<PAGE> 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 June 30, 1999
----------------------------------
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
---------------------------------
BANK OF GRANITE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 56-1550545
- ------------------------------- ------------------------------------
(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
11,482,379 SHARES OUTSTANDING AS OF JULY 31, 1999
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Exhibit Index begins on page 18
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 1 of 19
<PAGE> 2
BANK OF GRANITE CORPORATION
Index
Begins
on Page
-------
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998 3
Statements of Consolidated Income
Three Months Ended June 30, 1999 and 1998
And Six Months Ended June 30, 1999 and 1998 4
Statements of Consolidated Comprehensive Income
Three Months Ended June 30, 1999 and 1998
And Six Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows
Six Months Ended June 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, June 30, 1999, page 2 of 19
<PAGE> 3
BANK OF GRANITE CORPORATION
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 22,837,684 $ 19,518,740
Interest-bearing deposits 238,300 175,437
Federal funds sold 33,375,000 38,600,000
------------------------------------
Total cash and cash equivalents 56,450,984 58,294,177
------------------------------------
Investment securities:
Available for sale, at fair value 62,265,984 61,954,639
Held to maturity, at amortized cost 84,681,989 87,053,892
Loans 382,095,127 385,590,204
Allowance for loan losses (5,018,762) (4,619,586)
------------------------------------
Net loans 377,076,365 380,970,618
------------------------------------
Premises and equipment, net 10,065,337 10,095,628
Accrued interest receivable 4,854,356 5,104,174
Other assets 3,816,405 2,701,914
------------------------------------
Total $ 599,211,420 $ 606,175,042
------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 95,174,592 $ 91,967,287
NOW accounts 68,570,238 69,804,107
Money market accounts 30,525,124 29,970,288
Savings 26,145,398 23,904,317
Time deposits of $100,000 or more 96,835,681 101,335,011
Other time deposits 140,731,743 141,716,159
------------------------------------
Total deposits 457,982,776 458,697,169
Federal funds purchased and securities
sold under agreements to repurchase 2,047,261 1,538,350
Other borrowings 24,245,252 36,357,016
Accrued interest payable 1,834,226 2,220,988
Other liabilities 3,236,363 1,919,548
------------------------------------
Total liabilities 489,345,878 500,733,071
------------------------------------
Shareholders' equity:
Common stock, $1 par value
Authorized: 25,000,000 shares
Issued: 11,495,379 shares in 1999
and 11,464,913 shares in 1998 11,495,379 11,464,913
Capital surplus 22,979,594 22,615,559
Retained earnings 75,828,929 70,601,642
Accumulated other comprehensive income (loss),
net of deferred income taxes (218,484) 759,857
Less: Cost of common shares in treasury;
9,100 shares in 1999 and 0 shares in 1998 (219,876) --
------------------------------------
Total shareholders' equity 109,865,542 105,441,971
------------------------------------
Total $ 599,211,420 $ 606,175,042
------------------------------------
</TABLE>
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 3 of 19
<PAGE> 4
BANK OF GRANITE CORPORATION
Statements of Consolidated
Income (unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $ 9,362,515 $ 9,847,344 $18,831,283 $19,405,577
Federal funds sold 400,648 180,037 639,034 271,078
Interest-bearing deposits 3,894 3,014 7,447 5,521
Investments:
U.S. Treasury 186,234 279,429 379,517 596,290
U.S. Government agencies 736,178 575,501 1,467,931 1,083,148
States and political subdivisions 884,336 874,532 1,806,225 1,747,254
Other 179,501 217,641 412,318 413,613
--------------------------------------------------------------
Total interest income 11,753,306 11,977,498 23,543,755 23,522,481
--------------------------------------------------------------
INTEREST EXPENSE:
Time deposits of $100,000
or more 1,225,808 1,398,964 2,507,762 2,789,564
Other time and savings deposits 2,337,571 2,261,994 4,735,555 4,491,325
Federal funds purchased and
securities sold under
agreements to repurchase 22,189 48,118 42,915 100,356
Other borrowed funds 282,129 226,487 590,252 372,665
--------------------------------------------------------------
Total interest expense 3,867,697 3,935,563 7,876,484 7,753,910
--------------------------------------------------------------
Net interest income 7,885,609 8,041,935 15,667,271 15,768,571
Provision for loan losses 316,002 313,410 480,581 646,820
