1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549
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 SEPTEMBER 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
_______________
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
11,156,695 SHARES OUTSTANDING AS OF OCTOBER 31, 2000
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Exhibit Index begins on page 21
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 1 of 22
2
BANK OF GRANITE CORPORATION
INDEX
Begins
on Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Statements of Consolidated Income
Three Months Ended September 30, 2000 and 1999
And Nine Months Ended September 30, 2000 and 1999 4
Statements of Consolidated Comprehensive Income
Three Months Ended September 30, 2000 and 1999
And Nine Months Ended September 30, 2000 and 1999 5
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2000 and 1999 6
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 2 of 22
3
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets SEPTEMBER 30, December 31,
(unaudited) 2000 1999
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 21,568,177 $ 23,219,670
Interest-bearing deposits 383,200 268,826
Federal funds sold - 27,650,000
--------------------------------
Total cash and cash equivalents 21,951,377 51,138,496
--------------------------------
Investment securities:
Available for sale, at fair value 85,208,725 70,205,689
Held to maturity, at amortized cost 82,249,880 85,139,790
Loans 436,513,944 390,189,234
Allowance for loan losses (6,003,763) (4,746,692)
--------------------------------
Net loans 430,510,181 385,442,542
--------------------------------
Premises and equipment, net 9,360,938 9,673,010
Accrued interest receivable 6,500,837 5,456,567
Other assets 4,555,618 3,670,505
--------------------------------
Total assets $640,337,556 $610,726,599
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 91,285,262 $ 91,100,910
NOW accounts 75,150,011 73,907,404
Money market accounts 31,583,031 33,663,278
Savings 24,995,485 24,399,214
Time deposits of $100,000 or more 116,713,626 110,041,565
Other time deposits 156,341,063 138,546,827
--------------------------------
Total deposits 496,068,478 471,659,198
Overnight borrowings 13,448,754 13,461,774
Other borrowings 9,114,864 8,626,481
Accrued interest payable 2,466,717 2,031,605
Other liabilities 1,319,494 1,496,432
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Total liabilities 522,418,307 497,275,490
--------------------------------
Shareholders' equity:
Common stock, $1 par value
Authorized - 25,000,000 shares
Issued - 11,496,460 shares in 2000 and 11,495,897 shares in 1999
Outstanding - 11,254,025 shares in 2000 and 11,439,201 shares in 1999 11,496,460 11,495,897
Capital surplus 22,994,881 22,987,562
Retained earnings 88,933,413 80,976,641
Accumulated other comprehensive loss,
net of deferred income taxes (387,931) (746,948)
Less: Cost of common shares in treasury;
Held - 242,435 shares in 2000 and 56,696 shares in 1999 (5,117,574) (1,262,043)
--------------------------------
Total shareholders' equity 117,919,249 113,451,109
--------------------------------
Total liabilities and shareholders' equity $640,337,556 $610,726,599
--------------------------------
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 3 of 22
4
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Three Months Nine Months
Statements of Consolidated Ended September 30, Ended September 30,
Income (unaudited) 2000 1999 2000 1999
INTEREST INCOME:
Interest and fees on loans $ 11,606,509 $ 9,613,814 $ 32,900,701 $ 28,445,097
Federal funds sold 50,230 414,478 686,546 1,053,512
Interest-bearing deposits 7,639 4,744 19,749 12,191
Investments:
U.S. Treasury 116,753 181,852 380,702 561,369
U.S. Government agencies 1,345,629 847,452 3,657,752 2,315,383
States and political subdivisions 845,398 851,930 2,515,769 2,658,155
Other 161,694 184,969 502,311 597,287
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Total interest income 14,133,852 12,099,239 40,663,530 35,642,994
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INTEREST EXPENSE:
Time deposits of $100,000 or more 1,842,769 1,272,159 4,963,599 3,779,921
Other deposits 2,922,773 2,316,074 7,991,547 7,051,629
Overnight borrowings 146,078 136,073 454,584 354,300
Other borrowings 123,073 143,218 323,613 558,158
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Total interest expense 5,034,693 3,867,524 13,733,343 11,744,008
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Net interest income 9,099,159 8,231,715 26,930,187 23,898,986
Provision for loan losses 1,504,859 616,002 2,938,286 1,096,583
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Net interest income after
provision for loan losses 7,594,300 7,615,713 23,991,901 22,802,403
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OTHER INCOME:
Service charges on deposit accounts 1,319,164 930,210 3,480,277 2,606,476
Other service charges, fees and commissions 734,051 832,700 2,114,390 3,232,312
Securities gains - - - 675
Other 82,480 113,741 249,681 491,402
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Total other income 2,135,695 1,876,651 5,844,348 6,330,865
