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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 MARCH 31, 2001
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
11,117,947 SHARES OUTSTANDING AS OF APRIL 30, 2001
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Exhibit Index begins on page 20
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 1 of 35
2
INDEX
Begins
on Page
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 3
Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2001 and 2000 5
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2001 and 2000 6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 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 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 19
Exhibit Index 20
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 2 of 35
3
ITEM 1. FINANCIAL STATEMENTS
BANK OF GRANITE CORPORATION MARCH 31, December 31,
Consolidated Balance Sheets 2001 2000
(UNAUDITED)
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 21,632,046 $ 23,603,938
Interest-bearing deposits 463,042 423,142
Federal funds sold 31,750,000 6,600,000
------------- -------------
Total cash and cash equivalents 53,845,088 30,627,080
------------- -------------
Investment securities:
Available for sale, at fair value 77,518,242 85,296,735
Held to maturity, at amortized cost 80,777,742 82,208,485
Loans 473,156,573 450,398,252
Allowance for loan losses (6,918,760) (6,351,756)
------------- -------------
Net loans 466,237,813 444,046,496
------------- -------------
Premises and equipment, net 9,007,962 9,239,836
Accrued interest receivable 6,509,022 6,268,844
Other assets 8,792,693 3,935,336
------------- -------------
Total assets $ 702,688,562 $ 661,622,812
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand accounts $ 94,653,108 $ 94,326,293
NOW accounts 78,837,732 80,283,789
Money market accounts 30,178,721 29,993,262
Savings accounts 25,136,092 23,717,236
Time deposits of $100,000 or more 145,621,133 124,437,284
Other time deposits 172,400,720 164,523,636
------------- -------------
Total deposits 546,827,506 517,281,500
Overnight borrowings 9,876,816 12,768,442
Other borrowings 17,254,654 7,840,267
Accrued interest payable 2,775,021 2,796,811
Other liabilities 4,602,485 1,620,455
------------- -------------
Total liabilities 581,336,482 542,307,475
------------- -------------
Shareholders' equity:
Common stock, $1 par value
Authorized - 25,000,000 shares
Issued - 11,517,084 shares in 2001 and 11,517,084 shares in 2000
Outstanding - 11,106,816 shares in 2001 and 11,152,949 shares in 2000 11,517,084 11,517,084
Capital surplus 23,260,188 23,260,188
Retained earnings 94,416,119 91,794,837
Accumulated other comprehensive income,
net of deferred income taxes 690,788 358,923
Less: Cost of common shares in treasury;
Held - 410,268 shares in 2001 and 364,135 shares in 2000 (8,532,099) (7,615,695)
------------- -------------
Total shareholders' equity 121,352,080 119,315,337
------------- -------------
Total liabilities and shareholders' equity $ 702,688,562 $ 661,622,812
============= =============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 3 of 35
4
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Income Ended March 31,
(unaudited) 2001 2000
INTEREST INCOME:
Interest and fees on loans $ 11,559,337 $ 10,168,710
Federal funds sold 197,852 395,245
Interest-bearing deposits 8,165 5,469
Investments:
U.S. Treasury 114,703 142,631
U.S. Government agencies 1,207,531 1,028,982
States and political subdivisions 828,116 855,957
Other 180,655 183,147
------------- -------------
Total interest income 14,096,359 12,780,141
------------- -------------
INTEREST EXPENSE:
Time deposits of $100,000 or more 2,131,700 1,536,636
Other deposits 3,177,979 2,445,589
Overnight borrowings 102,010 145,734
Other borrowings 132,533 83,502
------------- -------------
Total interest expense 5,544,222 4,211,461
------------- -------------
Net interest income 8,552,137 8,568,680
Provision for loan losses 699,898 645,000
------------- -------------
Net interest income after
provision for loan losses 7,852,239 7,923,680
------------- -------------
OTHER INCOME:
Service charges on deposit accounts 1,261,297 882,163