--------------------------------------------------------------
Net interest income after
provision for loan losses 7,569,607 7,728,525 15,186,690 15,121,751
--------------------------------------------------------------
OTHER INCOME:
Service charges on deposit
accounts 862,598 888,670 1,676,266 1,740,790
Other service charges, fees
and commissions 997,194 1,082,470 2,399,612 1,956,294
Securities gains 675 99 675 99
Other 161,361 279,199 377,661 553,472
--------------------------------------------------------------
Total other income 2,021,828 2,250,438 4,454,214 4,250,655
--------------------------------------------------------------
OTHER EXPENSES:
Salaries and wages 2,138,382 2,039,732 4,418,285 3,942,082
Employee benefits 418,974 398,558 848,755 811,111
Occupancy expense, net 197,381 193,555 394,645 366,878
Equipment expense 336,740 372,256 681,212 712,402
Other 1,241,259 1,117,401 2,404,529 2,123,390
--------------------------------------------------------------
Total other expenses 4,332,736 4,121,502 8,747,426 7,955,863
--------------------------------------------------------------
Income before income taxes 5,258,699 5,857,461 10,893,478 11,416,543
Income taxes 1,730,579 1,963,425 3,600,094 3,809,166
--------------------------------------------------------------
Net income $ 3,528,120 $ 3,894,036 $ 7,293,384 $ 7,607,377
--------------------------------------------------------------
PER SHARE AMOUNTS:
Net income - Basic $ 0.31 $ 0.34 $ 0.64 $ 0.66
Net income - Diluted 0.31 0.34 0.63 0.66
Cash dividends 0.09 0.08 0.18 0.16
Book value 9.56 8.84
</TABLE>
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 4 of 19
<PAGE> 5
BANK OF GRANITE CORPORATION
Statements of Consolidated
Comprehensive Income
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 3,528,120 $ 3,894,036 $ 7,293,384 $ 7,607,377
-----------------------------------------------------------------
ITEMS OF OTHER COMPREHENSIVE
INCOME:
Items of other comprehensive
income, before tax:
Unrealized gains (losses) on
securities available for sale (967,438) (63,807) (1,627,176) 31,659
Less: Reclassification
adjustments for gains
included in net income 675 99 675 99
----------- ----------- ----------- -----------
Items of other comprehensive
income, before tax (968,113) (63,906) (1,627,851) 31,560
Less: Change in deferred income
taxes related to change in
unrealized gains or losses on
securities available for sale (385,765) (25,444) (648,835) 12,649
-----------------------------------------------------------------
Other comprehensive
income (losses), net of tax (582,348) (38,462) (979,016) 18,911
-----------------------------------------------------------------
Comprehensive income $ 2,945,772 $ 3,855,574 $ 6,314,368 $ 7,626,288
=================================================================
</TABLE>
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 5 of 19
<PAGE> 6
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
<S> <C> <C>
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
Cash flows from operating activities:
Interest received $ 23,904,065 $ 23,682,748
Fees and commissions received 4,453,539 4,250,556
Interest paid (8,263,246) (7,862,888)
Cash paid to suppliers and employees (7,067,124) (7,633,651)
Income taxes paid (4,169,598) (4,483,877)
-------------------------------
Net cash provided by operating activities 8,857,636 7,952,888
-------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 2,487,800 8,190,000
Proceeds from maturities and/or calls of
securities held to maturity 11,744,800 8,427,657
Proceeds from sales of securities
available for sale -- 200,000
Purchase of securities available for sale (4,441,316) (10,831,959)
Purchase of securities held to maturity (9,467,719) (10,450,066)
Net decrease (increase) in loans 3,413,672 (13,198,111)
Capital expenditures (485,184) (1,015,730)
Proceeds from sale of fixed assets 15,530 7,550
Proceeds from sale of other real estate 240,306 --
-------------------------------
Net cash provided (used) by investing activities 3,507,889 (18,670,659)
-------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 4,769,353 27,321,043
Net decrease (increase) in certificates of deposit (5,483,746) 7,554,630
Net decrease (increase) in federal funds purchased
and securities sold under agreements to
repurchase and other borrowings 508,911 (4,740,567)
Net decrease (increase) in other borrowings (12,111,764) 12,922,217
Net proceeds from issuance of common stock 394,501 393,352
Dividend paid (2,066,097) (1,831,840)
Purchases of common stock for treasury (219,876) --
Cash paid for fractional shares -- (21,581)
-------------------------------
Net cash provided (used) by financing activities (14,208,718) 41,597,254
