1
================================================================================
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, 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
11,464,913 shares outstanding as of October 31, 1998
================================================================================
Exhibit Index begins on page 17
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 1 of 19
2
Bank of Granite Corporation
Index
Begins
on Page
------------------
Part I - Financial Information
Financial Statements:
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Statements of Consolidated Income
Three Months Ended September 30, 1998 and 1997
And Nine Months Ended September 30, 1998 and 1997 4
Statements of Consolidated Comprehensive Income
Three Months Ended September 30, 1998 and 1997
And Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 9
Management's Discussion and Analysis of
Financial Condition and
Results of Operations 10
PART II - Other Information 15
Signatures 16
Exhibit Index 17
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 2 of 19
3
Bank of Granite Corporation
Consolidated Balance Sheets
(unaudited)
September 30, December 31,
1998 1997
Assets:
Cash and cash equivalents:
Cash and due from banks $ 23,246,300 $ 27,707,850
Interest-bearing deposits 144,332 157,507
Federal funds sold 16,700,000 --
------------- -------------
Total cash and cash equivalents 40,090,632 27,865,357
------------- -------------
Investment securities:
Available for sale, at fair value 57,022,729 52,072,834
Held to maturity, at amortized cost 83,368,551 79,036,384
Loans 371,550,775 357,845,513
Allowance for loan losses (4,440,340) (5,202,578)
------------- -------------
Net loans 367,110,435 352,642,935
------------- -------------
Premises and equipment, net 10,179,002 9,583,429
Accrued interest receivable 5,161,567 4,972,654
Other assets 3,901,818 2,806,140
------------- -------------
Total $ 566,834,734 $ 528,979,733
============= =============
Liabilities and shareholders' equity:
Deposits:
Demand $ 81,263,129 $ 80,637,746
NOW accounts 60,178,976 62,792,730
Money market accounts 31,548,655 25,697,397
Savings 25,204,369 23,848,043
Time deposits of $100,000 or more 95,384,046 92,588,469
Other time deposits 143,550,718 129,011,799
------------- -------------
Total deposits 437,129,893 414,576,184
Federal funds purchased and securities
sold under agreements to repurchase 3,795,010 8,882,016
Other borrowings 19,931,244 6,287,700
Accrued interest payable 2,074,154 2,138,430
Other liabilities 1,077,149 1,878,680
------------- -------------
Total liabilities 464,007,450 433,763,010
------------- -------------
Shareholders' equity:
Common stock, $1 par value
Authorized: 25,000,000 shares
Issued and outstanding: 11,464,913 shares in 1998
and 9,146,272 shares in 1997 11,464,913 9,146,272
Capital surplus 22,615,559 22,234,753
Retained earnings 67,756,337 63,362,060
Accumulated other comprehensive income:
Net unrealized gain on securities available
for sale, net of deferred income taxes 990,475 473,638
------------- -------------
Total shareholders' equity 102,827,284 95,216,723
------------- -------------
Total $ 566,834,734 $ 528,979,733
============= =============
See notes to consolidated financial statements
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 3 of 19
4
Bank of Granite Corporation
Statements of Consolidated
Income (unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Interest income:
Interest and fees on loans $ 9,807,154 $ 9,396,791 $29,212,731 $26,885,395
Federal funds sold 234,357 20,064 505,435 126,381
Interest-bearing deposits 3,899 2,637 9,420 8,026
Investments:
U.S. Treasury 272,104 307,041 868,394 901,489
U.S. Government agencies 619,045 532,853 1,702,193 1,686,203
States and political subdivisions 831,306 826,386 2,578,560 2,425,766
Other 208,912 234,068 622,525 681,960
----------- ----------- ----------- -----------
Total interest income 11,976,777 11,319,840 35,499,258 32,715,220
----------- ----------- ----------- -----------
Interest expense:
Time deposits of $100,000
or more 1,324,997 1,321,466 3,934,895 3,816,818
Other time and savings deposits 2,496,042 2,410,511 7,167,033 7,008,083
Federal funds purchased and
securities sold under
agreements to repurchase 47,438 58,679 152,360 168,317
Other borrowed funds 207,294 199,968 575,393 500,140
----------- ----------- ----------- -----------