Other service charges, fees and commissions 902,564 633,277
Securities gains 128,335 --
Other 154,661 144,241
------------- -------------
Total other income 2,446,857 1,659,681
------------- -------------
OTHER EXPENSES:
Salaries and wages 2,280,903 2,000,053
Employee benefits 511,623 433,673
Occupancy expense, net 215,328 208,180
Equipment expense 379,362 329,258
Other 1,113,400 1,137,277
------------- -------------
Total other expenses 4,500,616 4,108,441
------------- -------------
Income before income taxes 5,798,480 5,474,920
Income taxes 1,950,374 1,813,444
------------- -------------
Net income $ 3,848,106 $ 3,661,476
============= =============
PER SHARE AMOUNTS:
Net income - Basic $ 0.35 $ 0.32
Net income - Diluted 0.35 0.32
Cash dividends 0.11 0.10
Book value 10.93 10.07
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 4 of 35
5
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Ended March 31,
Comprehensive Income 2001 2000
(unaudited)
Net income $ 3,848,106 $ 3,661,476
------------ ------------
ITEMS OF OTHER COMPREHENSIVE
INCOME:
Items of other comprehensive
income (losses), before tax:
Unrealized gains (losses) on
securities available for sale 551,952 (451,978)
Less: Reclassification
adjustments for gains
included in net income 128,335 --
------------ ------------
Items of other comprehensive
income (losses), before tax 423,617 (451,978)
Less: Change in deferred income
taxes related to change in
unrealized gains or losses on
securities available for sale 220,087 (180,233)
------------ ------------
Other comprehensive
income (losses), net of tax 203,530 (271,745)
------------ ------------
Comprehensive income $ 4,051,636 $ 3,389,731
============ ============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 5 of 35
6
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Changes in Ended March 31,
Shareholders' Equity (unaudited) 2001 2000
COMMON STOCK, $1 PAR VALUE
At beginning of period $ 11,517,084 $ 11,495,897
-------------- --------------
At end of period 11,517,084 11,495,897
-------------- --------------
CAPITAL SURPLUS
At beginning of period 23,260,188 22,987,562
-------------- --------------
At end of period 23,260,188 22,987,562
-------------- --------------
RETAINED EARNINGS
At beginning of period 91,794,837 80,976,641
Net income 3,848,106 3,661,476
Cash dividends paid (1,226,824) (1,143,920)
-------------- --------------
At end of period 94,416,119 83,494,197
-------------- --------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES
At beginning of period 358,923 (746,948)
Net change in unrealized gains or losses on securities
available for sale, net of deferred income taxes 331,865 (271,745)
-------------- --------------
At end of period 690,788 (1,018,693)
-------------- --------------
COST OF COMMON SHARES HELD IN TREASURY
At beginning of period (7,615,695) (1,262,043)
Cost of common shares repurchased (916,404) (1,086,292)
-------------- --------------
At end of period (8,532,099) (2,348,335)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY $ 121,352,080 $ 114,610,628
============== ==============
SHARES ISSUED
At beginning of period 11,517,084 11,495,897
-------------- --------------
At end of period 11,517,084 11,495,897
-------------- --------------
SHARES HELD IN TREASURY
At beginning of period (364,135) (56,696)
Common shares repurchased (46,133) (56,200)
-------------- --------------
At end of period (410,268) (112,896)
-------------- --------------
TOTAL SHARES OUTSTANDING 11,106,816 11,383,001
============== ==============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 6 of 35
7
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Cash Flows Ended March 31,
(unaudited) 2001 2000
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 13,875,465 $ 12,385,735
Fees and commissions received 2,318,522 1,659,681
Interest paid (5,566,012) (4,205,478)
Cash paid to suppliers and employees (8,109,306) 508,254
Income taxes paid (146,311) (128,077)
------------ ------------
Net cash provided by operating activities 2,372,358 10,220,115
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 18,370,000 6,625,000
Proceeds from maturities and/or calls of