-------------------------------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS (1,843,193) 30,879,483
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 58,294,177 27,865,357
-------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 56,450,984 $ 58,744,840
-------------------------------
</TABLE>
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 6 of 19
<PAGE> 7
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited) - (concluded)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
1999 1998
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 7,293,384 $ 7,607,377
-------------------------------
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 510,605 550,413
Provision for loan loss 480,581 646,820
Premium amortization, net 110,492 14,754
Deferred income taxes (101,567) 3,671
Gains on sales or calls of securities
available for sale -- (99)
Gains on calls of securities
held to maturity (675) --
Loss (gain) on disposal or sale of equipment (10,660) 1,973
Gain on disposal or sale of other real estate (26,457) --
Decrease in taxes payable (467,937) (678,382)
Decrease in accrued interest receivable 249,818 145,513
Decrease in interest payable (386,762) (108,978)
Increase in other assets (577,938) (123,622)
Increase (decrease) in other liabilities 1,784,752 (106,552)
-------------------------------
Net adjustments to reconcile net income to
net cash provided by operating activities 1,564,252 345,511
-------------------------------
Net cash provided by operating activities $ 8,857,636 $ 7,952,888
-------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Increase (decrease) in unrealized gains or
losses on securities available for sale $ (1,627,176) $ 31,659
Decrease (increase) in deferred income taxes
on unrealized gains or losses on
securities available for sale (648,835) 12,649
Transfer from loans to other real estate owned 91,148 21,525
</TABLE>
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 7 of 19
<PAGE> 8
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements
June 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 June 30, 1999
and December 31, 1998, and the results of its operations for the three and
six month periods ended June 30, 1999 and 1998, and its cash flows for the
six month periods ended June 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:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Weighted average shares
outstanding 11,486,663 11,462,937 11,484,914 11,458,020
Potentially dilutive effect of
stock options 19,585 51,737 25,905 47,367
----------------------------------------------------------------------
Weighted average shares
outstanding, including
potentially dilutive effect of
stock options 11,506,248 11,514,674 11,510,819 11,505,387
----------------------------------------------------------------------
</TABLE>
3. In the normal course of business there are various commitments and
contingent liabilities such as commitments to extend credit, which are not
reflected on the financial statements. Management does not anticipate any
significant losses to result from these transactions. The unfunded portion
of loan commitments and standby letters of credit as of June 30, 1999 and
December 31, 1998 were as follows:
JUNE 30, December 31,
1999 1998
Unfunded commitments $ 62,558,128 $ 60,929,611
Letters of credit 3,431,018 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 fiscal all fiscal quarters
of fiscal years beginning after July 1, 2000. FAS 133 will 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, June 30, 1999, page 8 of 19
<PAGE> 9
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION
JUNE 30, 1999 COMPARED WITH DECEMBER 31, 1998
Total assets decreased $6,963,622, or 1.15%, from December 31, 1998 to
June 30, 1999. Earning assets decreased $10,717,772, or 1.87%, over the same
six month period. Loans, the largest earning asset, decreased $3,495,077, or
0.91%, over the same period, primarily because of a $14,858,663, or 47.07%
decrease as of June 30, 1999 in the level of mortgage loans on the Company's
mortgage subsidiary, partially offset by a $11,363,586, or 3.21% increase as
of June 30, 1999 in loans on the Company's bank subsidiary. The decrease of
$5,225,000, or 13.54%, in federal funds sold, was partially offset by a
$3,318,944, or 17.00%, increase in cash and due from banks, while investment
securities decreased $2,060,558, or 1.38%. Deposits decreased $714,393, or
0.16%, from December 31, 1998 to June 30, 1999. Noninterest-bearing demand
deposits increased $3,207,305, or 3.49%, over the same six month period.
Savings, NOW and money market deposits increased $1,562,048, or 1.26%, while
total time deposits decreased $5,483,746, or 2.26%, over the same period.
