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, 1999
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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
- ---------------------------------------- ----------
(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
11,465,997 SHARES OUTSTANDING AS OF OCTOBER 31, 1999
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Exhibit Index begins on page 18
Bank of Granite Corporation, Form 10-Q, September 30, 1999, Page 1 of 19
2
BANK OF GRANITE CORPORATION
Index
Begins
on Page
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PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Statements of Consolidated Income
Three Months Ended September 30, 1999 and 1998
And Nine Months Ended September 30, 1999 and 1998 4
Statements of Consolidated Comprehensive Income
Three Months Ended September 30, 1999 and 1998
And Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION 16
Signatures 17
Exhibit Index 18
Bank of Granite Corporation, Form 10-Q, September 30, 1999, Page 2 of 19
3
BANK OF GRANITE CORPORATION
Consolidated Balance Sheets
(unaudited)
SEPTEMBER 30, December 31,
1999 1998
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 18,850,834 $ 19,518,740
Interest-bearing deposits 273,434 175,437
Federal funds sold 24,450,000 38,600,000
----------------------------------
Total cash and cash equivalents 43,574,268 58,294,177
----------------------------------
Investment securities:
Available for sale, at fair value 71,720,058 61,954,639
Held to maturity, at amortized cost 84,155,465 87,053,892
Loans 385,057,030 385,590,204
Allowance for loan losses (4,988,295) (4,619,586)
----------------------------------
Net loans 380,068,735 380,970,618
----------------------------------
Premises and equipment, net 9,888,160 10,095,628
Accrued interest receivable 5,469,416 5,104,174
Other assets 3,703,209 2,701,914
----------------------------------
Total assets $ 598,579,311 $ 606,175,042
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 90,498,496 $ 91,967,287
NOW accounts 69,356,063 69,804,107
Money market accounts 32,632,277 29,970,288
Savings 25,885,871 23,904,317
Time deposits of $100,000 or more 99,325,050 101,335,011
Other time deposits 139,430,463 141,716,159
----------------------------------
Total deposits 457,128,220 458,697,169
Federal funds purchased and securities
sold under agreements to repurchase 1,791,461 1,538,350
Other borrowings 22,510,001 36,357,016
Accrued interest payable 1,758,897 2,220,988
Other liabilities 3,420,542 1,919,548
----------------------------------
Total liabilities 486,609,121 500,733,071
----------------------------------
Shareholders' equity:
Common stock, $1 par value
Authorized: 25,000,000 shares
Issued: 11,495,785 shares in 1999
and 11,464,913 shares in 1998 11,495,785 11,464,913
Capital surplus 22,985,822 22,615,559
Retained earnings 78,282,853 70,601,642
Accumulated other comprehensive income (loss),
net of deferred income taxes (215,062) 759,857
Less: Cost of common shares in treasury;
25,100 shares in 1999 and 0 shares in 1998 (579,208) --
----------------------------------
Total shareholders' equity 111,970,190 105,441,971
----------------------------------
Total liabilities and shareholders' equity $ 598,579,311 $ 606,175,042
==================================
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 3 of 19
4
BANK OF GRANITE CORPORATION
Statements of Consolidated
Income (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
INTEREST INCOME:
Interest and fees on loans $ 9,613,814 $ 9,807,155 $28,445,097 $29,212,732
Federal funds sold 414,478 234,357 1,053,512 505,435
Interest-bearing deposits 4,744 3,899 12,191 9,420
Investments:
U.S. Treasury 181,852 272,104 561,369 868,394
U.S. Government agencies 847,452 619,045 2,315,383 1,702,193
States and political subdivisions 851,930 831,306 2,658,155 2,578,560
Other 184,969 208,912 597,287 622,525
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Total interest income 12,099,239 11,976,778 35,642,994 35,499,259
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INTEREST EXPENSE:
Time deposits of $100,000
or more 1,272,159 1,463,825 3,779,921 4,253,389
Other time and savings deposits 2,316,074 2,357,214 7,051,629 6,848,540
Federal funds purchased and
securities sold under
agreements to repurchase 22,197 52,004 65,112 152,360
Other borrowed funds 257,094 202,728 847,346 575,393
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Total interest expense 3,867,524 4,075,771 11,744,008 11,829,682
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Net interest income 8,231,715 7,901,007 23,898,986 23,669,577
Provision for loan losses 616,002 3,361,510 1,096,583 4,008,330
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Net interest income after
provision for loan losses 7,615,713 4,539,497 22,802,403 19,661,247
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OTHER INCOME:
Service charges on deposit
accounts 930,210 936,552 2,606,476 2,677,342
Other service charges, fees