securities held to maturity 3,049,325 3,061,750
Proceeds from sales of securities
available for sale 130,755 --
Purchase of securities available for sale (10,020,434) (14,095,001)
Purchase of securities held to maturity (1,659,407) --
Net increase in loans (22,891,215) (15,858,561)
Capital expenditures (58,913) (145,093)
------------ ------------
Net cash used by investing activities (13,079,889) (20,411,905)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, NOW, money market
and savings deposits 485,073 14,884,679
Net increase in time deposits 29,060,933 6,741,058
Net increase (decrease) in overnight borrowings (2,891,626) 1,322,692
Net increase in other borrowings 9,414,387 836,288
Dividend paid (1,226,824) (1,143,920)
Purchases of common stock for treasury (916,404) (1,086,292)
------------ ------------
Net cash provided by financing activities 33,925,539 21,554,505
------------ ------------
Net increase in cash equivalents 23,218,008 11,362,715
Cash and cash equivalents at beginning of period 30,627,080 51,138,496
------------ ------------
Cash and cash equivalents at end of period $ 53,845,088 $ 62,501,211
============ ============
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 7 of 35
8
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Cash Flows Ended March 31,
(unaudited) - (concluded) 2001 2000
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 3,848,106 $ 3,661,476
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 286,461 245,814
Provision for loan loss 699,898 645,000
Premium amortization, net 19,284 50,612
Deferred income taxes (114,921) (114,148)
Gains on sales or calls of securities
available for sale (128,335) --
Losses on disposal or sale of equipment 4,326 --
Increase in taxes payable 1,918,984 1,799,515
Increase in accrued interest receivable (240,178) (445,018)
Increase (decrease) in interest payable (21,790) 5,983
Increase in other assets (4,962,523) (743,188)
Increase in other liabilities 1,063,046 5,114,069
------------ ------------
Net adjustments to reconcile net income to
net cash provided by operating activities (1,475,748) 6,558,639
------------ ------------
Net cash provided by operating activities $ 2,372,358 $ 10,220,115
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Increase (decrease) in unrealized gains or
losses on securities available for sale $ 551,952 $ (451,978)
Decrease (increase) in deferred income taxes
on unrealized gains or losses on
securities available for sale 220,087 (180,233)
Transfer from loans to other real estate owned -- 142,000
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 8 of 35
9
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements
March 31, 2001
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 March 31, 2001 and
December 31, 2000, and the results of its operations and its cash flows for the
three month periods ended March 31, 2001 and 2000.
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 banking company.
The accounting policies followed are set forth in Note 1 to the Company's 2000
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
Ended March 31,
(in shares) 2001 2000
Weighted average shares outstanding 11,141,509 11,419,226
Potentially dilutive effect of stock options 4,365 9,225
---------- ----------
Weighted average shares outstanding,
including potentially dilutive effect of
stock options 11,145,874 11,428,451
========== ==========
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 March 31, 2001 and December
31, 2000 were as follows:
MARCH 31, December 31,
2001 2000
Unfunded commitments $ 82,387,238 $ 81,135,503
Letters of credit 3,819,261 2,865,570
4. New Accounting Standards - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 was amended by SFAS No. 138, "Accounting for Certain
Derivative Instrument and Certain Hedging Activities." SFAS No. 133, as amended,
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. The new
standard 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 No. 133 was amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
for FASB Statement No. 133," which delayed the Company's effective date until
January 1, 2001. Effective January 1, 2001, the Company adopted the Standard.