The loan to deposit ratio was 83.43% as of June 30, 1999 compared to 84.06%
as of December 31, 1998. Also from December 31, 1998 to June 30, 1999,
securities sold under agreements to repurchase increased $508,911, or
33.08%. Other borrowings decreased $12,111,764, or 33.31%, reflecting a
decrease of $14,585,484, or 48.61%, in temporary borrowings on the mortgage
subsidiary primarily due to lower mortgage origination activity partially
offset by an increase of $2,473,720, or 38.94%, in higher overnight
borrowings in the form of commercial paper. Common stock outstanding
increased 30,466 shares, or 0.27%, from December 31, 1998 to June 30, 1999,
primarily due to shares issued in connection with the exercise of stock
options. Earnings retained were $5,227,287 for the first six months of 1999,
after paying cash dividends of $2,066,097. Accumulated other comprehensive
income (loss), net of deferred income taxes decreased $978,341, or 128.75%,
from December 31, 1998 to June 30, 1999, primarily because the value of
securities available for sale declined when interest rates rose during the
period. From December 31, 1998 through June 30, 1999, the Company
repurchased 9,100 shares of its common stock at an average price of $24.16.
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 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.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 9 of 19
<PAGE> 10
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION - (continued)
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 JUNE 30, 1999 COMPARED WITH THE SAME PERIOD
IN 1998 AND FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 COMPARED WITH THE
SAME PERIOD IN 1998
During the three month period ended June 30, 1999, interest income
decreased $224,192, or 1.87%, from the same period last year. The decrease
is primarily attributable to decreased loan rates. The prime lending rate
during the three month period averaged 7.75% compared to 8.50% during the
same period in 1998. Yields on loans averaged 9.84% for the quarter, down
from 10.50% for the same quarter last year. Gross loans averaged
$380,607,352 compared to $374,975,516 last year, an increase of $5,631,836,
or 1.50%. Interest on securities and overnight investments increased
$260,637, or 12.24%, due to higher average volumes invested during the
quarter. Average securities and overnight investments were $181,677,635
compared to $147,187,661 last year, an increase of $34,489,974, or 23.43%.
Interest expense decreased $67,866, or 1.72%, primarily because of lower
rates on interest-bearing deposits. Interest-bearing deposits averaged
$365,413,589 compared to $347,664,462 last year, an increase of $17,749,127,
or 5.11%. Other borrowings averaged $25,168,093 compared to $18,948,571 last
year, an increase of $6,219,522, or 32.82%, reflecting an increase of
$8,300,780 in higher overnight borrowings in the form of commercial paper
partially offset by a decrease of $2,081,258 in temporary borrowings on the
mortgage subsidiary primarily due to lower mortgage origination activity.
Other borrowings were the principal source of funding for the mortgage
origination activities of the mortgage subsidiary.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 10 of 19
<PAGE> 11
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
During the first six months of 1999, interest income changed very
little 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 lending rate during the six month period averaged 7.75% compared
to 8.47% during the same period in 1998. Yields on loans averaged 9.94% for
the year-to-date period, down from 10.45% for the same period last year.
Gross loans averaged $378,707,602 compared to $371,390,344 last year, an
increase of $7,317,258, or 1.97%. Interest on securities and overnight
investments increased $595,568, or 14.47%, due to higher average volumes
invested during the period. Average securities and overnight investments
were $176,499,063 compared to $141,973,686 last year, an increase of
$34,525,377, or 24.32%. Interest expense increased $122,574, or 1.58%,
primarily because of growth in other borrowings. Other borrowings averaged
$26,401,010 compared to $16,772,802 last year, an increase of $9,628,208, or
57.40%, reflecting an increase of $7,567,178 in higher overnight borrowings
in the form of commercial paper and an increase of $2,061,030 in temporary
borrowings on the mortgage subsidiary primarily due to higher mortgage
origination activity. Other borrowings were the principal source of funding
for the mortgage origination activities of the mortgage subsidiary. Rates on
interest-bearing deposits averaged 3.98% for the quarter, down from 4.23%
for the same quarter last year. Interest-bearing deposits averaged
$364,192,706 compared to $344,094,306 last year, an increase of $20,098,400,
or 5.84%.
Management determines the allowance for loan losses based on a number
of factors including reviewing and evaluating the Company's loan portfolio
in order to identify potential problem loans, credit concentrations and
other risk factors connected to the loan portfolio as well as current and
projected economic conditions locally and nationally. Upon loan origination,
management evaluates the relative quality of each loan and assigns a
corresponding loan grade. All loans are periodically reviewed to determine
whether any changes in these loan grades are necessary. The loan grading
system assists management in determining the overall risk in the loan
portfolio.
