected
economic conditions locally and nationally. Upon loan origination, management
evaluates the relative quality of each loan and assigns a corresponding loan
grade. All loans are periodically reviewed to determine whether any changes in
these loan grades are necessary. The loan grading system assists management in
determining the overall risk in the loan portfolio.
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. During the three and
six month periods ended June 30, 2000, management determined a charge to
operations of $788,427 and $1,433,427, respectively, would bring the loan loss
reserve to a balance considered to be adequate to reflect the growth in loans
and to absorb estimated potential losses in the portfolio. At June 30, 2000, the
loan loss reserve was 1.37% of net loans outstanding compared to 1.23% as of
December 31, 1999.
At June 30, 2000 and 1999, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $1,734,516 ($1,207,725 of which
was on a non-accrual basis) and $2,116,753 ($1,624,885 which was on a
non-accrual basis), respectively. The average recorded balance of impaired loans
during 2000 and 1999 was not significantly different from the balance at June
30, 2000 and 1999, respectively. The related allowance for loan losses
determined in accordance with SFAS No. 114 for these loans was $878,086 and
$1,529,469 at June 30, 2000 and 1999, respectively. For the six months ended
June 30, 2000 and 1999, the Company recognized interest income on those impaired
loans of approximately $67,829 and $88,243, respectively.
For the quarter ended June 30, 2000, total noninterest income was
$2,048,972, up $27,144, or 1.34%, from $2,021,828 earned in the same period of
1999, primarily because increases in fee income of $333,782, or 27.31%, of the
banking subsidiary were substantially offset by mortgage fee decreases of
$232,280, or 29.05%, from fewer mortgage originations on the mortgage
subsidiary. Fees on deposit accounts were $1,278,950 during the second quarter,
up $416,352, or 48.27%, from $862,598 earned in the second quarter of 1999,
primarily due to $377,959 in additional fees associated with a new overdraft
protection program designed for retail customers and introduced in April 2000.
Second quarter other service fees and commissions were $747,062 for 2000, down
$250,132, or 25.08%, from $997,194 earned in the same period of 1999. Included
in other service fees was mortgage origination fee income of $567,334 for 2000,
down $232,280, or 29.05%, from $799,614 earned in the same period of 1999. As
mortgage rates rose sharply, beginning in April 1999, mortgage origination
activity dropped dramatically and continued at low levels throughout the second
quarter of 2000. There were no significant gains or losses on sales of
securities in the second quarter of 2000 or 1999. Other noninterest income was
only $22,960 for the second quarter of 2000, down $138,401, or 85.77%, from
$161,361 earned in the second quarter of 1999, partially due to lower sales of
small business loans which generated no income in the second quarter of 2000
compared to $50,961 in the same quarter of 1999. Although management continued
to emphasize fees from nontraditional banking services such as annuities, life
insurance, and sales of mortgage and small business loans, management decided
that in 2000 it would retain the small business loans in the Company's loan
portfolio rather than sell these loans at one-time gains. Also contributing to
the lower second quarter other noninterest income was a $74,358 write-down in a
partnership interest held by the Company.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 12 of 18
13
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
Second quarter 2000 noninterest expenses totaled $4,276,186, down
$56,550, or 1.31%, from $4,332,736 in the same quarter of 1999, primarily
because of lower costs associated with the slowdown in mortgage origination
activities. Personnel costs, the largest of the overhead expenses, were
$2,547,286 during the quarter, down $10,070, or 0.39%, from $2,557,356 in 1999.
Of the $10,070 decrease in personnel costs, $179,210 were related to mortgage
operations, partially offset by a $169,140 increase in the personnel costs of
the banking subsidiary.
Noninterest expenses other than for personnel decreased to $1,728,900
during the quarter, or 2.62%, from $1,775,380 incurred in the same period of
1999. Of the $46,480 decrease, $138,701 were related to mortgage operations,
partially offset by a $85,050 increase in the nonpersonnel costs of the banking
subsidiary. Occupancy expenses for the quarter were $209,254, up $11,873, or
6.02%, from $197,381 in the same period of 1999. Equipment expenses were
$360,624 during the second quarter, up $23,884, or 7.09%, from $336,740 in the
same period of 1999. Second quarter other noninterest expenses were $1,159,022
in 2000, down $82,237, or 6.63%, from $1,241,259 in the same quarter a year ago.
Of the $82,237 decrease, $143,365 was related to mortgage operations. partially
offset by a $53,957 increase in the other noninterest costs of the banking
subsidiary. Income tax expense was $2,159,277 for the quarter, up $428,698, or
24.77%, from $1,730,579 for the 1999 second quarter. The effective tax rates
were 34.57% and 32.91% for the second quarters of 2000 and 1999, respectively,
primarily because of lower relative levels of income from tax-exempt loans and
investments. Net income increased to $4,087,430 during the quarter, or 15.85%,
from $3,528,120 earned in the same period of 1999.