The Standard did not have an impact on the Company's financial statements and
current disclosures.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 140
revises the standards for accounting for securitization and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of the provisions of SFAS No. 125 without reconsideration. The
statement is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after March 31, 2001. Management does
not believe that SFAS No. 140 will have a material effect on the Company's
financial statements and current disclosures.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 9 of 35
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CHANGES IN FINANCIAL CONDITION
March 31, 2001 Compared With December 31, 2000
Total assets increased $41,065,750, or 6.21%, from December 31, 2000 to
March 31, 2001. Earning assets increased $38,738,985, or 6.20%, over the same
three month period. Loans, the largest earning asset, increased $22,758,321, or
5.05%, over the same period, primarily because of a $13,115,417, or 2.98%,
increase as of March 31, 2001 in loans of the Bank and a $9,642,904, or 97.10%,
increase in the level of mortgage loans of GLL. Cash and cash equivalents
increased $23,218,008, or 75.81%, because Federal funds sold increased of
$25,150,000, or 381.06%, which was partially offset by a $1,971,892, or 8.35%,
decrease in cash and due from banks. The increase in Federal funds sold was
attributable to increases in deposits exceeding the increases in loans and to a
decrease in investment securities. Investment securities decreased $9,209,236,
or 5.50%, because of calls of debt securities due to lower interest rates. Also
during this period, other assets increased $4,857,357, or 123.43%, primarily due
to proceeds receivable of $4,500,000 from security calls and maturities that
were unsettled as of March 31, 2001.
Funding the asset growth was a combination of deposit growth, growth in
overnight and other borrowings and earnings retained. Deposits increased
$29,546,006, or 5.71%, from December 31, 2000 to March 31, 2001. Demand, NOW,
money market and savings deposits increased $485,073, or 0.21%. Time deposits
greater than $100,000 increased $21,183,849, or 17.02%, from December 31, 2000
to March 31, 2001. Other time deposits increased $7,877,084, or 4.79%, from
December 31, 2000 to March 31, 2001. while total time deposits increased
$29,060,933, or 10.06%, over the same period. The Company's loan to deposit
ratio was 86.53% as of March 31, 2001 compared to 87.07% as of December 31,
2000, while the Bank's loan to deposit ratio was 81.63% compared to 83.17% 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, 2000 to March 31, 2001, such overnight borrowings
decreased $2,891,626, or 22.65%, reflecting a decrease of $3,157,694, or 28.80%,
in lower overnight borrowings in the form of commercial paper, partially offset
by an increase of $266,068, or 14.74%, in higher overnight borrowings in the
form of federal funds purchased and securities sold under agreements to
repurchase. Other borrowings increased $9,414,387, or 120.08%, reflecting an
increase in temporary borrowings by GLL primarily due to higher mortgage
origination activity. Other liabilities increased $2,982,030, or 184.02%, from
December 31, 2000 to March 31, 2001, primarily because of the combination of
investment security purchases of $1,426,101 that were in the process of
settlement and a $1,918,984 increase in income taxes currently payable
attributable to timing differences in due dates for estimated taxes.
Common stock outstanding decreased 46,133 shares, or 0.41%, from
December 31, 2000 to March 31, 2001, due to shares repurchased at an average
price of $19.86 under the Company's current stock repurchase plan. Earnings
retained were $2,621,282 for the first three months of 2001, after paying cash
dividends of $1,226,824. Accumulated other comprehensive income, net of deferred
income taxes, increased $331,865, or 92.46%, from December 31, 2000 to March 31,
2001, primarily because the value of securities available for sale rose when
interest rates on longer term bonds fell during the period.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 10 of 35
11
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 three month period ended March 31, 2001.
The Company places great significance on monitoring and managing the
Company's asset/liability position. The Company's policy for 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 has not historically been 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.
In response to a slowing economy during the first quarter of 2001, the
Federal Reserve lowered its rate on short-term overnight funds by 150 basis
points. Because of its asset sensitivity, the Company experienced a 50 basis
point decline in its net interest margin, which was 5.72% in the first quarter
of 2001 compared with 6.22% in the first quarter of 2000. The Company's variable
rate loans, and certain investments that matured or were called, repriced
immediately at the lower rates. The Company's time deposits will reprice as they
mature over the next several quarters. The Federal Reserve reduced its overnight
rates another 50 basis points in April and the Company believes that the Federal
Reserve may further reduce short-term rates as the economy continues to show
signs of weakness. The Federal Reserve lowers rates to reduce borrowing costs
thereby increasing loan demand to stimulate the economy. Such increases in loan
demand, should they occur, could mitigate the effects of the Company's repricing
differences discussed above.