Total interest expense 4,075,771 3,990,624 11,829,681 11,493,358
----------- ----------- ----------- -----------
Net interest income 7,901,006 7,329,216 23,669,577 21,221,862
Provision for loan losses 3,361,510 300,000 4,008,330 875,000
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 4,539,496 7,029,216 19,661,247 20,346,862
----------- ----------- ----------- -----------
Other income:
Service charges on deposit
accounts 936,552 776,614 2,677,342 2,364,900
Other service charges, fees
and commissions 1,107,063 1,014,761 3,063,357 2,625,322
Securities gains -- 3,695 99 3,695
Other 78,230 52,030 631,702 393,871
----------- ----------- ----------- -----------
Total other income 2,121,845 1,847,100 6,372,500 5,387,788
----------- ----------- ----------- -----------
Other expenses:
Salaries and wages 2,080,553 1,785,755 6,022,635 5,130,416
Employee benefits 191,988 337,344 1,003,099 1,053,598
Occupancy expense, net 188,826 178,505 555,704 461,191
Equipment expense 348,298 310,260 1,060,700 837,757
Other 1,069,936 1,044,950 3,193,326 2,790,405
----------- ----------- ----------- -----------
Total other expenses 3,879,601 3,656,814 11,835,464 10,273,367
----------- ----------- ----------- -----------
Income before income taxes 2,781,740 5,219,502 14,198,283 15,461,283
Income taxes 817,829 1,580,380 4,626,995 4,867,548
----------- ----------- ----------- -----------
Net income $ 1,963,911 $ 3,639,122 $ 9,571,288 $10,593,735
=========== =========== =========== ===========
Per share amounts:
Net income - Basic $ 0.17 $ 0.32 $ 0.84 $ 0.93
Net income - Diluted 0.17 0.32 0.83 0.92
Cash dividends 0.09 0.07 0.25 0.22
Book value 8.97 8.07
See notes to consolidated financial statements
Bank of Granite Corporation, Form 10-Q, September 30, 1998, 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,
1998 1997 1998 1997
Net income $ 1,963,911 $ 3,639,122 $ 9,571,288 $ 10,593,735
----------- ----------- ------------ ------------
Items of other comprehensive
income:
Other comprehensive income,
before tax:
Unrealized gains
during the period on
securities available for sale 827,980 252,245 859,639 243,027
Less: Income taxes related to
unrealized gains or losses on
securities available for sale (330,153) (100,143) (342,802) (96,223)
----------- ----------- ------------ ------------
Other comprehensive
income, net of tax 497,827 152,102 516,837 146,804
----------- ----------- ------------ ------------
Comprehensive income $ 2,461,738 $ 3,791,224 $ 10,088,125 $ 10,740,539
=========== =========== ============ ============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 5 of 19
6
Bank of Granite Corporation
Consolidated Statements of
Cash Flows (unaudited)
Nine Months
Ended September 30,
1998 1997
Increase (decrease) in cash & cash equivalents:
Cash flows from operating activities:
Interest received $ 35,370,329 $ 32,135,713
Fees and commissions received 6,372,401 5,384,093
Interest paid (11,893,957) (11,536,244)
Cash paid to suppliers and employees (11,611,200) (10,063,567)
Income taxes paid (6,303,755) (5,533,782)
------------ ------------
Net cash provided by operating activities 11,933,818 10,386,213
------------ ------------
Cash flows from investing activities:
Proceeds from maturities and/or calls of
securities available for sale 11,690,000 12,819,317
Proceeds from maturities and/or calls of
securities held to maturity 9,213,782 8,299,238
Proceeds from sales of securities
available for sale 200,000 25,000
Purchase of securities available for sale (15,999,587) (13,188,621)
Purchase of securities held to maturity (13,586,503) (8,520,934)
Net increase in loans (18,475,830) (27,506,606)
Capital expenditures (1,409,563) (2,072,889)
Proceeds from sale of fixed assets 26,475 20,000
------------ ------------
Net cash used by investing activities (28,341,226) (30,125,495)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW accounts,
and savings accounts 5,219,213 7,017,649
Net increase in certificates of deposit 17,334,496 8,680,506
Net decrease (increase) in federal funds purchased
and securities sold under agreements to
repurchase and other borrowings (5,087,006) 1,966,609
Net decrease (increase) in other borrowings 13,643,544 (8,501)
Net proceeds from issuance of common stock 407,592 344,019
Dividend paid (2,863,575) (2,437,103)
Subsidiary's premerger distribution of income
as a Subchapter S corporation -- (454,988)
Cash paid for fractional shares (21,581) --
------------ ------------