For the six months ended June 30, 2000, total noninterest income was
$3,708,653, down $745,561, or 16.74%, from $4,454,214 earned in the first six
months of 1999, primarily because of lower fees from mortgage originations as
discussed below. Fees on deposit accounts were $2,161,113 during the first six
months of 2000, up $484,847, or 28.92%, from $1,676,266 in the same period of
1999, primarily due to $400,305 in additional fees associated with a new
overdraft protection program designed for retail customers and introduced in
April 2000. Also for the year-to-date period, other service fees and commissions
were $1,380,339, down $1,019,273, or 42.48%, from $2,399,612 in 1999. Included
in other service fees was mortgage origination fee income of $964,118 for 2000,
down $962,954, or 49.97%, from $1,927,072 earned in the same period of 1999. As
was the case for the quarter, the rise in mortgage rates that began in April
1999 significantly reduced mortgage origination activity, which continued
throughout the 2000 year-to-date period. There were no significant gains or
losses on sales of securities in the year-to-date periods of 2000 or 1999. Other
noninterest income was $167,201 during the six months ended June 30, 2000, down
$210,460, or 55.73%, from $377,661 in the same period of 1999, primarily due to
lower sales of small business loans which generated no income in the first six
months of 2000 compared to $133,846 in the same period of 1999. Although
management continued to emphasize fees from nontraditional banking services such
as annuities, life insurance, and sales of mortgage and small business loans,
management decided that in 2000 it would retain the small business loans in the
Company's loan portfolio rather than sell these loans at one-time gains. Also
contributing to the lower year-to-date other noninterest income was a $74,358
write-down in a partnership interest held by the Company.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 13 of 18
14
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (concluded)
Total noninterest expenses were $8,384,627 during the first six months
of 2000, down $362,799, or 4.15%, from $8,747,426 in the same period of 1999. As
was the case for the second quarter, the year-to-date decreases were primarily
because of lower costs associated with the slowdown in mortgage origination
activities. Total personnel costs, the largest of the overhead expenses, were
$4,981,012 during the first six months of 2000, down $286,028, or 5.43%, from
$5,267,040 in the same period of 1999. Of the decrease in personnel costs,
$584,750 were related to mortgage operations, partially offset by a $298,722
increase related to banking operations.
Noninterest expenses other than for personnel decreased to $3,403,615
during the quarter, or 2.21%, from $3,480,386 incurred in the same period of
1999. Of the $76,771 decrease, $251,032 were related to mortgage operations,
partially offset by a $173,918 increase in the nonpersonnel costs of the banking
subsidiary. Year-to-date occupancy expenses were $417,434, up $22,789, or 5.77%,
from $394,645 in 1999, and equipment expenses were $689,882, up $8,670, or
1.27%, from $681,212 in the same year-to-date period of 1999. Other noninterest
expenses were $2,296,299 for the six months ended June 30, 2000, down $108,230,
or 4.50%, from $2,404,529 in the same period of 1999. Of the $108,230 decrease
in other noninterest expenses, $263,055 were related to mortgage operations,
partially offset by a $154,482 increase related to banking operations.
Year-to-date income tax expense was $3,972,721 in 2000, up $372,627, or 10.35%,
from $3,600,094 in 1999. The year-to-date effective tax rates were 33.89% and
33.05% for 2000 and 1999, respectively, primarily because of lower relative
levels of income from tax-exempt loans and investments. Net income was
$7,748,906 during the first six months of 2000, up $455,522, or 6.25%, from
$7,293,384 earned in the same year-to-date period of 1999.
DISCLOSURES ABOUT FORWARD LOOKING STATEMENTS
The discussions included in this document contain forward looking
statements within the meaning of the Private Securities Litigation Act of 1995,
including Section 21E of the Securities Exchange Act of 1934 and Section 27A of
the Securities Act of 1933. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to differ
materially. For the purposes of these discussions, any statements that are not
statements of historical fact may be deemed to be forward looking statements.
Such statements are often characterized by the use of qualifying words such as
"expect," "believe," "plan," "project," or other statements concerning opinions
or judgments of the Company and its management about future events. The accuracy
of such forward looking statements could be affected by such factors as,
including but not limited to, the financial success or changing conditions or
strategies of the Company's customers or vendors, fluctuations in interest
rates, actions of government regulators, the availability of capital and
personnel or general economic conditions.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 14 of 18
15
BANK OF GRANITE CORPORATION
PART II - Other Information
Item 4 - Submission of Matters to a Vote of Shareholders
The following proposals were considered and acted upon at the annual
meeting of shareholders of the Company held on April 24, 2000:
Proposal 1. To consider the election of seven persons named as
director nominees in the Proxy Statement dated March 23, 2000.
John N. Bray FOR 9,764,907 WITHHELD 82,731
Paul M. Fleetwood, III, CPA FOR 9,764,907 WITHHELD 82,731
John A. Forlines, Jr. FOR 9,764,907 WITHHELD 82,731
Barbara F. Freiman FOR 9,760,900 WITHHELD 86,738
Hugh R. Gaither FOR 9,758,578 WITHHELD 89,060
Charles M. Snipes FOR 9,764,907 WITHHELD 82,731
Boyd C. Wilson, Jr., CPA FOR 9,764,907 WITHHELD 82,731
Proposal 2. To consider the ratification of the selection of
Deloitte & Touche LLP as the Company's independent Certified
Public Accountants for the fiscal year ending December 31,
2000.
FOR 9,766,040 AGAINST 23,783 ABSTAIN 57,815
No other business came before the meeting, or any adjournment
or adjournments thereof.
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
27 Financial Data Schedules (for SEC use only)
B) Reports on Form 8-K
No reports on Form 8-K have been filed for the quarter ended
June 30, 2000.
Items 1,2,3 and 5 are inapplicable and are omitted.
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 15 of 18
16
BANK OF GRANITE CORPORATION
Signatures
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Bank of Granite Corporation
(Registrant)
Date: August 9, 2000 /s/ Kirby A. Tyndall
-----------------------------------
Kirby A. Tyndall
Senior Vice President and
Chief Financial Officer and
Principal Accounting Officer
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 16 of 18
17
BANK OF GRANITE CORPORATION
Exhibit Index
Begins
on Page
-------
Exhibit 27 - Financial Data Schedule (June 30, 2000) 18
(for SEC use only)
Bank of Granite Corporation, Form 10-Q, June 30, 2000, page 17 of 18