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 shocks" 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, 2000.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 11 of 35
12
RESULTS OF OPERATIONS
For the Three Month Period Ended March 31, 2001
Compared With the Same Period in 2000
NET INTEREST INCOME FOR THE QUARTERLY PERIODS
During the three month period ended March 31, 2001, interest income
increased $1,316,218, or 10.30%, from the same period last year, primarily
because of higher volumes of loans. Interest and fees on loans increased
$1,390,627, or 13.68%, due to higher average volumes during the quarter. Yields
on loans averaged 10.13% for the quarter, down from 10.31% for the same quarter
last year. The prime lending rate during the three month period averaged 8.84%
compared to 8.64% during the same period in 2000. Gross loans averaged
$462,658,830 compared to $396,621,147 last year, an increase of $66,037,683, or
16.65%. Average loans of the Bank were $446,028,973 compared to $387,506,397
last year, an increase of $58,522,576, or 15.10%, while average loans of GLL
were $16,629,857 compared to $9,114,750 last year, an increase of $7,515,107, or
82.45%. Interest on securities and overnight investments decreased $74,409, or
2.85%, due to lower average volumes invested during the quarter. Average
securities and overnight investments were $175,070,532 compared to $187,071,245
last year, a decrease of $12,000,713, or 6.42%.
Interest expense increased $1,332,761, or 31.65%, primarily because of
higher rates and secondarily because of higher volumes of interest-bearing
deposits and other borrowings. Rates on interest-bearing deposits averaged 4.97%
for the quarter, up from 4.14% for the same quarter last year. Total
interest-bearing deposits averaged $433,509,110 compared to $386,530,330 last
year, an increase of $46,978,780, or 12.15%. Savings, NOW and money market
deposits averaged $130,983,535 compared to $134,531,174 last year, a decrease of
$3,547,639, or 2.64%. Time deposits averaged $302,525,575 compared to
$251,999,156 last year, an increase of $50,526,419, or 20.05%. Overnight
borrowings averaged $9,211,885 compared to $13,085,510 last year, a decrease of
$3,873,625, or 29.60%, reflecting a decrease in overnight borrowings in the form
of commercial paper related to the commercial deposit sweep arrangements of the
Bank. Other borrowings averaged $14,426,198 compared to $7,500,679 last year, an
increase of $6,925,519, or 92.33%, due to an increase of $6,925,519, or 92.33%,
in temporary borrowings of GLL primarily due to higher mortgage origination
activity. Other borrowings were the principal source of funding for the mortgage
origination activities of GLL.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 12 of 35
13
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.
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 month
period ended March 31, 2001, management determined a charge to operations of
$699,898 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 March 31, 2001, the loan loss reserve was 1.48% of net
loans outstanding, compared to 1.43% as of December 31, 2000. The following
table and subsequent discussion presents an analysis of changes in the allowance
for loan losses during the first quarter of 2001.
Three Months
Ended March 31,
2001 2000
Allowance for loan losses, beginning of period $6,351,756 $4,746,692
---------- ----------
Net charge-offs:
Loans charged off:
Real estate -- 65,288
Commercial, financial and agricultural 26,202 168,309
Credit cards and related plans 6,044 1,907
Installment loans to individuals 88,154 33,457
Demand deposit overdraft program 109,739 --
---------- ----------
Total charge-offs 230,139 268,961
---------- ----------
Recoveries of loans previously charged off:
Real estate 26,327 12,449
Commercial, financial and agricultural 4,648 37,560
Credit cards and related plans 245 521
Installment loans to individuals 2,522 26,487
Demand deposit overdraft program 63,503 --
---------- ----------
Total recoveries 97,245 77,017
---------- ----------
Total net charge-offs 132,894 191,944
---------- ----------
Loss provisions charged to operations 699,898 645,000
---------- ----------
Allowance for loan losses, end of period $6,918,760 $5,199,748
========== ==========
Ratio of annualized net charge-offs during the
period to average loans during the period 0.12% 0.20%
Allowance coverage of annualized net charge-offs 1283.73% 667.97%
Allowance as a percentage of gross loans 1.46% 1.28%
Allowance as a percentage of net loans 1.48% 1.30%
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 13 of 35
14
Nonperforming assets at March 31, 2001 and December 31, 2000 were as
follows:
MARCH 31, December 31,
2001 2000
Nonperforming assets:
Nonaccrual loans $1,571,449 $1,502,019
Loans past due 90 days or more and
still accruing interest 2,770,822 1,982,926
---------- ----------
Total nonperforming loans 4,342,271 3,484,945
Foreclosed properties 133,846 133,846
---------- ----------
Total nonperforming assets $4,476,117 $3,618,791
========== ==========
Nonperforming loans to total loans 0.92% 0.77%
Allowance coverage of nonperforming loans 159.34% 149.21%
Nonperforming assets to total assets 0.64% 0.55%
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 first quarter would not have been materially
different from the amount reported.