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OTHER EXPENSES:
Salaries and wages 2,065,342 2,083,434 6,163,574 6,501,719
Employee benefits 431,365 418,684 1,314,145 1,267,439
Occupancy expense, net 214,798 198,295 632,232 592,940
Equipment expense 360,097 336,499 1,049,979 1,017,711
Other 1,116,514 1,083,293 3,412,813 3,487,822
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Total other expenses 4,188,116 4,120,205 12,572,743 12,867,631
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Income before income taxes 5,541,879 5,372,159 17,263,506 16,265,637
Income taxes 1,807,456 1,769,607 5,780,177 5,369,701
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Net income $ 3,734,423 $ 3,602,552 $ 11,483,329 $ 10,895,936
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PER SHARE AMOUNTS:
Net income - Basic $ 0.33 $ 0.31 $ 1.01 $ 0.95
Net income - Diluted 0.33 0.31 1.01 0.95
Cash dividends 0.11 0.10 0.31 0.28
Book value 10.48 9.76
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 4 of 22
5
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Three Months Nine Months
Statements of Consolidated Ended September 30, Ended September 30,
Comprehensive Income 2000 1999 2000 1999
(unaudited)
Net income $ 3,734,423 $ 3,602,552 $ 11,483,329 $ 10,895,936
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ITEMS OF OTHER COMPREHENSIVE
INCOME:
Items of other comprehensive
income (losses), before tax:
Unrealized gains (losses) on
securities available for sale 1,101,209 5,689 597,110 (1,621,487)
Less: Reclassification
adjustments for gains
included in net income - - - 675
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Items of other comprehensive
income (losses), before tax 1,101,209 5,689 597,110 (1,622,162)
Less: Change in deferred income
taxes related to change in
unrealized gains or losses on
securities available for sale 439,110 2,267 238,093 (646,568)
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Other comprehensive
income (losses), net of tax 662,099 3,422 359,017 (975,594)
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Comprehensive income $ 4,396,522 $ 3,605,974 $ 11,842,346 $ 9,920,342
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See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 5 of 22
6
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Nine Months
Consolidated Statements of Changes in Ended September 30,
Shareholders' Equity (unaudited) 2000 1999
COMMON STOCK, $1 PAR VALUE
At beginning of period $ 11,495,897 $ 11,464,913
Shares issued under incentive stock option plans 563 30,872
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At end of period 11,496,460 11,495,785
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CAPITAL SURPLUS
At beginning of period 22,987,562 22,615,559
Shares issued under incentive stock option plans 7,319 370,263
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At end of period 22,994,881 22,985,822
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RETAINED EARNINGS
At beginning of period 80,976,641 70,601,642
Net income 11,483,329 10,895,936
Cash dividends paid (3,526,557) (3,214,725)
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At end of period 88,933,413 78,282,853
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ACCUMULATED OTHER COMPREHENSIVE LOSS,
NET OF DEFERRED INCOME TAXES
At beginning of period (746,948) 759,857
Net change in unrealized gains or losses on securities
available for sale, net of deferred income taxes 359,017 (974,919)
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At end of period (387,931) (215,062)
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COST OF COMMON SHARES HELD IN TREASURY
At beginning of period (1,262,043) -
Cost of common shares repurchased (3,855,531) (579,208)
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At end of period (5,117,574) (579,208)
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TOTAL SHAREHOLDERS' EQUITY $117,919,249 $111,970,190
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SHARES ISSUED
At beginning of period 11,495,897 11,464,913
Shares issued under incentive stock option plans 563 30,872
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At end of period 11,496,460 11,495,785
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SHARES HELD IN TREASURY
At beginning of period (56,696) -
Common shares repurchased (185,739) (25,100)
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At end of period (242,435) (25,100)
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TOTAL SHARES OUTSTANDING 11,254,025 11,470,685
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See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 6 of 22
7
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Nine Months
Consolidated Statements of Ended September 30,
Cash Flows (unaudited) 2000 1999
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 39,762,091 $ 35,442,732
Fees and commissions received 5,844,348 6,330,190
Interest paid (13,298,231) (12,206,099)
Cash paid to suppliers and employees (12,435,220) (10,552,671)
Income taxes paid (6,583,762) (6,040,066)
