1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1998
----------------------
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
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(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
9,170,164 SHARES OUTSTANDING AS OF APRIL 30, 1998
================================================================================
Exhibit Index begins on page 14
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 1 of 16
2
BANK OF GRANITE CORPORATION
Index
Begins
on Page
-------
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 3
Statements of Consolidated Income
Three Months Ended March 31, 1998 and 1997 4
Statements of Consolidated Comprehensive Income
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Financial Condition and
Results of Operations 9
PART II - OTHER INFORMATION 12
Signatures 13
Exhibit Index 14
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 2 of 16
3
BANK OF GRANITE CORPORATION
Consolidated Balance Sheets
(unaudited)
MARCH 31, December 31,
1998 1997
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 30,942,537 $ 27,707,850
Interest-bearing deposits 86,010 157,507
Federal funds sold 16,000,000 --
------------------------------------
Total cash and cash equivalents 47,028,547 27,865,357
------------------------------------
Investment Securities:
Available for sale, at fair value 54,935,634 52,072,834
Held to maturity, at amortized cost 75,998,214 79,036,384
Loans 373,926,320 357,845,513
Allowance for loan losses (5,421,590) (5,202,578)
------------------------------------
Net loans 368,504,730 352,642,935
------------------------------------
Premises and equipment, net 9,658,150 9,583,429
Accrued interest receivable 5,046,505 4,972,654
Other assets 3,146,872 2,806,140
------------------------------------
Total $ 564,318,652 $ 528,979,733
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 88,966,964 $ 80,637,746
NOW accounts 64,204,256 62,792,730
Money market accounts 33,361,157 25,697,397
Savings 25,444,278 23,848,043
Time deposits of $100,000 or more 92,531,425 92,588,469
Other time deposits 133,493,539 129,011,799
------------------------------------
Total deposits 438,001,619 414,576,184
Federal funds purchased and securities
sold under agreements to repurchase 3,697,997 8,882,016
Other borrowings 19,143,861 6,287,700
Accrued interest payable 1,884,256 2,138,430
Other liabilities 3,156,466 1,878,680
------------------------------------
Total liabilities 465,884,199 433,763,010
------------------------------------
Shareholders' equity:
Common stock, $1 par value
Authorized: 10,000,000 shares
Issued and outstanding: 9,170,074 shares in 1998
and 9,146,272 shares in 1997 9,170,074 9,146,272
Capital surplus 22,572,801 22,234,753
Retained earnings 66,160,566 63,362,060
Accumulated other comprehensive income:
Net unrealized gain on securities available
for sale, net of deferred income taxes 531,012 473,638
------------------------------------
Total shareholders' equity 98,434,453 95,216,723
------------------------------------
Total $ 564,318,652 $ 528,979,733
====================================
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 3 of 16
4
BANK OF GRANITE CORPORATION
Statements of Consolidated
Income (unaudited)
Three Months
Ended March 31,
1998 1997
INTEREST INCOME:
Interest and fees on loans $ 9,558,233 $ 8,416,162
Federal funds sold 91,041 54,509
Interest-bearing deposits 2,507 2,985
Investments:
U.S. Treasury 316,861 293,739
U.S. Government agencies 507,647 586,261
States and political subdivisions 872,722 793,912
Other 195,972 214,275
------------------------------------
Total interest income 11,544,983 10,361,843
------------------------------------
INTEREST EXPENSE:
Time deposits of $100,000
or more 1,317,822 1,244,696
Other time and savings deposits 2,302,109 2,247,090
Federal funds purchased and
securities sold under
agreements to repurchase 52,238 44,162
Other borrowed funds 146,178 126,133
------------------------------------
Total interest expense 3,818,347 3,662,081
------------------------------------
Net interest income 7,726,636 6,699,762
Provision for loan losses 333,410 255,000
------------------------------------
Net interest income after
provision for loan losses 7,393,226 6,444,762
------------------------------------
OTHER INCOME:
Service charges on deposit
accounts 852,120 784,142
Other service charges, fees
and commissions 873,824 734,422
Other 269,173 262,690
------------------------------------
Total other income 1,995,117 1,781,254
------------------------------------
OTHER EXPENSES:
Salaries and wages 1,902,350 1,626,579
Employee benefits 412,553 371,404
Occupancy expense, net 168,223 140,026
Equipment rentals, depreciation
and maintenance 340,146 251,428
Other 1,005,989 738,091
------------------------------------
Total other expenses 3,829,261 3,127,528
------------------------------------
Income before income taxes 5,559,082 5,098,488
Income taxes 1,845,741 1,728,758
------------------------------------
Net income $ 3,713,341 $ 3,369,730