Net cash provided by financing activities 28,632,683 15,108,191
------------ ------------
Net increase (decrease) in cash equivalents 12,225,275 (4,631,091)
Cash and cash equivalents at beginning of period 27,865,357 29,645,178
------------ ------------
Cash and cash equivalents at end of period $ 40,090,632 $ 25,014,087
============ ============
See notes to consolidated financial statements
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 6 of 19
7
Bank of Granite Corporation
Consolidated Statements of
Cash Flows (unaudited) - (concluded)
Nine Months
Ended September 30,
1998 1997
Reconciliation of net income to net cash provided
by operating activities:
Net Income $ 9,571,288 $ 10,593,735
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 788,410 669,833
Provision for loan loss 4,008,330 875,000
Premium amortization, net 59,984 115,259
Deferred income taxes (1,125,595) (13,852)
Gains on sales or calls of securities
available for sale (99) (683)
Gains on calls of securities
held to maturity -- (3,012)
Gain on disposal or sale of equipment (895) (99)
Decrease in taxes payable (551,165) (652,382)
Increase in accrued interest receivable (188,913) (694,766)
Decrease in interest payable (64,276) (42,886)
Increase in other assets (312,885) (126,218)
Decrease in other liabilities (250,366) (333,716)
------------ ------------
Net adjustments to reconcile net income to
net cash provided by operating activities 2,362,530 (207,522)
------------ ------------
Net cash provided by operating activities $ 11,933,818 $ 10,386,213
============ ============
Supplemental disclosure of non-cash transactions:
Increase in unrealized gains or
losses on securities available for sale $ 859,639 $ 243,027
Increase in deferred income taxes
on unrealized gains or losses on
securities available for sale (342,802) (96,223)
Transfer from retained earnings to common stock
for stock split 2,291,855 --
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, September 30, 1998, page 7 of 19
8
Bank of Granite Corporation
Notes to Consolidated Financial Statements
September 30, 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 (the "Company") as of September 30,
1998 and December 31, 1997, and the results of its operations for the three
and nine month periods ended September 30, 1998 and 1997, and its cash flows
for the nine month periods ended September 30, 1998 and 1997.
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.
Results of operations and cash flows for the periods ended September 30,
1997 have been restated to include the merger of GLL & Associates, Inc.
acquired in November 1997 and accounted for as a pooling of interests.
Per share amounts and average shares have been adjusted to reflect the
5-for-4 stock split paid May 29, 1998.
The accounting policies followed are set forth in Note 1 to the Company'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 Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
Weighted average shares
outstanding 11,464,756 11,431,506 11,460,358 11,424,598
Potentially dilutive effect of
stock options 50,147 53,382 48,306 52,917
---------- ---------- ---------- ----------
Weighted average shares
outstanding, including
potentially dilutive effect of
stock options 11,514,903 11,484,888 11,508,664 11,477,515
========== ========== ========== ==========
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, 1998
and December 31, 1997 were as follows:
September 30, December 31,
1998 1997
Unfunded commitments $57,398,992 $57,413,913
Letters of credit 4,845,725 3,773,055
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 8 of 19
9
Bank of Granite Corporation
Notes to Consolidated Financial Statements - (concluded)
September 30, 1998
4. New Accounting Standards - In June 1997, the Financial Accounting
Standards Board issued Financial Accounting Standard No. 130, "Reporting
Comprehensive Income." FAS No. 130 requires disclosure of comprehensive
income (which is defined as "the change in equity during a period excluding
changes resulting from investments by shareholders and distributions to
shareholders") and its components. FAS No. 130 is effective for fiscal years
beginning after December 15, 1997, with reclassification of comparative
years. The Company adopted FAS No. 130 in the quarter ended March 31, 1998.
The disclosures required by FAS No. 130 are included in this filing as a
separate statement captioned "Statements of Consolidated Comprehensive
Income."