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Net cash provided by operating activities 13,289,226 12,974,086
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 9,725,000 5,487,800
Proceeds from maturities and/or calls of
securities held to maturity 8,166,750 12,829,800
Purchase of securities available for sale (24,142,739) (16,896,309)
Purchase of securities held to maturity (5,407,858) (10,074,075)
Net increase in loans (48,005,925) (194,700)
Capital expenditures (470,610) (575,502)
Proceeds from sale of fixed assets 6,600 44,336
Proceeds from sale of other real estate 142,000 240,306
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Net cash used by investing activities (59,986,782) (9,138,344)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW accounts,
and savings accounts (57,017) 2,726,708
Net increase (decrease) in certificates of deposit 24,466,297 (4,295,657)
Net increase (decrease) in overnight borrowings (13,020) 253,111
Net increase (decrease) in other borrowings 488,383 (13,847,015)
Net proceeds from issuance of common stock 7,882 401,135
Dividend paid (3,526,557) (3,214,725)
Purchases of common stock for treasury (3,855,531) (579,208)
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Net cash provided (used) by financing activities 17,510,437 (18,555,651)
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Net decrease in cash equivalents (29,187,119) (14,719,909)
Cash and cash equivalents at beginning of period 51,138,496 58,294,177
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Cash and cash equivalents at end of period $ 21,951,377 $ 43,574,268
-------------------------------
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 7 of 22
8
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
Nine Months
Consolidated Statements of Ended September 30,
Cash Flows (unaudited) - (concluded) 2000 1999
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 11,483,329 $ 10,895,936
-------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 779,202 749,188
Provision for loan loss 2,938,286 1,096,583
Premium amortization, net 142,831 164,980
Deferred income taxes (553,117) (162,037)
Gains on calls of securities
held to maturity - (675)
Gain on disposal or sale of equipment (3,120) (10,554)
Gain on disposal or sale of other real estate - (26,457)
Decrease in taxes payable (250,468) (508,328)
Increase in accrued interest receivable (1,044,270) (365,242)
Increase (decrease) in interest payable 435,112 (462,091)
Increase in other assets (712,089) (406,539)
Increase in other liabilities 73,530 2,009,322
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Net adjustments to reconcile net income to
net cash provided by operating activities 1,805,897 2,078,150
-------------------------------
Net cash provided by operating activities $ 13,289,226 $ 12,974,086
-------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Increase (decrease) in unrealized gains or
losses on securities available for sale $ 597,110 $ (1,621,487)
Decrease (increase) in deferred income taxes
on unrealized gains or losses on
securities available for sale 238,093 (646,568)
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, September 30, 2000, page 8 of 22
9
BANK OF GRANITE CORPORATION
ITEM 1. FINANCIAL STATEMENTS (CONCLUDED)
Notes to Consolidated Financial Statements
September 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 September 30, 2000
and December 31, 1999, and the results of its operations for the three and nine
month periods ended September 30, 2000 and 1999, and its cash flows for the nine
month periods ended September 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 Nine Months
Ended September 30, Ended September 30,
(in shares) 2000 1999 2000 1999
Weighted average shares outstanding 11,287,290 11,480,156 11,352,504 11,483,328
Potentially dilutive effect of stock options - 15,935 - 23,006
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Weighted average shares outstanding,
including potentially dilutive effect of
stock options 11,287,290 11,496,091 11,352,504 11,506,334
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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 September 30, 2000 and December 31, 1999 were as
follows:
SEPTEMBER 30, December 31,
2000 1999
Unfunded commitments $ 82,095,750 $ 74,923,283
Letters of credit 2,833,782 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. Adoption of SFAS 133 is required as of January 1,
2001. SFAS 133 will not be applied retroactively to financial statements of
prior periods. Management does not believe that the adoption of SFAS 133 will
have a material impact, if any, on the Company's financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 9 of 22
10
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
September 30, 2000 Compared With December 31, 1999
Total assets increased $29,610,957, or 4.85%, from December 31, 1999 to
September 30, 2000. Earning assets increased $30,902,210, or 5.39%, over the
same nine month period. Loans, the largest earning asset, increased $46,324,710,
or 11.87%, over the same period, primarily because of a $45,442,997, or 11.96%,
increase as of September 30, 2000 in loans of the Company's bank subsidiary.