The Company's investment in impaired loans at March 31, 2001 and
December 31, 2000 was as follows:
MARCH 31, December 31,
2001 2000
Investment in impaired loans:
Impaired loans still accruing interest $ 769,740 $ 545,351
Accrued interest on accruing impaired loans 58,291 24,181
Impaired loans not accruing interest 1,571,449 1,502,019
Accrued interest on nonaccruing impaired loans 40,257 53,034
---------- ----------
Total investment in impaired loans $2,439,737 $2,124,585
---------- ----------
Loan loss allowance related to impaired loans $1,412,459 $1,009,562
========== ==========
When comparing March 31, 2001 with March 31, 2000, the recorded investment
in loans that were considered to be impaired under SFAS No. 114 was $2,439,737
($1,611,706 of which was on a non-accrual basis) and $1,882,617 ($1,152,630 of
which was on a non-accrual basis), respectively. The average recorded balance of
impaired loans during 2001 and 2000 was not significantly different from the
balance at March 31, 2001 and 2000, respectively. The related allowance for loan
losses determined in accordance with SFAS No. 114 for these loans was $1,412,459
and $657,655 at March 31, 2001 and 2000, respectively. For the three months
ended March 31, 2001 and 2000, the Company recognized interest income on those
impaired loans of approximately $98,549 and $92,636, respectively.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 14 of 35
15
NONINTEREST INCOME AND EXPENSES FOR THE QUARTERLY PERIODS
For the quarter ended March 31, 2001, total noninterest income was
$2,446,857, up $787,176, or 47.43%, from $1,659,681 earned in the same period of
2000, primarily because of higher fees on deposit accounts and from mortgage
originations. Fees on deposit accounts were $1,261,297 during the first quarter,
up $379,134, or 42.98%, from $882,163 earned in the first quarter of 2000,
primarily due to $401,436 in additional fees associated with the new demand
deposit overdraft program designed for retail customers and introduced in April
2000. Other service fees and commissions were $902,564 for the first quarter of
2001, up $269,287, or 42.52%, from $633,277 earned in the same period of 2000.
Included in other service fees was mortgage origination fee income of $669,504
for 2001, up $272,720, or 68.73%, from $396,784 earned in the same period of
2000. As mortgage rates fell in the late fourth quarter of 2000 and early first
quarter of 2001, mortgage origination activity increased substantially. First
quarter gains on sales of securities were $128,335 in 2001 compared with no
gains realized in the same period of 2000. Other noninterest income was $154,661
for the first quarter of 2001, up 7.22%, from $144,241 earned in the first
quarter of 2000. Although management emphasizes the generation of fees from
nontraditional banking services such as annuities, life insurance, and sales of
mortgage and small business loans, management decided to continue the practice
that was started in 2000 of retaining the small business loans in the Company's
loan portfolio rather than selling these loans at one-time gains.
First quarter 2001 noninterest expenses totaled $4,500,616, up
$392,175, or 9.55%, from $4,108,441 in the same quarter of 2000, primarily
because of higher personnel costs, which were $2,792,526 during the quarter, up
$358,800, or 14.74%, from $2,433,726 in 2000. Of the $358,800 increase in
personnel costs, $207,035 resulted from increased personnel costs in the Bank
and $151,765 related to staffing for higher mortgage origination activity.