Also in June 1997, FAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" was issued. FAS No. 131 is effective for the
Company in the fiscal year ending December 31, 1998. FAS No. 131 redefines
how operating segments are determined and requires disclosure of certain
financial and descriptive information about a company's operating segments.
Management does not believe that the adoption of FAS No. 131 will have a
material impact on the Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." FAS No. 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. The new standard requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
FAS No. 133 will be effective for the year ending December 31, 2000. Because
the Company does not currently use derivative instruments and has no plans
to do so in the foreseeable future, management does not believe that the
adoption of FAS No. 133 will have a material impact on the Company's
financial statements.
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 9 of 19
10
Bank of Granite Corporation
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION
SEPTEMBER 30, 1998 COMPARED WITH DECEMBER 31, 1997
Total assets increased $37,855,001, or 7.16%, from December 31, 1997 to
September 30, 1998. Earning assets increased $39,674,149, or 8.11%, over the
same nine month period. Loans, the largest earning asset, increased $13,705,262,
or 3.83%, over the same period, while investment securities increased
$9,282,062, or 7.08%. Also during this period, cash and cash equivalents
increased $12,225,275, or 43.87%. Funding the asset growth was a combination of
deposit growth, growth in other borrowings and earnings retained. Deposits
increased $22,553,709, or 5.44%, from December 31, 1997 to September 30, 1998.
Over the same nine month period, noninterest-bearing demand deposits increased
less than 1%, NOW account deposits decreased $2,613,754, or 4.16%, money market
deposits increased $5,851,258, or 22.77%, and savings deposits increased
$1,356,326, or 5.69%. Time deposits greater than $100,000 increased $2,795,577,
or 3.02%, from December 31, 1997 to September 30, 1998, while other time
deposits increased $14,538,919, or 11.27%, over the same nine month period,
resulting in a $17,334,496, or 7.82%, increase in total time deposits. The loan
to deposit ratio was 85.00% as of September 30, 1998 compared to 86.32% as of
December 31, 1997. Also from December 31, 1997 to September 30, 1998, federal
funds purchased and securities sold under agreements to repurchase decreased
$5,087,006, or 57.27%, while other borrowings increased $13,643,544, or 216.99%,
primarily due to temporary borrowings used to fund mortgage origination
activity. Common stock outstanding increased 2,318,641 shares, or 25.35%, from
December 31, 1997 to September 30, 1998, primarily due to shares issued in
connection with the 5-for-4 stock split in May 1998 and the exercise of stock
options. Earnings retained were $6,707,713 for the first nine months of 1998,
after paying cash dividends of $2,863,575. The Company's liquidity position
remained strong.
RESULTS OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 COMPARED WITH THE SAME
PERIOD IN 1997 AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
COMPARED WITH THE SAME PERIOD IN 1997
Results of operations for the periods ended September 30, 1997 have been
restated to include the merger of GLL acquired in November 1997 and accounted
for as a pooling of interests.
On September 25, 1998, the Company announced that third quarter earnings
would decline due to a charge primarily related to increasing loan loss reserves
on 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.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 10 of 19
11
Bank of Granite Corporation
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
During the three month period ended September 30, 1998, interest income
increased $656,937, or 5.80%, 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% unchanged from the same period in 1997. Gross loans
averaged $370,792,243 compared to $352,111,615 last year, an increase of
$18,680,628, or 5.31%. Interest expense increased $85,147, or 2.13%, primarily
because of growth in interest-bearing deposits. Interest-bearing deposits
averaged $348,594,714 compared to $329,899,245 last year, an increase of
$18,695,469, or 5.67%. Other borrowings averaged $17,826,603 compared to
$11,710,139 last year, an increase of $6,116,464, or 52.23%. Other borrowings
were the principal source of funding for the mortgage origination activities of
GLL.
For substantially the same reasons, interest income and expense were higher
for the nine month period ended September 30, 1998. During the first nine months
of 1998, interest income increased $2,784,038, or 8.51%, from the same period
last year. The increase is primarily attributable to increased loan volume. The
prime rate during the nine month period averaged 8.50% compared to 8.42% during
the same period in 1997. Gross loans averaged $371,190,977 compared to
$343,855,517 last year, an increase of $27,335,460, or 7.95%. Interest expense
increased $336,323, or 2.93%, primarily because of growth in interest-bearing
deposits. Interest-bearing deposits averaged $345,681,860 compared to
$326,888,551 last year, an increase of $18,793,309, or 5.75%. Other borrowings
averaged $17,124,069 compared to $10,434,029 last year, an increase of
$6,690,040, or 64.12%. Other borrowings were the principal source of funding for
the mortgage origination activities of GLL.