Cash and cash equivalents decreased $29,187,119, or 57.07%, which included a
$27,650,000 decrease in Federal funds sold and a $1,651,493 decrease in cash and
due from banks. Investment securities increased $12,113,126, or 7.80%.
Funding the asset growth was a combination of deposit growth, growth in
overnight and other borrowings and earnings retained. Deposits increased
$24,409,280, or 5.18%, from December 31, 1999 to September 30, 2000. Time
deposits increased $24,466,297, or 9.84%, over the same period, while demand,
money market and savings deposits decreased slightly. Time deposits greater than
$100,000 increased $6,672,061, or 6.06%, from December 31, 1999 to September 30,
2000, while other time deposits increased $17,794,236, or 12.84%. The loan to
deposit ratio was 87.99% as of September 30, 2000 compared to 82.73% as of
December 31, 1999, while the Bank's loan to deposit ratio was 83.83% 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 other 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 September 30, 2000, such overnight borrowings
remained virtually unchanged, because an increase of $3,242,984, or 197.28%, in
higher overnight borrowings in the form of federal funds purchased and
securities sold under agreements to repurchase was partially offset by a
decrease of $3,256,004, or 27.55%, in overnight borrowings in the form of
commercial paper. Other borrowings increased $488,383, or 5.66%, reflecting an
increase in temporary borrowings by GLL. Accrued interest payable increased
$435,112, or 21.42%, from December 31, 1999 to September 30, 2000, while other
liabilities decreased $176,938, or 11.82%.
Common stock outstanding decreased 185,176 shares, or 1.62%, from
December 31, 1999 to September 30, 2000, due to shares repurchased under the
Company's stock repurchase plan. From the first quarter of 1999 through the
third quarter of 2000, the Company purchased 242,435 shares at an average
purchase price of $21.11. For the year-to-date period ended September 30, 2000,
the Company repurchased 185,739 shares of its common stock at an average price
of $20.76. Earnings retained were $7,956,772 for the first nine months of 2000,
after paying cash dividends of $3,526,557. Accumulated other comprehensive loss,
net of deferred income taxes, declined by $359,017, or 48.06%, from December 31,
1999 to September 30, 2000, primarily because the value of certain securities
rose with the lower interest rates on longer term bonds during the period.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 10 of 22
11
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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 during the nine month period ended September 30, 2000.
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 the levels of volatility experienced in
national financial markets in recent years; however, the Company does realize
the importance of minimizing such volatility while at the same time maintaining
and improving earnings. A common method used to manage interest rate sensitivity
is to measure, over various time periods, the difference or gap between the
volume of interest-earning assets and interest-bearing liabilities repricing
over a specific time period. However, this method addresses only the magnitude
of funding mismatches and does not address the magnitude or relative timing of
rate changes. Therefore, management prepares on a regular basis earnings
projections based on a range of interest rate scenarios of rising, flat and
declining rates in order to more accurately measure interest rate risk.
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.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 11 of 22
12
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
For the Three Month Period Ended September 30, 2000 Compared With the Same
Period in 1999 and for the Nine Month Period Ended September 30, 2000 Compared
With the Same Period in 1999
Net Interest Income for the Quarterly Periods
During the three month period ended September 30, 2000, interest income
increased $2,034,613, or 16.82%, from the same period last year, primarily
because of growth in interest income due to higher rates on interest-earning
assets and secondarily because of increases in interest income due to higher
earning asset volumes. Interest and fees on loans increased $1,992,695, or
20.73%, due to higher average volumes during the quarter. Yields on loans
averaged 10.83% for the quarter, up from 10.08% for the same quarter last year.