Management realizes that general economic trends greatly affect loan
losses and no assurances can be made that further charges to the loan loss
allowance may not be significant in relation to the amount provided during a
particular period or that further evaluation of the loan portfolio based on
conditions then prevailing may not require sizable additions to the
allowance, thus necessitating similarly sizable charges to operations.
During the three and six month periods ended June 30, 1999, management
determined a charge to operations of $316,002 and $480,581, respectively,
would bring the loan loss reserve to a balance considered to be adequate to
absorb estimated potential losses in the portfolio. At June 30, 1999 the
loan loss reserve was 1.33% of net loans outstanding.
At June 30, 1999 and 1998, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $2,116,753 ($1,624,885 of
which was on a non-accrual basis) and $1,433,916 ($1,230,744 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 June 30, 1999 and 1998, respectively. The related allowance for loan
losses determined in accordance with SFAS No. 114 for these loans was
$1,529,469 and $822,400 at June 30, 1999 and 1998, respectively. For the six
months ended June 30, 1999 and 1998, the Company recognized interest income
on those impaired loans of approximately $88,243 and $18,385, respectively.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 11 of 19
<PAGE> 12
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
For the quarter ended June 30, 1999, total noninterest income was
$2,021,828, down $228,610, or 10.16%, from $2,250,438 earned in the same
period of 1998. Fees on deposit accounts were $862,598 during the second
quarter, down 2.93% from the $888,670 earned in the second quarter of 1998.
Second quarter other service fees and commissions were $997,194 for 1999,
down $85,276, or 7.88%, from $1,082,470 earned in the same period of 1998,
primarily because of lower fees from mortgage originations. When mortgage
rates rose sharply in April 1999, mortgage origination activity dropped
dramatically. There were no significant gains or losses on sales of
securities in the second quarter of 1999 or 1998. Other noninterest income
was $161,361 for the second quarter of 1999, down $117,838, or 42.21%, from
$279,199 earned in the second quarter of 1998, due to lower sales of small
business loans which generated $50,961 in the second quarter of 1999
compared to $209,372 in the same quarter of 1998. Management continued to
emphasize nontraditional banking services such as annuities, life insurance,
and sales of mortgage and small business loans, though the second quarter
1999 income from the sales of mortgages and small business loans was
disappointing.
Second quarter 1999 noninterest expenses totaled $4,332,736, up
$211,234, or 5.13%, from $4,121,502 in the same quarter of 1998, primarily
because of increased costs associated with mortgage origination services
which rose $177,001, or 17.87%. Although the fees from mortgage originations
decreased due to higher rates on mortgages, there is usually an approximate
60 to 90 day lag in the cost reductions associated with the reduced mortgage
income generating activity. Salaries and wages were $2,138,382 during the
quarter, up $98,650, or 4.84%, from $2,039,732 in 1998. Employee benefits
were $418,974, up $20,416, or 5.12%, compared to $398,558 in the second
quarter of 1998. Of the $119,066 increase in personnel costs, $60,888 were
related to mortgage operations. Occupancy expenses for the quarter were
$197,381, up $3,826, or 1.98%, from $193,555 in the same period of 1998.
Equipment expenses were $336,740 during the second quarter, down $35,516, or
9.54%, from $372,256 in the same period of 1998. Second quarter other
noninterest expenses were $1,241,259 in 1999, up $123,858, or 11.08%, from
$1,117,401 in the same quarter a year ago. Of the $123,858 increase,
$101,505 was related to mortgage operations. Income tax expense was
$1,730,579 for the quarter, down $232,846, or 11.86%, from $1,963,425 for
the 1998 second quarter. Net income decreased to $3,528,120 during the
quarter, or 9.40%, from $3,894,036 earned in the same period of 1998.
For the six months ended June 30, 1999, total noninterest income was
$4,454,214, up $203,559, or 4.79%, from $4,250,655 earned in the first six
months of 1998. Fees on deposit accounts were $1,676,266 during the first
six months of 1999, down $64,524, or 3.71%, from $1,740,790 in the same
period of 1998. Also for the year-to-date period, other service fees and
commissions were $2,399,612, up $443,318, or 22.66%, from $1,956,294 in
1998. primarily because of higher fees from mortgage originations in the
first quarter of 1999. When mortgage rates rose sharply in April 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 $377,661 during the
six months ended June 30, 1999, down $175,811, or 31.77%, from $553,472 in
the same period of 1998, due to lower sales of small business loans which
generated $133,846 in the first six months of 1999 compared to $380,744 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 income from the sales
of mortgages and small business loans was disappointing.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 12 of 19
<PAGE> 13
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
Total noninterest expenses were $8,747,426 during the first six months
of 1999, up $791,563, or 9.95%, from $7,955,863 in the same period of 1998.