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. Primarily because of the
third quarter loan charge to the textile borrower discussed above, management
determined that a charge to operations of $3,361,510 and $4,008,330 during the
three and nine month periods ended September 30, 1998, respectively, would bring
the loan loss reserve to a balance considered to be adequate to absorb the
charge off of the loans to the textile borrower and the other estimated
potential losses in the portfolio. At September 30, 1998 the loan loss reserve
was 1.21% of net loans outstanding.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 11 of 19
12
Bank of Granite Corporation
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
At September 30, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $1,503,490 ($1,089,138 of which
was on a non-accrual basis) and $1,235,664 ($918,216 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 September 30, 1998
and 1997, respectively. The related allowance for loan losses determined in
accordance with SFAS No. 114 for these loans was $409,507 and $586,216 at
September 30, 1998 and 1997, respectively. For the nine months ended September
30, 1998 and 1997, the Company recognized interest income on those impaired
loans of approximately $21,583 and $29,281, respectively.
For the quarter ended September 30, 1998, total noninterest income was
$2,121,845, up $274,745, or 14.87%, from $1,847,100 earned in the same period of
1997. Fees on deposit accounts were $936,552 during the third quarter, up
$159,938, or 20.59%, from $776,614 earned in the third quarter of 1997. Third
quarter other service fees and commissions were $1,107,063 for 1998, up $92,302,
or 9.10%, from $1,014,761 earned in the same period of 1997. There were no
significant gains or losses on sales of securities in the third quarter of 1998
or 1997. Other noninterest income was $78,230 for the third quarter of 1998, up
$26,200, or 50.36%, from $52,030 earned in the third 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 $977,439 in nontraditional fee income during the third quarter of 1998,
up 13.18% from the third quarter of 1997.
Third quarter 1998 noninterest expenses totaled $3,879,601, up $222,787, or
6.09%, from $3,656,814 in the third quarter of 1997, primarily because of
overhead costs associated with (1) meeting the higher demand for mortgage
banking services, (2) opening of two new retail offices in March 1998 and May
1998, and (3) additional depreciation and maintenance of new imaging and data
communications technology installed in September 1997. Salaries and wages were
$2,080,553 during the quarter, up $294,798, or 16.51%, from $1,785,755 in 1997.
Profit sharing and employee benefits were $191,988, down $145,356, or 43.09%,
compared to $337,344 in the third quarter of 1997. Occupancy expenses for the
quarter were $188,826, up $10,321, or 5.78%, from $178,505 in the same period of
1997. Equipment expenses were $348,298 during the third quarter, up $38,038, or
12.26%, from $310,260 in the same period of 1997. Third quarter other
noninterest expenses were $1,069,936 in 1998, up $24,986, or 2.39%, from
$1,044,950 in the same quarter a year ago. Income tax expense was $817,829 for
the quarter, down $762,551, or 48.25%, from $1,580,380 for the 1997 third
quarter. Net income increased to $1,963,911 during the quarter, or 46.03%, from
$3,639,122 earned in the same period of 1997, primarily due to the third quarter
loan charge discussed above.