The prime lending rate during the three month period averaged 9.50% compared to
8.02% during the same period in 1999. Gross loans averaged $428,585,257 compared
to $381,609,697 last year, an increase of $46,975,560, or 12.31%. Average loans
of the Bank were $417,310,637 compared to $366,581,246 last year, an increase of
$50,729,391, or 13.84%, while average loans of GLL were $11,274,620 compared to
$15,028,451 last year, a decrease of $3,753,831, or 24.98%. Interest on
securities and overnight investments increased $41,918, or 1.69%, due to higher
rates that were mostly offset by lower average volumes invested during the
quarter. Average securities and overnight investments were $173,420,049 compared
to $183,720,780 last year, a decrease of $10,300,731, or 5.61%.
Interest expense increased $1,167,169, or 30.18%, primarily because of
growth in interest expense due to higher rates and secondarily because of
increases in interest expense resulting from growth in volumes of
interest-bearing deposits and other borrowings. Rates on interest-bearing
deposits averaged 4.77% for the quarter, up from 3.92% for the same quarter last
year. Total interest-bearing deposits averaged $399,737,872 compared to
$366,391,790 last year, an increase of $33,346,082, or 9.10%. Savings, NOW and
money market deposits averaged $132,409,932 compared to $128,551,717 last year,
an increase of $3,858,215, or 3.00%. Time deposits averaged $267,327,940
compared to $237,840,073 last year, an increase of $29,487,867, or 12.40%.
Overnight borrowings averaged $12,042,273 compared to $12,298,085 last year, a
decrease of $255,812, or 2.08%, reflecting a decrease of $1,115,600, or 10.77%,
in average overnight borrowings in the form of commercial paper related to the
commercial deposit sweep arrangements of the Bank, partially offset by an
increase of $859,788, or 44.38%, in average overnight borrowings in the form of
federal funds purchased and securities sold under agreements to repurchase of
the Bank. Other borrowings averaged $9,437,583 compared to $13,578,800 last
year, a decrease of $4,141,217, or 30.50%, due to a decrease in temporary
borrowings of GLL primarily due to lower mortgage origination activity. Other
borrowings were the principal source of funding for the mortgage origination
activities of GLL.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 12 of 22
13
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net Interest Income for the Year-to-Date Periods
For substantially the same reasons as during the third quarter, both
higher volumes and rates, interest income and expense were higher for the nine
month period ended September 30, 2000. During the first nine months of 2000,
interest income increased $5,020,536, or 14.09%, from the same period last year
with growth in interest income due to higher rates slightly outpacing increases
in interest income resulting from growth in volumes of interest-earning assets.
Interest and fees on loans increased $4,455,604, or 15.66%, primarily due to
higher average volumes during the year-to-date period. Yields on loans averaged
10.61% for the year-to-date period, up from 9.99% for the same period last year.
The prime rate during the nine month period averaged 9.08% compared to 7.86%
during the same period in 1999. Gross loans averaged $413,534,003 compared to
$379,674,967 last year, an increase of $33,859,036, or 8.92%. Average loans of
the Bank were $402,895,297 compared to $361,107,340 last year, an increase of
$41,787,957, or 11.57%, while average loans of GLL were $10,638,706 compared to
$18,567,627 last year, a decrease of $7,928,921, or 42.70%. Interest on
securities and overnight investments increased $564,932, or 7.85%, due to higher
average volumes invested during the period. Average securities and overnight
investments were $180,936,515 compared to $178,906,302 last year, an increase of
$2,030,213, or 1.13%.
Interest expense increased $1,989,335, or 16.94%, primarily because of
growth in interest expense due to higher rates, and secondarily because of
increases in interest expense resulting from growth in volumes of
interest-bearing deposits and other borrowings. Rates on interest-bearing
deposits averaged 4.40% for the year-to-date period, up from 3.96% for the same
period last year. Interest-bearing deposits averaged $392,201,944 compared to
$364,925,734 last year, an increase of $27,276,210, or 7.47%. Overnight
borrowings averaged $13,102,785 compared to $10,805,317 last year, an increase
of $2,297,468, or 21.26%, reflecting increases of $501,658, or 24.81%, in
average overnight borrowings in the form of federal funds purchased and
securities sold under agreements to repurchase of the Bank and $1,795,810, or
20.45%, in average overnight borrowings in the form of commercial paper related
to the commercial deposit sweep arrangements of the Bank. Other borrowings
averaged $8,902,871 compared to $17,012,472 last year, a decrease of $8,109,601,
or 47.67%, reflecting a decrease in temporary borrowings of GLL primarily due to
lower mortgage origination activity. Other borrowings were the principal source
of funding for the mortgage origination activities of GLL.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 13 of 22
14
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Provisions for Possible Loan Losses, Allowance for Loan Losses
and Discussions of Asset Quality
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
nine month periods ended September 30, 2000, management determined a charge to
operations of $1,504,859 and $2,938,286, 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 September 30,
2000, the loan loss reserve was 1.39% of net loans outstanding compared to 1.23%
as of December 31, 1999. The following table and subsequent discussion presents
an analysis of changes in the allowance for loan losses for the quarter-to-date
and year-to-date periods.