====================================
PER SHARE AMOUNTS:
Net income - Basic $ 0.41 $ 0.37
Net income - Diluted 0.40 0.37
Cash dividends 0.10 0.09
Book value 10.73 9.46
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 4 of 16
5
BANK OF GRANITE CORPORATION
Statements of Consolidated
Comprehensive Income
(unaudited)
Three Months
Ended March 31,
1998 1997
Net income $ 3,713,341 $ 3,369,730
------------------------------------
ITEMS OF OTHER COMPREHENSIVE
INCOME:
Other comprehensive income,
before tax:
Unrealized gains (losses)
during the period on
securities available for sale 95,466 (331,568)
Less: Income taxes related to
unrealized gains or losses on
securities available for sale (38,092) 132,730
------------------------------------
Other comprehensive
income (losses), net of tax 57,374 (198,838)
------------------------------------
Comprehensive income $ 3,770,715 $ 3,170,892
====================================
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 5 of 16
6
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited)
Three Months
Ended March 31,
1998 1997
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
Cash flows from operating activities:
Interest received $ 11,482,119 $ 9,940,541
Fees and commissions received 1,995,117 1,781,254
Interest paid (4,072,521) (3,888,402)
Cash paid to suppliers and employees (3,906,889) (3,635,372)
Income taxes paid (604,877) (531,475)
------------------------------------
Net cash provided by operating activities 4,892,949 3,666,546
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 5,800,000 3,100,000
Proceeds from maturities and/or calls of
securities held to maturity 3,299,900 800,000
Purchase of securities available for sale (8,573,523) (1,290,052)
Purchase of securities held to maturity (266,528) (772,760)
Net increase in loans (16,195,205) (7,974,460)
Capital expenditures (338,995) (578,850)
Proceeds from sale of fixed assets 0 20,000
------------------------------------
Net cash used by investing activities (16,274,351) (6,696,122)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 19,000,739 1,173,896
Net increase in certificates of deposit 4,424,696 4,716,378
Net decrease(increase) in federal funds purchased
and securities sold under agreements to
repurchase and other borrowings (5,184,019) 514,038
Net increase in other borrowings 12,856,161 920,192
Net proceeds from issuance of common stock 361,850 267,763
Dividend paid (914,835) (810,877)
Subsidiary's premerger distribution of income
as a Subchapter S corporation -- (160,000)
------------------------------------
Net cash provided by financing activities 30,544,592 6,621,390
------------------------------------
NET INCREASE IN CASH EQUIVALENTS 19,163,190 3,591,814
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,865,357 29,645,178
------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 47,028,547 $ 33,236,992
====================================
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 6 of 16
7
BANK OF GRANITE CORPORATION
Consolidated Statements of
Cash Flows (unaudited) - (concluded)
Three Months
Ended March 31,
1998 1997
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 3,713,341 $ 3,369,730
------------------------------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 264,274 215,924
Provision for loan loss 333,410 255,000
Premium amortization, net 10,987 40,193
Deferred income taxes (79,947) (13,852)
Gain on disposal or sale of equipment -- (525)
Increase in taxes payable 1,320,811 1,211,135
Increase in accrued interest receivable (73,851) (461,495)
Decrease in interest payable (254,174) (226,321)
Increase (decrease) in other assets (298,877) 15,205
Decrease in other liabilities (43,025) (738,448)
------------------------------------
Net adjustments to reconcile net income to
net cash provided by operating activities 1,179,608 296,816
------------------------------------
Net cash provided by operating activities $ 4,892,949 $ 3,666,546
====================================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Increase (decrease) in unrealized gains or
losses on securities available for sale $ 95,466 $ (331,568)
Decrease (increase) in deferred income taxes
on unrealized gains or losses on
securities available for sale (38,092) 132,730
Transfer from loans to other real estate owned 21,525 40,000
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 7 of 16
8
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements
March 31, 1998
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 as of March 31, 1998 and December 31,
1997, and the results of its operations and its cash flows for the three month
periods ended March 31, 1998 and 1997.
Results of operations and cash flows for the periods ended March 31, 1997 have
been restated to include the merger of GLL & Associates, Inc. acquired in
November 1997 and accounted for as a pooling of interests.
The accounting policies followed are set forth in Note 1 to the Corporation's
1997 Annual Report to Shareholders on file with the Securities and Exchange
Commission.