For the nine months ended September 30, 1998, total noninterest income was
$6,372,500, up $984,712, or 18.28%, from $5,387,788 earned in the first nine
months of 1997. Fees on deposit accounts were $2,677,342 during the first nine
months of 1998, up $312,442, or 13.21%, from $2,364,900 in the same period of
1997. Also for the year-to-date period, other service fees and commissions were
$3,063,357, up $438,035, or 16.69%, from $2,625,322 in 1997. There were no
significant gains or losses on sales of securities in the year-to-date periods
of 1998 or 1997. Other noninterest income was $631,702 during the nine months
ended September 30, 1998, up $237,831, or 60.38%, from $393,871 in the same
period 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 $2,935,217 in nontraditional fee income during
the first nine months of 1998, up 25.17% from 1997.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 12 of 19
13
Bank of Granite Corporation
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (continued)
Total noninterest expenses were $11,835,464 during the first nine months of
1998, up $1,562,097, or 15.21%, from $10,273,367 in the same period of 1997. As
was the case for the third quarter, the year-to-date increases in the various
overhead captions also included costs associated with (1) meeting the higher
demand for mortgage banking services, (2) organizing a department to administer
a new cashflow management product launched in June 1997 for commercial
customers, (3) opening of three new retail offices in April 1997, March 1998 and
May 1998, and (4) additional depreciation and maintenance of new imaging and
data communications technology installed in September 1997. Salaries and wages
were $6,022,635 during the first nine months of 1998, up $892,219, or 17.39%,
from $5,130,416 in the same period of 1997, while profit sharing and employee
benefits were $1,003,099 down $50,499, or 4.79%, from $1,053,598. Year-to-date
occupancy expenses were $555,704, up $94,513, or 20.49%, from $461,191 in 1997,
and equipment expenses were $1,060,700, up $222,943, or 26.61%, from $837,757 in
the same year-to-date period of 1997. Other noninterest expenses were $3,193,326
for the nine months ended September 30, 1998, up $402,921, or 14.44%, from
$2,790,405 in the same period of 1997. Year-to-date income tax expense was
$4,626,995 in 1998, down $240,553, or 4.94%, from $4,867,548 in 1997. Net income
was $9,571,288 during the first nine months of 1998, down $1,022,447, or 9.65%,
from $10,593,735 earned in the same year-to-date period of 1997, primarily due
to the third quarter loan charge discussed above.
YEAR 2000 COMPLIANCE ISSUES
All levels of the Company's management and its Board of Directors are aware
of the issues presented by the Year 2000 century change and the serious effects
it may have on the Company and its customers. The Company has a Year 2000
project team under the counsel of an independent consultant to guide it through
its action plan for addressing Year 2000 issues. The plan includes steps to be
taken by the Company (1) to identify, assess, evaluate, test and validate its
own date sensitive systems, (2) to amend its loan underwriting policies to
include assessments, as appropriate, regarding Year 2000 readiness by commercial
loan applicants, (3) to offer education to business customers regarding Year
2000 issues in their own businesses, and (4) to 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 and hardware and its
security and environmental equipment, all date sensitive systems are being or
will be evaluated for Year 2000 compliance. It is the Company's goal to have the
systems it has identified as "critical" to conducting its banking businesses in
compliance and substantially tested by the end of 1998. Testing of systems with
lower priorities is planned for early 1999, which should allow ample time in
1999 for validation and follow-up. The Company is also developing contingency
plans for its computer processes, including the use of alternative systems, the
extension of operating hours and the manual processing of certain operations.
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 has mailed its deposit customers its Year 2000 summary and
plans another seminar in early 1999. The Company estimates that its total costs
of Year 2000 compliance will be $125,000 to $150,000, of which an estimated
$60,000 will be capitalized and an estimated $75,000 will be charged to
operations in 1998 and 1999. In addition to the estimated costs of its Year 2000
compliance, the Company routinely makes annual investments in technology in its
efforts to improve customer service and to efficiently manage its product and
service delivery systems.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 13 of 19
14
Bank of Granite Corporation
Management's Discussion and Analysis
RESULTS OF OPERATIONS - (concluded)
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, September 30, 1998, page 14 of 19
15
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
On September 29, 1998, the Company filed a report on Form 8-K
regarding its September 25, 1998 new release in which it
announced that third quarter earnings would decline due to a
before tax charge of approximately $3,140,000, amounting to
$1,884,000, or 16.5 cents per share, after tax. The full text
news release dated September 25, 1998 was attached as exhibit
99(a) to this Form 8-K filing.
Items 1,2,3,4 and 5 are inapplicable and are omitted.
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 15 of 19
16
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, 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, September 30, 1998, page 16 of 19
17
Bank of Granite Corporation
Exhibit Index
Begins
on Page
-------
Exhibit 27.1 - Financial Data Schedule (September 30, 1998) 18
Exhibit 27.2 - Financial Data Schedule (September 30, 1997 - RESTATED) 19
Bank of Granite Corporation, Form 10-Q, September 30, 1998, page 17 of 19