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
Allowance for loan losses, beginning of period $ 5,721,018 $ 5,018,762 $ 4,746,692 $ 4,619,586
---------------------------------------------------------------
Net charge-offs:
Loans charged off:
Real estate 865,403 549,376 976,806 560,376
Commercial, financial and agricultural 307,476 105,873 544,253 149,588
Credit cards and related plans 1,737 3,358 6,693 13,320
Installment loans to individuals 22,052 32,461 161,757 140,138
Demand deposit overdraft program 154,134 - 243,616 -
---------------------------------------------------------------
Total charge-offs 1,350,802 691,068 1,933,125 863,422
---------------------------------------------------------------
Recoveries of loans previously charged off:
Real estate 76,563 9,968 89,012 16,223
Commercial, financial and agricultural 17,010 12,759 76,139 54,845
Credit cards and related plans 349 2,847 2,946 6,983
Installment loans to individuals 10,196 19,025 55,360 57,497
Demand deposit overdraft program 24,570 - 28,453 -
---------------------------------------------------------------
Total recoveries 128,688 44,599 251,910 135,548
---------------------------------------------------------------
Total net charge-offs 1,222,114 646,469 1,681,215 727,874
---------------------------------------------------------------
Loss provisions charged to operations 1,504,859 616,002 2,938,286 1,096,583
---------------------------------------------------------------
Allowance for loan losses, end of period $ 6,003,763 $ 4,988,295 $ 6,003,763 $ 4,988,295
===============================================================
Ratio of annualized net charge-offs during the
period to average loans during the period 1.14% 0.68% 0.54% 0.26%
Allowance coverage of annualized net charge-offs 122.82% 192.91% 267.83% 513.99%
Allowance as a percentage of gross loans 1.38% 1.30%
Allowance as a percentage of net loans 1.39% 1.31%
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 14 of 22
15
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The 2000 quarter-to-date and year-to-date provisions for possible loan
losses and net charge-off's were substantially higher than those in the same
periods of the previous year. In September 2000, the Company charged off a
$921,771 deficiency on three loans to one borrower. As of June 30, 2000,
approximately $197,000 was reserved for potential losses on these three loans.
In the third quarter of 2000, approximately $758,543 was charged to provisions
for possible losses related to these loans. Also for the quarter, $117,859 in
loss provisions and $129,564 in net charge-off's were attributable to a new
demand deposit overdraft program that was implemented in the second quarter of
2000. For the year-to-date period, $251,286 in loss provisions and $215,163 in
net charge-off's were attributable to the new overdraft program.
Nonperforming assets at September 30, 2000 and December 31, 1999 were
as follows:
SEPTEMBER 30, December 31,
2000 1999
Nonperforming assets:
Nonaccrual loans $ 1,543,104 $ 1,078,992
Loans past due 90 days or more and
still accruing interest 1,486,270 981,345
-------------------------------
Total nonperforming loans 3,029,374 2,060,337
Foreclosed properties 82,704 54,079
-------------------------------
Total nonperforming assets $ 3,112,078 $ 2,114,416
===============================
Nonperforming loans to total loans 0.69% 0.53%
Allowance coverage of nonperforming loans 198.18% 242.11%
Nonperforming assets to total assets 0.49% 0.35%
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 the quarter-to-date and year-to-date periods would not
have been materially different from the amounts reported.