and commissions 832,700 1,107,063 3,232,312 3,063,357
Securities gains -- -- 675 99
Other 113,741 78,230 491,402 631,702
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Total other income 1,876,651 2,121,845 6,330,865 6,372,500
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OTHER EXPENSES:
Salaries and wages 2,083,434 2,080,553 6,501,719 6,022,635
Employee benefits 418,684 191,988 1,267,439 1,003,099
Occupancy expense, net 198,295 188,825 592,940 555,704
Equipment expense 336,499 348,298 1,017,711 1,060,700
Other 1,083,293 1,069,940 3,487,822 3,193,327
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Total other expenses 4,120,205 3,879,604 12,867,631 11,835,465
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Income before income taxes 5,372,159 2,781,738 16,265,637 14,198,282
Income taxes 1,769,607 817,827 5,369,701 4,626,994
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Net income $ 3,602,552 $ 1,963,911 $10,895,936 $ 9,571,288
=================================================================
PER SHARE AMOUNTS:
Net income - Basic $ 0.31 $ 0.17 $ 0.95 $ 0.84
Net income - Diluted 0.31 0.17 0.95 0.83
Cash dividends 0.10 0.09 0.28 0.25
Book value 9.76 8.97
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 4 of 19
5
BANK OF GRANITE CORPORATION
Statements of Consolidated
Comprehensive Income
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1999 1998 1999 1998
Net income $ 3,602,552 $ 1,963,911 $ 10,895,936 $ 9,571,288
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ITEMS OF OTHER COMPREHENSIVE
INCOME:
Items of other comprehensive
income, before tax:
Unrealized gains (losses) on
securities available for sale 5,689 827,980 (1,621,487) 859,639
Less: Reclassification
adjustments for gains
included in net income -- -- 675 99
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Items of other comprehensive
income, before tax 5,689 827,980 (1,622,162) 859,540
Less: Change in deferred income
taxes related to change in
unrealized gains or losses on
securities available for sale 2,267 330,153 (646,568) 342,802
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Other comprehensive
income (losses), net of tax 3,422 497,827 (975,594) 516,738
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Comprehensive income $ 3,605,974 $ 2,461,738 $ 9,920,342 $ 10,088,026
===================================================================
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 5 of 19
6
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited)
Nine Months
Ended September 30,
1999 1998
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received $ 35,442,732 $ 35,370,330
Fees and commissions received 6,330,190 6,372,401
Interest paid (12,206,099) (11,893,958)
Cash paid to suppliers and employees (10,552,671) (11,611,201)
Income taxes paid (6,040,066) (6,303,754)
---------------------------------
Net cash provided by operating activities 12,974,086 11,933,818
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 5,487,800 11,690,000
Proceeds from maturities and/or calls of
securities held to maturity 12,829,800 9,213,782
Proceeds from sales of securities
available for sale -- 200,000
Purchase of securities available for sale (16,896,309) (15,999,587)
Purchase of securities held to maturity (10,074,075) (13,586,503)
Net increase in loans (194,700) (18,475,830)
Capital expenditures (575,502) (1,409,563)
Proceeds from sale of fixed assets 44,336 26,475
Proceeds from sale of other real estate 240,306 --
---------------------------------
Net cash used by investing activities (9,138,344) (28,341,226)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 2,726,708 5,219,213
Net decrease (increase) in certificates of deposit (4,295,657) 17,334,496
Net decrease (increase) in federal funds purchased
and securities sold under agreements to
repurchase 253,111 (5,087,006)
Net decrease (increase) in other borrowings (13,847,015) 13,643,544
Net proceeds from issuance of common stock 401,135 407,592
Dividend paid (3,214,725) (2,863,575)
Purchases of common stock for treasury (579,208) --
Cash paid for fractional shares -- (21,581)
---------------------------------
Net cash provided (used) by financing activities (18,555,651) 28,632,683
---------------------------------
Net increase (decrease) in cash equivalents (14,719,909) 12,225,275
Cash and cash equivalents at beginning of period 58,294,177 27,865,357
---------------------------------
Cash and cash equivalents at end of period $ 43,574,268 $ 40,090,632
=================================
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 6 of 19
7
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited) - (concluded)
Nine Months
Ended September 30,
1999 1998
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 10,895,936 $ 9,571,288
---------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 749,188 788,410
Provision for loan loss 1,096,583 4,008,330
Premium amortization, net 164,980 59,984
Deferred income taxes (162,037) (1,125,595)
Gains on sales or calls of securities