2. Earnings per share have been computed using the weighted average number of
shares of common stock and potentially dilutive common stock equivalents
outstanding as follows:
Three Months
Ended March 31,
1998 1997
Weighted average shares
outstanding 9,162,575 9,129,715
Potentially dilutive effect of
stock options 33,799 72,294
------------------------------------
Weighted average shares
outstanding, including
potentially dilutive effect of
stock options 9,196,374 9,202,009
====================================
3. In the normal course of business there are various commitments and contingent
liabilities such as commitments to extend credit, which are not reflected on the
financial statements. Management does not anticipate any significant losses to
result from these transactions. The unfunded portion of loan commitments and
standby letters of credit as of March 31, 1998 and December 31, 1997 were as
follows:
MARCH 31, December 31,
1998 1997
Unfunded commitments $55,260,108 $57,413,913
Letters of credit 4,300,740 3,773,055
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 8 of 16
9
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION
MARCH 31, 1998 COMPARED WITH DECEMBER 31, 1997
Total assets increased $35,353,919, or 6.68%, from December 31, 1997 to
March 31, 1998. Earning assets increased $31,833,940, or 6.51%, from December
31, 1997 to March 31, 1998. Loans, the largest earning asset, increased
$16,080,807, or 4.49%, from December 31, 1997 to March 31, 1998. Funding the
asset growth was a combination of deposit growth and earnings retained. Deposits
increased $23,425,435, or 5.65%, from December 31, 1997 to March 31, 1998.
Noninterest-bearing demand deposits increased $8,329,218, or 10.33%, from
December 31, 1997 to March 31, 1998. Savings, NOW and money market deposits
increased $1,596,235, or 6.69%, from December 31, 1997 to March 31, 1998. Time
deposits greater than $100,000 decreased $57,044, or 0.06%, from December 31,
1997 to March 31, 1998. Other time deposits increased $4,481,740, or 3.47%, from
December 31, 1997 to March 31, 1998. Total time deposits increased $4,424,696,
or 2.00%, from December 31, 1997 to March 31, 1998. The loan to deposit ratio
was 85.37% as of March 31, 1998 compared to 86.32% as of December 31, 1997.
Federal funds purchased and securities sold under agreements to repurchase
decreased $5,184,019, or 58.37%, from December 31, 1997 to March 31, 1998. Other
borrowings increased $12,856,161, or 204.47%, from December 31, 1997 to March
31, 1998. Common stock outstanding increased 23,802 shares, or 0.26%, from
December 31, 1997 to March 31, 1998, primarily due to the exercise of stock
options. Earnings retained were $2,798,506 from December 31, 1997 to March 31,
1998, after paying dividends of 914,833. Net unrealized gain on securities
available for sale, net of deferred income taxes increased $57,374, or 12.11%,
from December 31, 1997 to March 31, 1998. The Company's liquidity position
remained strong.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998
COMPARED WITH THE SAME PERIOD IN 1997
Results of operations for the periods ended March 31, 1997 have been
restated to include the merger of GLL & Associates, Inc. acquired in November
1997 and accounted for as a pooling of interests.
During the three month period ended March 31, 1998, interest income
increased $1,183,140, or 11.42%, from the same period last year. The increase is
primarily attributable to increased loan volume. The prime rate during the three
month period averaged 8.50% compared to 8.26% during the same period in 1997.
Gross loans averaged $367,805,172 compared to 332,249,574 last year, an increase
of 10.70%. Interest expense increased $156,266, or 4.27%, primarily because of
growth in interest-bearing deposits.
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.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 9 of 16
10
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
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
month period ended March 31, 1998, management determined a charge to operations
of $333,410 would bring the loan loss reserve to an estimated balance considered
to be adequate to absorb potential losses in the portfolio. At March 31, 1998
the loan loss reserve was 1.47% of net loans outstanding.
At March 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $1,315,688 ($988,751 of which
was on a non-accrual basis) and $935,736 ($731,935 which was on a non-accrual
basis), respectively. The average recorded balance of impaired loans during 1998
and 1997 was not significantly different from the balance at March 31, 1998 and
1997, respectively. The related allowance for loan losses determined in
accordance with SFAS No. 114 for these loans was $571,281 and $455,988 at March
31, 1998 and 1997, respectively. For the three months ended March 31, 1998 and
1997, the Company recognized interest income on those impaired loans of
approximately $8,262 and $6,825, respectively.