The Company's investment in impaired loans at September 30, 2000 and
December 31, 1999 was as follows:
SEPTEMBER 30, December 31,
2000 1999
Investment in impaired loans:
Impaired loans still accruing interest $ 317,832 $ 1,171,452
Accrued interest on accruing impaired loans 10,167 51,191
Impaired loans not accruing interest 1,543,104 1,078,992
Accrued interest on nonaccruing impaired loans 65,301 56,050
-------------------------------
Total investment in impaired loans $ 1,936,404 $ 2,357,685
===============================
Loan loss allowance related to impaired loans $ 991,283 $ 746,783
===============================
When comparing September 30, 2000 with September 30, 1999, the recorded
investment in loans that are considered to be impaired under SFAS No. 114 was
$1,936,404 ($1,608,405 of which was on a non-accrual basis) and $2,654,769
($1,610,566 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 September 30, 2000 and 1999, respectively. The
related allowance for loan losses determined in accordance with SFAS No. 114 for
these loans was $991,283 and $1,214,083 at September 30, 2000 and 1999,
respectively. For the nine months ended September 30, 2000 and 1999, the Company
recognized interest income on those impaired loans of approximately $75,468 and
$94,076, respectively.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 15 of 22
16
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Noninterest Income and Expenses for the Quarterly Periods
For the quarter ended September 30, 2000, total noninterest income was
$2,135,695, up $259,044, or 13.80%, from $1,876,651 earned in the same period of
1999, primarily because of higher fees on deposit accounts and partially offset
by lower fees from mortgage originations. Fees on deposit accounts were
$1,319,164 during the third quarter, up $388,954, or 41.81%, from $930,210
earned in the third quarter of 1999, primarily due to $511,596 in additional
fees associated with a new demand deposit overdraft program designed for retail
customers and introduced in April 2000. Other service fees and commissions were
$734,051 for the third quarter of 2000, down $98,649, or 11.85%, from $832,700
earned in the same period of 1999. Included in other service fees was mortgage
origination fee income of $566,367 for 2000, down $89,314, or 13.62%, from
$655,681 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 third quarter of 2000. There were no
significant gains or losses on sales of securities in the third quarter of 2000
or 1999. Other noninterest income was $82,480 for the third quarter of 2000,
down $31,261, or 27.48%, from $113,741 earned in the third quarter of 1999,
partially due to lower sales of small business loans which generated no fees in
the third quarter of 2000 compared to $36,320 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.
Third quarter 2000 noninterest expenses totaled $4,188,116, up $67,911,
or 1.65%, from $4,120,205 in the same quarter of 1999, primarily because higher
overhead costs of the Bank were mostly offset by lower costs associated with the
slowdown in mortgage origination activities. Personnel costs, the largest of the
overhead expenses, were $2,496,707 during the quarter, down $5,411, or 0.22%,
from $2,502,118 in 1999. Of the $5,411 decrease in personnel costs, $119,734
were related to mortgage operations, partially offset by a $114,323 increase in
the personnel costs of the Bank.
Noninterest expenses other than for personnel increased to $1,691,409
during the quarter, or 4.53%, from $1,618,087 incurred in the same period of
1999. Of the $73,322 increase, a $113,998 increase in the nonpersonnel costs of
the Bank was partially offset by a $51,799 decrease in the nonpersonnel costs of
GLL. Occupancy expenses for the quarter were $214,798, up $16,503, or 8.32%,
from $198,295 in the same period of 1999 while equipment expenses were $360,097
during the third quarter, up $23,598, or 7.01%, from $336,499 when comparing the
same periods. Third quarter other noninterest expenses were $1,116,514 in 2000,
up $33,221, or 3.07%, from $1,083,293 in the same quarter a year ago. Of the
$33,221 increase, an increase of $73,630 in the other noninterest costs of the
Bank was partially offset by a $51,532 decrease in the other noninterest costs
of GLL. Income tax expense was $1,807,456 for the quarter, up $37,849, or 2.14%,
from $1,769,607 for the 1999 third quarter. The effective tax rates were 32.61%
and 32.94% for the third quarters of 2000 and 1999, respectively. Net income
increased to $3,734,423 during the quarter, or 3.66%, from $3,602,552 earned in
the same period of 1999.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 16 of 22
17
BANK OF GRANITE CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONCLUDED)
Noninterest Income and Expenses for the Year-to-Date Periods
For the nine months ended September 30, 2000, total noninterest income
was $5,844,348, down $486,517, or 7.68%, from $6,330,865 earned in the first
nine months of 1999, primarily because of lower fees from mortgage originations.