available for sale -- (99)
Gains on calls of securities
held to maturity (675) --
Gain on disposal or sale of equipment (10,554) (895)
Gain on disposal or sale of other real estate (26,457) --
Decrease in taxes payable (508,328) (551,165)
Increase in accrued interest receivable (365,242) (188,913)
Decrease in interest payable (462,091) (64,276)
Increase in other assets (406,539) (312,885)
Increase (decrease) in other liabilities 2,009,322 (250,366)
---------------------------------
Net adjustments to reconcile net income to
net cash provided by operating activities 2,078,150 2,362,530
---------------------------------
Net cash provided by operating activities $ 12,974,086 $ 11,933,818
=================================
Supplemental disclosure of non-cash transactions:
Increase (decrease) in unrealized gains or
losses on securities available for sale $ (1,621,487) $ 859,639
Decrease (increase) in deferred income taxes
on unrealized gains or losses on
securities available for sale (646,568) 342,802
Transfer from retained earnings to common stock
for stock split -- 2,291,855
Transfer from loans to other real estate owned 91,148 21,525
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 7 of 19
8
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements
September 30, 1999
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, 1999
and December 31, 1998, and the results of its operations for the three and nine
month periods ended September 30, 1999 and 1998, and its cash flows for the nine
month periods ended September 30, 1999 and 1998.
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 1998
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) 1999 1998 1999 1998
Weighted average shares outstanding 11,479,819 11,463,971 11,483,328 11,460,358
Potentially dilutive effect of stock options 16,272 50,926 23,006 48,275
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Weighted average shares outstanding,
including potentially dilutive effect of
stock options 11,496,091 11,514,897 11,506,334 11,508,633
================================================================-
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, 1999 and December 31, 1998 were as
follows:
SEPTEMBER 30, December 31,
1999 1998
Unfunded commitments $ 71,118,328 $ 60,929,611
Letters of credit 3,638,724 3,901,923
4. New Accounting Standards - In June 1998, the Financial Accounting Standards
Board issued FAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." FAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. FAS 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. FAS 133 will not be applied
retroactively to financial statements of prior periods. Management has not
evaluated the impact that the adoption of FAS 133 will have on the Company's
financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 8 of 19
9
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION
SEPTEMBER 30, 1999 COMPARED WITH DECEMBER 31, 1998
Total assets decreased $7,595,731, or 1.25%, from December 31, 1998 to
September 30, 1999. Earning assets decreased $7,718,185, or 1.35%, over the same
nine month period. Loans, the largest earning asset, decreased $533,174, or
0.14%, over the same period, primarily because of a $18,454,622, or 58.47%,
decrease as of September 30, 1999 in the level of mortgage loans on the
Company's mortgage subsidiary, partially offset by a $17,921,448, or 5.06%,
increase as of September 30, 1999 in loans on the Company's bank subsidiary. The
decrease of $14,150,000, or 36.66%, in federal funds sold was partially offset
by an increase of $6,866,992, or 4.61%, in investment securities.
Accompanying the decline in assets were lower levels of deposits and
other borrowings, partially offset by earnings retained. Deposits decreased
$1,568,949, or 0.34%, from December 31, 1998 to September 30, 1999.
Noninterest-bearing demand deposits decreased $1,468,791, or 1.60%, over the
same nine month period. Although savings, NOW and money market deposits
increased $4,195,499, or 3.39%, total time deposits decreased $4,295,657, or
1.77%, over the same period. The loan to deposit ratio was 84.23% as of
September 30, 1999 compared to 84.06% as of December 31, 1998. The Company has
sources of funding, in addition to deposits, in the form of overnight and other
short-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, 1998 to September 30, 1999, such overnight
borrowings increased $5,186,484, or 65.73%, reflecting an increase of
$4,933,373, or 77.66%, in higher overnight borrowings in the form of commercial
paper. Other borrowings decreased $18,780,388, or 62.59%, caused by a decrease
in temporary borrowings on the mortgage subsidiary primarily due to lower
mortgage origination activity. Accrued interest payable decreased $462,091, or
20.81%, from December 31, 1998 to September 30, 1999. Other liabilities
increased $1,500,994, or 78.20%, from December 31, 1998 to September 30, 1999,
primarily because of the purchase of investment securities in the process of
settlement.