As was the case for the second quarter, the year-to-date increases in the
various overhead captions included costs associated with meeting the higher
first quarter demand for mortgage banking services. Salaries and wages were
$4,418,285 during the first six months of 1999, up $476,203, or 12.08%, from
$3,942,082 in the same period of 1998, while employee benefits were $848,755
up $37,644, or 4.64%, from $811,111. Of the $513,847 increase in personnel
costs, $364,890 were related to mortgage operations. Year-to-date occupancy
expenses were $394,645, up $27,767, or 7.57%, from $366,878 in 1998, and
equipment expenses were $681,212, down $31,190, or 4.38%, from $712,402 in
the same year-to-date period of 1998. Other noninterest expenses were
$2,404,529 for the six months ended June 30, 1999, up $281,139, or 13.24%,
from $2,123,390 in the same period of 1998. Of the $281,139 increase in
other noninterest expenses, $230,946 were related to mortgage operations.
Year-to-date income tax expense was $3,600,094 in 1999, down $209,072, or
5.49%, from $3,809,166 in 1998. Net income was $7,293,384 during the first
six months of 1999, down $313,993, or 4.13%, from $7,607,377 earned in the
same year-to-date period of 1998.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 13 of 19
<PAGE> 14
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
YEAR 2000 READINESS DISCLOSURES
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's Year 2000 readiness plan includes steps
designed with the intent 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, which should allow ample time in the remainder 1999 for
validation and follow-up. As of June 30, 1999, the Company had completed the
development of contingency plans for certain computer processes, including
the use of alternative systems, the extension of operating hours and the
manual processing of certain operations.
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.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 14 of 19
<PAGE> 15
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (concluded)
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 first
six months of 1999.
During the six months ended June 30, 1999, the Company spent
approximately $40,200 on its Year 2000 preparations, of which approximately
$11,000 were capitalized new equipment and software and approximately
$29,200 were expensed against 1999 earnings. This brings the Company's
cumulative costs of Year 2000 preparations to approximately $126,200, of
which $33,000 were capitalized and $93,200 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 $175,000.
For the remainder of 1999, the Company estimates that its Year 2000
preparations will cost an additional $23,800, of which an estimated $9,000
is anticipated to be capitalized and an estimated $14,800 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, June 30, 1999, page 15 of 19
<PAGE> 16
BANK OF GRANITE CORPORATION
PART II - Other Information
Item 4 - Submission of Matters to a Vote of Shareholders
The following proposals were considered and acted upon at the annual
meeting of shareholders of the Company held on April 26, 1999:
Proposal 1. To consider the election of seven persons named as
director nominees in the Proxy Statement dated March 22, 1999.
John N. Bray FOR 9,758,591 WITHHELD 55,434
Paul M. Fleetwood, III, CPA FOR 9,759,042 WITHHELD 54,983
John A. Forlines, Jr. FOR 9,755,311 WITHHELD 58,714
Barbara F. Freiman FOR 9,743,885 WITHHELD 70,140
Hugh R. Gaither FOR 9,751,200 WITHHELD 62,825
Charles M. Snipes FOR 9,755,698 WITHHELD 58,327
Boyd C. Wilson, Jr., CPA FOR 9,758,855 WITHHELD 55,170
Proposal 2. To consider the ratification of the selection of Deloitte
& Touche LLP as the Company's independent Certified Public Accountants
for the fiscal year ending December 31, 1999.
FOR 9,707,843 AGAINST 89,809 ABSTAIN 16,372
No other business came before the meeting, or any adjournment or
urnments thereof.
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 June 30,
1999.
Items 1,2,3 and 5 are inapplicable and are omitted.
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 16 of 19
<PAGE> 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: August 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, June 30, 1999, page 17 of 19
<PAGE> 18
BANK OF GRANITE CORPORATION
Exhibit Index
Begins
on Page
-------
Exhibit 27 - Financial Data Schedule (June 30, 1999) 19
Bank of Granite Corporation, Form 10-Q, June 30, 1999, page 18 of 19
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
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