Fees on deposit accounts were $3,480,277 during the first nine months of 2000,
up $873,801, or 33.52%, from $2,606,476 in the same period of 1999, primarily
due to $967,731 in additional fees associated with a new demand deposit
overdraft program designed for retail customers and introduced in April 2000.
Also for the year-to-date period, other service fees and commissions were
$2,114,390, down $1,117,922, or 34.59%, from $3,232,312 in 1999, primarily
because of lower mortgage origination activity in 2000. Included in other
service fees was mortgage origination fee income of $1,530,485 for 2000, down
$1,052,268, or 40.74%, from $2,582,753 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 $249,681 during the nine months ended September 30, 2000, down
$241,721, or 49.19%, from $491,402 in the same period of 1999, primarily due to
lower sales of small business loans which generated no fee income in the first
nine months of 2000 compared to $170,166 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.
Total noninterest expenses were $12,572,743 during the first nine
months of 2000, down $294,888, or 2.29%, from $12,867,631 in the same period of
1999. As was the case for the third quarter, the year-to-date changes in the
various overhead categories also included lower costs associated with the
slowdown in mortgage origination activities. Total personnel costs, the largest
of the overhead expenses, were $7,477,719 during the first nine months of 2000,
down $291,439, or 3.75%, from $7,769,158 in the same period of 1999. Included in
the change in personnel costs was a decrease of $338,145 in salaries and wages
that was partially offset by an increase of $46,706 in employee benefits. Also,
$704,484 of the decrease in personnel costs was related to mortgage operations,
partially offset by a $413,045 increase related to banking operations.
Noninterest expenses other than for personnel decreased to $5,095,024
during the first nine months of 2000, or 0.07%, from $5,098,473 incurred in the
same period of 1999. Of the $3,449 decrease, a $302,831 decrease in the
nonpersonnel costs of GLL was partially offset by a $287,916 increase in the
nonpersonnel costs of the Bank. Year-to-date occupancy expenses were $632,232,
up $39,292, or 6.63%, from $592,940 in 1999, and equipment expenses were
$1,049,979, up $32,268, or 3.17%, from $1,017,711 in the same year-to-date
period of 1999. Other noninterest expenses were $3,412,813 for the nine months
ended September 30, 2000, down $75,009, or 2.15%, from $3,487,822 in the same
period of 1999. Of the $75,009 decrease in other noninterest expenses, $314,587
were related to mortgage operations, partially offset by a $228,112 increase
related to banking operations. Year-to-date income tax expense was $5,780,177 in
2000, up $410,476, or 7.64%, from $5,369,701 in 1999. The year-to-date effective
tax rates were 33.48% and 33.01% for 2000 and 1999, respectively, with the small
increase being primarily attributable to lower relative levels of income from
tax-exempt loans and investments in 2000. Net income was $11,483,329 during the
first nine months of 2000, up $587,393, or 5.39%, from $10,895,936 earned in the
same year-to-date period of 1999.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 17 of 22
18
BANK OF GRANITE CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Item 2,
Management's Discussion of Financial Condition and Results of Operations, above,
under the caption "Liquidity, Interest Rate Sensitivity and Market Risk."
DISCLOSURES ABOUT FORWARD LOOKING STATEMENTS
The discussions included in this document contain statements that may
be deemed 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, September 30, 2000, page 18 of 22
19
BANK OF GRANITE CORPORATION PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A) Exhibits
27 Financial Data Schedules
B) Reports on Form 8-K
On October 10, 2000, the Company filed a report on Form 8-K
regarding its October 10, 2000 news release in which it
announced its earnings for the quarter September 30, 2000. The
full text news release dated October 10, 2000 was attached as
exhibit 99(a) to this Form 8-K filing.
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 19 of 22
20
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: November 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, September 30, 2000, page 20 of 22
21
BANK OF GRANITE CORPORATION
Exhibit Index
Begins
on Page
-------
Exhibit 27 - Financial Data Schedule (September 30, 2000) 22
Bank of Granite Corporation, Form 10-Q, September 30, 2000, page 21 of 22