Common stock outstanding increased 30,872 shares, or 0.27%, from
December 31, 1998 to September 30, 1999, primarily due to shares issued in
connection with the exercise of stock options. Earnings retained were $7,681,211
for the first nine months of 1999, after paying cash dividends of $3,214,725.
Accumulated other comprehensive income (loss), net of deferred income taxes
decreased $974,919, or 128.30%, from December 31, 1998 to September 30, 1999,
primarily because the value of securities available for sale declined when
interest rates rose during the period. From December 31, 1998 through September
30, 1999, the Company repurchased $25,100 shares of its common stock at an
average price of $23.08. The Company's liquidity position remained strong.
LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISKS
The objectives of the Company's liquidity management policy include
providing adequate funds to meet the needs of depositors and borrowers at all
times, as well as providing funds to meet the basic needs for on-going
operations of the Company and regulatory requirements. The Company's liquidity
position remained strong.
The Company places great significance on monitoring and managing the
Company's asset/liability position. The Company's policy of managing its
interest margin (or net yield on interest-earning assets) is to maximize net
interest income while maintaining a stable deposit base. The Company's deposit
base is not generally subject to volatility experienced in national financial
markets in recent
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 9 of 19
10
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION - (continued)
years; however, the Company does realize the importance of minimizing such
volatility while at the same time maintaining and improving earnings. A common
method used to manage interest rate sensitivity is to measure, over various time
periods, the difference or gap between the volume of interest-earning assets and
interest-bearing liabilities repricing over a specific time period. However,
this method addresses only the magnitude of funding mismatches and does not
address the magnitude or relative timing of rate changes. Therefore, management
prepares on a regular basis earnings projections based on a range of interest
rate scenarios of rising, flat and declining rates in order to more accurately
measure interest rate risk.
Interest-bearing liabilities and the loan portfolio are generally
repriced to current market rates. The Company's balance sheet is
asset-sensitive, meaning that in a given period there will be more assets than
liabilities subject to immediate repricing as the market rates change. Because
most of the Company's loans are at variable rates, they reprice more rapidly
than rate sensitive interest-bearing deposits. During periods of rising rates,
this results in increased net interest income. The opposite occurs during
periods of declining rates.
The Bank uses several modeling techniques to measure interest rate risk
including the gap analysis previously discussed, the simulation of net interest
income under varying interest rate scenarios and the theoretical impact of
immediate and sustained rate changes referred to as "rate shocks." "Rate shocks"
measure the estimated theoretical impact on the Bank's tax equivalent net
interest income and market value of equity from hypothetical immediate changes
of plus and minus 1%, 2%, 3% and 4% as compared to the estimated theoretical
impact of rates remaining unchanged. The prospective effects of these
hypothetical interest rate changes, is based upon numerous assumptions including
relative and estimated levels of key interest rates. "Rate shock" modeling is of
limited usefulness because it does not take into account the pricing strategies
management would undertake in response to the depicted sudden and sustained rate
changes. Additionally, management does not believe rate changes of the magnitude
described are likely in the foreseeable future.