Salaries and wages were $2,280,903 during the quarter, up $280,850, or 14.04%,
from $2,000,053 in 2000, while employee benefits were $511,623, up $77,950, or
17.97%, compared to $433,673 in the first quarter of 2000. Bank salaries rose
$134,696 or 8.84%, while mortgage-related salaries rose $146,154 or 30.67%.
Noninterest expenses other than for personnel increased $33,375, or
1.99%, to $1,708,090 during the quarter from $1,674,715 incurred in the same
period of 2000. Equipment expenses were up $50,104, or 15.22%, during the first
quarter, which were partially offset by a $22,860 decrease in the other
noninterest costs of the Company. Income tax expenses were $1,950,374 for the
quarter, up $136,930, or 7.55%, from $1,813,444 for the 2000 first quarter. The
effective tax rates were 33.64% and 33.12% for the first quarters of 2001 and
2000, respectively, with the slight increase primarily resulting from lower
relative levels of income from tax-exempt loans and investments. Net income
increased to $3,848,106 during the quarter, or 5.10%, from $3,661,476 earned in
the same period of 2000.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 15 of 35
16
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 "expects," "anticipates," "believes,"
"estimates," "plans," "projects," 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, March 31, 2001, page 16 of 35
17
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
* Exhibits, Financial Statement Schedules and Reports on Forms 8-K, included in
or incorporated by reference into this filing were filed with the Securities and
Exchange Commission. Bank of Granite Corporation provides these documents
through its Internet site at www.bankofgranite.com or by mail upon written
request.
(a) 1. Financial Statements
The information required by this item is set forth under
Item 1
2. Financial Statement Schedules
None
3. Exhibits included herein
(a) Certificate of Incorporation
Bank of Granite Corporation's Restated Certificate of
Incorporation, as amended
(b) Bylaws of the Registrant
Bank of Granite Corporation's Bylaws, filed as Exhibit D of
Pre-Effective Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (Registration Statement No. 33-11876) on
February 23, 1987 is incorporated herein by reference
10. Material Contracts
1. Bank of Granite Employees' Profit Sharing Plan and Trust, as
amended December 31, 1996, filed as Exhibit 10.1 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000 is incorporated herein by reference
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 17 of 35
18
2. Bank of Granite Supplemental Executive Retirement Plan filed
as Exhibit 10.2 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 is incorporated
herein by reference
3. Bank of Granite Corporation's 1997 Incentive Stock Option
Plan, filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Registration Statement No. 333-29157)
on June 13, 1997 is incorporated herein by reference
4. Employment and Noncompetition Agreement, dated June 1, 1999,
between GLL & Associates, Inc. and Gary L. Lackey filed as
Exhibit 10.4 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 is incorporated
herein by reference
11. Schedule of Computation of Net Income Per Share
The information required by this item is set forth under Item
1, Note 2
(b) Reports on Form 8-K
On April 9, 2001, the Company filed a report on Form 8-K
regarding its April 9, 2001 news release in which it announced
its earnings for the quarter ended March 31, 2001. The full
text news release dated April 9, 2001 was attached as exhibit
99(a) to this Form 8-K filing.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 18 of 35
19
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: May 8, 2001 /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, March 31, 2001, page 19 of 35
20
EXHIBIT INDEX
Begins
on Page
-------
Certificate of Incorporation, as amended 21
Bylaws of the Registrant *
Bank of Granite Employees' Profit Sharing Plan and Trust, as amended *
Bank of Granite Supplemental Executive Retirement Plan *
Bank of Granite Corporation's 1997 Incentive Stock Option Plan *
Employment and Noncompetition Agreement, dated June 1, 1999, between GLL &
Associates, Inc. and Gary L. Lackey *
- -------------------
* Incorporated herein by reference.
Bank of Granite Corporation, Form 10-Q, March 31, 2001, page 20 of 35