For the quarter ended March 31, 1998, total noninterest income was
$1,995,117, up $213,863, or 12.01%, from $1,781,254 earned in the same period of
1997. Fees on deposit accounts were $852,120 during the first quarter, up
$67,978, or 8.67%, from $784,142 earned in the first quarter of 1997. First
quarter other service fees and commissions were $873,824 for 1998, up $139,402,
or 18.98%, from $734,422 earned in the same period of 1997. There were no gains
on sales of securities in the first quarter of 1998 or 1997. Other noninterest
income was $269,173 for the first quarter of 1998, up $6,483, or 2.47%, from
$262,690 earned in the first quarter of 1997. Management continued to place
emphasis on nontraditional banking services such as annuities, life insurance,
and sales of mortgage and small business loans, which produced $838,123 in
nontraditional fee income during the first quarter of 1998, up 12.05% from the
first quarter of 1997.
First quarter 1998 noninterest expenses totaled $3,829,261, up
$701,733, or 22.44%, from $3,127,528 in the first quarter of 1997, primarily
because of costs associated with (1) commissions incurred with the increase in
mortgage banking fee income, (2) the organizing of a department in June 1997 to
launch a new cashflow management product for commercial customers, (3) the
opening in April 1997 and March 1998 of two new retail offices and (4)
depreciation and maintenance of new imaging and data communications technology
installed in September 1997. Salaries and wages were $1,902,350 during the
quarter, up $275,771, or 16.95%, from $1,626,579 in 1997. Profit sharing and
employee benefits were $412,553, up $41,149, or 11.08%, compared to $371,404 in
the first quarter of 1997. Occupancy expenses for the quarter were $168,223, up
$28,197, or 20.14%, from $140,026 in the same period of 1997. Equipment expenses
were $340,146 during the first quarter, up $88,718, or 35.29%, from $251,428 in
the same period of 1997. First quarter other noninterest expenses were
$1,005,989 in 1998, up $267,898, or 36.30%, from $738,091 in the same quarter a
year ago. Income tax expense was $1,845,741 for the quarter, up $116,983, or
6.77%, from $1,728,758 for the 1997 first quarter. Net income increased to
$3,713,341 during the quarter, or 10.20%, from $3,369,730 earned in the same
period of 1997.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 10 of 16
11
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (concluded)
YEAR 2000 COMPLIANCE ISSUES
All levels of the Company's management and its Board of Directors are
aware of the seriousness of the Year 2000 century change and the effects it may
have on the Company and its customers. The Company has a Year 2000 project team
under the leadership of an independent consultant to guide it through its action
plan for compliance. The plan includes steps to be taken by the Company (i) to
identify, assess, evaluate, test and validate its own date sensitive systems,
(ii) to amend its loan underwriting policies to include assessments, as
appropriate, regarding Year 2000 readiness by commercial loan applicants and
(iii) to offer education to business customers regarding Year 2000 awareness in
their own businesses. Although the Company relies entirely upon outside vendors
for its computer software and hardware and its security and environmental
equipment, all date sensitive systems must be thoroughly evaluated for Year 2000
compliance. It is the Company's goal to have areas identified as having Year
2000 issues to be in compliance by the end of 1998. This will allow all of 1999
to be devoted to testing and validation. Regarding the Company's business
customers, the Company hosted two well attended seminars in March 1998 to
educate customers concerning Year 2000 compliance issues. The Company cannot
determine its costs of Year 2000 compliance until its assessment is completed.
The Company will disclose such amounts in future communications with
shareholders when such amounts can be reasonably estimated.
FORWARD LOOKING STATEMENTS
The foregoing discussion may contain forward looking statements within
the meaning of the Private Securities Litigation Reform Act. The accuracy of
such forward looking statements could be affected by such factors as, including
but not limited to, the financial success or changing strategies of the
Company's customers, actions of government regulators, or general economic
conditions.
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 11 of 16
12
BANK OF GRANITE CORPORATION
PART II - Other Information
Item 6 - Exhibits and Reports on Form 8-K
A) Exhibits
27.1 Financial Data Schedule (March 31, 1998)
27.2 Financial Data Schedule (March 31, 1997 - Restated)
B) Reports on Form 8-K
No reports on Form 8-K have been filed for the quarter ended March 31,
1998.
Items 1, 2, 3, 4 and 5 are inapplicable and are omitted.
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 12 of 16
13
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: May 13, 1998 /s/ Kirby A. Tyndall
------------------------------------
Kirby A. Tyndall
Senior Vice President and
Chief Financial Officer and
Principal Accounting Officer
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 13 of 16
14
BANK OF GRANITE CORPORATION
Exhibit Index
Begins
on Page
-------
Exhibit 27.1 - Financial Data Schedule (March 31, 1998) 15
Exhibit 27.2 - Financial Data Schedule (March 31, 1997 - RESTATED) 16
Bank of Granite Corporation, Form 10-Q, March 31, 1998, page 14 of 16