The Company has not experienced a material change in the mix of its
rate-sensitive assets and liabilities or in interest rates in the market that it
believes would result in a material change in its interest rate sensitivity
since reported at December 31, 1998.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1999 COMPARED WITH THE SAME
PERIOD IN 1998 AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
COMPARED WITH THE SAME PERIOD IN 1998
During the three month period ended September 30, 1999, interest income
increased $122,461, or 1.02%, from the same period last year. The increase is
primarily attributable to income from growth in loan and investment volumes that
slightly outpaced the decline in income resulting from lower interest rates. The
prime lending rate during the three month period averaged 8.02% compared to
8.50% during the same period in 1998. Yields on loans averaged 10.08% for the
quarter, down from 10.58% for the same quarter last year. Gross loans averaged
$381,609,697 compared to $370,751,719 last year, an increase of $10,857,978, or
2.93%. Interest on securities and overnight investments increased $315,802, or
14.56%, due to higher average volumes invested during the quarter. Average
securities and overnight investments were $183,720,780 compared to $153,964,377
last year, an increase of $29,756,403, or 19.33%. Interest expense decreased
$208,247, or 5.11%, primarily because lower interest rates on interest-bearing
deposits outpaced the growth in the average balances of such deposits. Rates on
interest-bearing deposits averaged 3.94% for the quarter, down
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 10 of 19
11
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
from 4.40% for the same quarter last year. Interest-bearing deposits averaged
$366,391,790 compared to $348,487,641 last year, an increase of $17,904,149, or
5.14%. Savings, NOW and money market deposits averaged $128,551,717 compared to
$114,633,798 last year, an increase of $13,917,919, or 12.14%. Time deposits
averaged $237,840,073 compared to $233,853,843 last year, an increase of
$3,986,230, or 1.70%. Other borrowings averaged $24,076,607 compared to
$17,826,603 last year, an increase of $6,250,004, or 35.06%, reflecting an
increase of $8,147,501 in higher overnight borrowings in the form of commercial
paper related to the commercial deposit sweep arrangements of the banking
subsidiary. This growth was partially offset by a decrease of $1,897,497, or
12.26%, in temporary borrowings on the mortgage subsidiary primarily due to
lower mortgage origination activity. Other borrowings were the principal source
of funding for the mortgage origination activities of the mortgage subsidiary.
For substantially the same reasons, interest income and expense were
higher for the nine month period ended September 30, 1999. During the first nine
months of 1999, interest income increased $143,735, or 0.40%, from the same
period last year. The increases in interest income due to higher investment
security and overnight investment volumes were mostly offset by decreases in
loan interest due to lower interest rates on loans. The prime rate during the
nine month period averaged 7.90% compared to 8.50% during the same period in
1998. Yields on loans averaged 9.99% for the year-to-date period, down from
10.49% for the same period last year. Gross loans averaged $379,674,967 compared
to $371,177,469 last year, an increase of $8,497,498, or 2.29%. Interest on
securities and overnight investments increased $911,370, or 14.50%, due to
higher average volumes invested during the period. Average securities and
overnight investments were $178,906,302 compared to $145,970,583 last year, an
increase of $32,935,719, or 22.56%. Interest expense decreased $85,674, or
0.72%, primarily because decreases in interest expense due to lower rates
outpaced increases in interest expense resulting from growth in interest-bearing
deposits and other borrowings. Rates on interest-bearing deposits averaged 3.96%
for the year-to-date period, down from 4.28% for the same period last year.
Interest-bearing deposits averaged $364,925,734 compared to $345,558,751 last
year, an increase of $19,366,983, or 5.60%. Other borrowings averaged
$25,626,209 compared to $17,124,069 last year, an increase of $8,502,140, or
49.65%, reflecting an increase of $7,760,619 in higher overnight borrowings in
the form of commercial paper related to the commercial deposit sweep
arrangements of the banking subsidiary. Also modestly contributing to the volume
growth was an increase of $741,521, or 4.56%, in average temporary borrowings on
the mortgage subsidiary primarily due to higher mortgage originations in the
first quarter. Other borrowings were the principal source of funding for the
mortgage origination activities of the mortgage subsidiary.
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
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 11 of 19
12
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
similarly sizable charges to operations. During the three and nine month periods
ended September 30, 1999, management determined a charge to operations of
$616,002 and $1,096,583, respectively, would bring the loan loss reserve to a
balance considered to be adequate to absorb estimated potential losses in the
portfolio. At September 30, 1999 the loan loss reserve was 1.31% of net loans
outstanding.
The 1999 quarter-to-date and year-to-date provisions for possible loan
losses were substantially lower than those of the previous year. In the third
quarter of 1998, the Company announced that third quarter earnings would decline
due to a charge primarily related to increasing the loan loss reserves of the
Bank. One of the Bank's borrowers, a textile related plant and its owners,
became unable to repay loans which the Bank had made for a period extending over
several years. The Bank had hoped that this borrower's business would improve.
The borrower managed to generate positive cash flows in mid-summer, but the
positive cash flows proved to be short-lived. The Bank increased its loan loss
reserves by $3,046,425 and wrote off related accrued interest of $91,900
resulting in an aggregate charge to earnings of $3,138,325 before tax, or
$1,882,995 after tax, or 16.4 cents per share. The Bank also charged off its
estimated loss on the loans to this borrower.
At September 30, 1999 and 1998, the recorded investment in loans that
are considered to be impaired under FAS No. 114 was $2,654,769 ($1,610,566 of
which was on a non-accrual basis) and $1,503,490 ($1,089,138 which was on a
non-accrual basis), respectively. The average recorded balance of impaired loans
during 1999 and 1998 was not significantly different from the balance at
September 30, 1999 and 1998, respectively. The related allowance for loan losses
determined in accordance with FAS No. 114 for these loans was $1,214,083 and
$409,507 at September 30, 1999 and 1998, respectively. For the nine months ended
September 30, 1999 and 1998, the Company recognized interest income on those
impaired loans of approximately $94,076 and $21,583, respectively.
For the quarter ended September 30, 1999, total noninterest income was
$1,876,651, down $245,194, or 11.56%, from $2,121,845 earned in the same period
of 1998. Fees on deposit accounts were $930,210 during the third quarter, down
slightly from $936,552 earned in the third quarter of 1998. Third quarter other
service fees and commissions were $832,700 for 1999, down $274,363, or 24.78%,
from $1,107,063 earned in the same period of 1998, primarily because of lower
fees from mortgage originations. When mortgage rates rose sharply in the second
and third quarters of 1999, mortgage origination activity dropped dramatically.
There were no significant gains or losses on sales of securities in the third
quarter of 1999 or 1998. Other noninterest income was $113,741 for the third
quarter of 1999, up $35,511, or 45.39%, from $78,230 earned in the third quarter
of 1998, due to a combination of higher sales of small business loans, annuities
and life insurance products. Management continued to emphasize nontraditional
banking services such as annuities, life insurance, and sales of mortgage and
small business loans, though the third quarter 1999 income from the sales of
mortgages and small business loans remained below the levels of such income in
the third quarter of the previous year.
Third quarter 1999 noninterest expenses totaled $4,120,205, up
$240,601, or 6.20%, from $3,879,604 in the same quarter of 1998. Salaries and
wages were $2,083,434 during the quarter, up $2,881, or 0.14%, from $2,080,553
in 1998, while employee benefits were $418,684, up $226,696, or 118.08%,
compared to $191,988 in the third quarter of 1998. In the third quarter of the
previous year, the Company's banking subsidiary decreased its profit sharing
expense by $231,133. This expense reduction was related to lower profit levels
anticipated for 1998 resulting from the pretax loan charge of $3.1 million,
discussed above, that the Company reported in the third quarter of
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 12 of 19
13
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
1998. Occupancy expenses for the quarter were $198,295, up $9,470, or 5.02%,
from $188,825 in the same period of 1998. Equipment expenses were $336,499
during the third quarter, down $11,799, or 3.39%, from $348,298 in the same
period of 1998. Third quarter other noninterest expenses were $1,083,293 in
1999, up $13,353, or 1.25%, from $1,069,940 in the same quarter a year ago.
Income tax expense was $1,769,607 for the quarter, up $951,780, or 116.38%, from
$817,827 for the 1998 third quarter. Income tax expense was lower in the 1998
third quarter due to the loan charge referred to above. The effective tax rates
were 32.94% and 29.40% for the third quarters of 1999 and 1998, respectively.
Net income increased to $3,602,552 during the quarter, or 83.44%, from
$1,963,911 earned in the same period of 1998. The net income change was also
attributable to the loan charge referred to above.
For the nine months ended September 30, 1999, total noninterest income
was $6,330,865, down $41,635, or 0.65%, from $6,372,500 earned in the first nine
months of 1998. Fees on deposit accounts were $2,606,476 during the first nine
months of 1999, down $70,866, or 2.65%, from $2,677,342 in the same period of
1998. Also for the year-to-date period, other service fees and commissions were
$3,232,312, up $168,955, or 5.52%, from $3,063,357 in 1998, primarily because of
higher fees from mortgage originations in the first quarter of 1999. When
mortgage rates rose sharply in the second and third quarters of 1999, mortgage
origination activity dropped dramatically. There were no significant gains or
losses on sales of securities in the year-to-date periods of 1999 or 1998. Other
noninterest income was $491,402 during the nine months ended September 30, 1999,
down $140,300, or 22.21%, from $631,702 in the same period of 1998, primarily
due to lower sales of small business loans which generated $170,166 in the first
nine months of 1999 compared to $406,799 in the same period of 1998. Management
continued to emphasize nontraditional banking services such as annuities, life
insurance, and sales of mortgage and small business loans, though the
year-to-date 1999 sales of these services and products lagged the 1998 levels.
Total noninterest expenses were $12,867,631 during the first nine
months of 1999, up $1,032,166, or 8.72%, from $11,835,465 in the same period of
1998. The year-to-date increases in the various overhead captions included costs
associated with meeting the higher first quarter demand for mortgage banking
services. Also, costs associated with two new retail offices that opened in
March and May of 1998 included three quarters of expenses in 1999 compared with
less than two quarters of expenses in 1998. Total personnel costs were
$7,769,158 during the first nine months of 1999, up $743,424, or 10.58%, from
$7,025,734 in the same period of 1998. Of the increase in personnel costs,
$455,298 were related to banking operations and $288,126 were related to
mortgage operations. Salaries and wages were $6,501,719 during the first nine
months of 1999, up $479,084, or 7.95%, from $6,022,635 in the same period of
1998. The increase in salaries and wages consisted of $242,013 related to
banking operations and $237,071 related to mortgage operations. Employee
benefits were $1,267,439 up $264,340, or 26.35%, from $1,003,099. Of this
increase, $213,285 were related to banking operations and $51,055 were related
to mortgage operations. In the third quarter of the previous year, the Company's
banking subsidiary decreased its profit sharing expense by $231,133. This
expense reduction was related to lower profit levels anticipated for 1998
resulting from a loan charge of $3.4 million, before taxes, that the Company
reported in the third quarter of 1998. Year-to-date occupancy expenses were
$592,940, up $37,236, or 6.70%, from $555,704 in 1998, and equipment expenses
were $1,017,711, down $42,989, or 4.05%, from $1,060,700 in the same
year-to-date period of 1998. Other noninterest expenses were $3,487,822 for the
nine months ended September 30, 1999, up $294,495, or 9.22%, from $3,193,327 in
the same period of 1998. Of the $294,495 increase in other noninterest expenses,
$241,723 were related to mortgage operations. Year-to-date income tax expense
was $5,369,701 in 1999, up $742,707, or 16.05%, from $4,626,994 in 1998. Income
tax expense in the previous year-to-date period was lower due to the
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 13 of 19
14
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
loan charge referred to above. The year-to-date effective tax rates were 33.01%
and 32.59% for 1999 and 1998, respectively. Net income was $10,895,936 during
the first nine months of 1999, up $1,324,648, or 13.84%, from $9,571,288 earned
in the same year-to-date period of 1998. The year-to-date net income change was
also attributable to the loan charge in 1998 referred to above.
YEAR 2000 READINESS DISCLOSURES
The Company has gone to great lengths to ensure that there will not be
significant disruptions to its operations from the so-called "Year 2000 issue"
on January 1, 2000. Based upon these efforts and actions taken to date, the
Company had a high degree of confidence that its systems will perform properly
after January 1, 2000 and that its business operations and financial condition
will not be negatively affected in a material way by the Year 2000 issue.
The Year 2000 issue is the result of computer programs that were
written to limit data indicating "years" to two, rather than four, digits. For
example, such programs may mathematically recognize the year 1900 and the year
2000 as the same "00" year. If ignored, this condition could possibly result in
program failures or miscalculations, and could potentially cause disruptions of
operations, including, among other things, temporary inabilities to process
transactions, send statements or engage in similar normal business activities.
All levels of the Company's management and its Board of Directors are
aware of the technology challenges presented by the Year 2000 century date
change and, if neglected, the potentially serious effects on the technologies of
the Company and its customers. The Company has an active Year 2000 project team
under the guidance of an independent technology consulting firm. The Company has
carried out a detailed Year 2000 readiness plan, including steps designed to (1)
identify, assess, evaluate, test and validate its own date-sensitive systems,
including the development of contingency and remediation plans, (2) amend its
loan underwriting policies to include assessments, as appropriate, regarding
Year 2000 readiness by commercial loan customers, (3) offer education to
customers regarding Year 2000 issues in their own lives and businesses, and (4)
inform the Company's customers as to the Company's Year 2000 compliance process.
Although the Company relies entirely upon outside vendors for its computer
software, hardware and its security and environmental equipment, all of the
Company's systems identified as being date-sensitive have been evaluated for
Year 2000 compliance.
As of June 30, 1999, the Company had completed the successful testing
of its significant systems identified as "mission critical" or critical to
conducting its day-to-day banking businesses. The term "systems" includes both
hardware and software. Examples of the mission critical hardware systems
identified and successfully tested include mid-range computers, imaging and item
processing equipment, personal computers, network file servers, automated teller
machines or ATM's and security systems. Examples of the mission critical
software systems (or applications) identified and successfully tested include
operating software for the mid-range and network computers, software related to
loans, deposits, general ledger, ATM network and wire transfer, and third-party
software used for various purposes. Testing of systems with lower priorities was
also substantially completed by June 30, 1999, allowing ample time in the
remainder 1999 for validation and follow-up. Also as of June 30, 1999, the
Company had completed the development of extensive contingency plans for certain
computer processes, including the use of alternative systems, the extension of
operating hours and the manual processing of certain operations.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 14 of 19
15
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (concluded)
To inform and educate customers about the status of its Year 2000
readiness, the Company hosted two Year 2000 seminars in March 1998 and two
seminars in February 1999. The seminars provide an opportunity not only for the
Company to share information about its Year 2000 readiness, but also to share
general information about the banking industry and ideas to help customers in
their efforts to make their businesses ready for the Year 2000. In 1998, the
Bank mailed its deposit customers a summary of its Year 2000 readiness status.
The Bank also posted this summary in its office lobbies and on its internet web
site. The Bank is providing similar updates during 1999.
Also during 1999, the Bank continues its assessments of the Year 2000
readiness of its significant commercial loan customers. The Bank includes these
assessments as a part of its analysis of the adequacy of its loan loss reserves
and may determine that additional reserves in 1999 are prudent based upon
changes in these assessments. The Bank provided no additional loan loss reserves
specifically related to Year 2000 issues during the nine months of 1999.
During the nine months ended September 30, 1999, the Company spent
approximately $45,650 on its Year 2000 preparations, of which approximately
$11,000 were capitalized new equipment and software and approximately $34,650
were expensed against 1999 earnings. This brings the Company's cumulative costs
of Year 2000 preparations to approximately $131,650, of which $33,000 were
capitalized and $98,650 were charged against earnings. The Company continues to
estimate that its total costs of Year 2000 compliance will be within the range
of approximately $125,000 to $150,000. For the remainder of 1999, the Company
estimates that its Year 2000 preparations will cost an additional $18,350, of
which an estimated $9,000 is anticipated to be capitalized and an estimated
$9,350 is anticipated to be charged to operations. In providing these amounts,
the Company has excluded the technology upgrade costs that were planned in the
normal course of business and not necessarily in response to its Year 2000
compliance plan. For example, the Company's routine technology upgrades for
1997, 1998 and 1999 included a new imaging system to replace its aging item
processing system, new ATM's and personal computer file servers throughout those
respective networks, a new teller automation system throughout its offices, and
numerous personal computer hardware and software systems previously scheduled
for replacement. The Company routinely makes investments in technology in its
efforts to improve customer service and to efficiently manage its product and
service delivery systems.
DISCLOSURES ABOUT YEAR 2000 READINESS AND
FORWARD LOOKING STATEMENTS
The discussions included in this document contain (1) year 2000
readiness disclosures within the meaning of the Year 2000 Information and
Readiness Disclosure Act of 1998, subject to certain express provisions of such
Act that may exclude certain disclosures from the coverage of such Act under
limited circumstances and (2) forward looking statements within the meaning of
the federal securities laws, including Section 21E of the Securities Exchange
Act of 1934 and Section 27A of the Securities Act of 1933, which statements are
subject to risks and uncertainties. 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 year 2000 readiness disclosures and
forward looking statements could be affected by such factors as, including but
not limited to, the financial success or changing conditions or strategies of
the Company's customers or vendors (including, without limitation, utility
providers), actions of government regulators, or general economic conditions.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 15 of 19
16
BANK OF GRANITE CORPORATION
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
27 Financial Data Schedules
B) Reports on Form 8-K
No reports on Form 8-K have been filed for the quarter ended September
30, 1999.
Items 1,2,3,4 and 5 are inapplicable and are omitted.
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 16 of 19
17
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 10, 1999 /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, 1999, page 17 of 19
18
BANK OF GRANITE CORPORATION
Exhibit Index
Begins
on Page
-------
Exhibit 27 - Financial Data Schedule (September 30, 1999) 19
Bank of Granite Corporation, Form 10-Q, September 30, 1999, page 18 of 19