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 March 31, 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
-------------------------------------------------------
(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
11,486,404 SHARES OUTSTANDING AS OF APRIL 30, 1999
- -------------------------------------------------------------------------------
Exhibit Index begins on page 17
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 1 of 18
2
BANK OF GRANITE CORPORATION
Index
Begins
on Page
------------
PART I - FINANCIAL INFORMATION
Financial Statements:
Consolidated Balance Sheets
March 31, 1999 and December 31, 1998 3
Statements of Consolidated Income
Three Months Ended March 31, 1999 and 1998 4
Statements of Consolidated Comprehensive Income
Three Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998 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, March 31, 1999, page 2 of 18
3
BANK OF GRANITE CORPORATION
Consolidated Balance Sheets MARCH 31, December 31,
(unaudited) 1999 1998
ASSETS:
Cash and cash equivalents:
Cash and due from banks $ 29,992,622 $ 19,518,740
Interest-bearing deposits 206,893 175,437
Federal funds sold 25,750,000 38,600,000
------------- -------------
Total cash and cash equivalents 55,949,515 58,294,177
------------- -------------
Investment securities:
Available for sale, at fair value 59,987,221 61,954,639
Held to maturity, at amortized cost 90,191,263 87,053,892
Loans 373,242,251 385,590,204
Allowance for loan losses (4,782,190) (4,619,586)
------------- -------------
Net loans 368,460,061 380,970,618
------------- -------------
Premises and equipment, net 10,144,523 10,095,628
Accrued interest receivable 5,396,533 5,104,174
Other assets 3,448,301 2,701,914
------------- -------------
Total $ 593,577,417 $ 606,175,042
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits:
Demand $ 88,875,499 $ 91,967,287
NOW accounts 69,800,238 69,804,107
Money market accounts 31,945,936 29,970,288
Savings 25,676,095 23,904,317
Time deposits of $100,000 or more 98,263,869 101,335,011
Other time deposits 143,460,476 141,716,159
------------- -------------
Total deposits 458,022,113 458,697,169
Federal funds purchased and securities
sold under agreements to repurchase 1,794,606 1,538,350
Other borrowings 21,044,075 36,357,016
Accrued interest payable 1,838,424 2,220,988
Other liabilities 2,773,434 1,919,548
------------- -------------
Total liabilities 485,472,652 500,733,071
------------- -------------
Shareholders' equity:
Common stock, $1 par value
Authorized: 25,000,000 shares
Issued: 11,494,067 shares in 1999
and 11,464,913 shares in 1998 11,494,067 11,464,913
Capital surplus 22,957,311 22,615,559
Retained earnings 73,334,915 70,601,642
Accumulated other comprehensive income,
net of deferred income taxes 363,189 759,857
Less: Cost of common shares in treasury;
2,000 shares in 1999 and 0 shares in 1998 (44,717) --
------------- -------------
Total shareholders' equity 108,104,765 105,441,971
------------- -------------
Total $ 593,577,417 $ 606,175,042
============= =============
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 3 of 18
4
BANK OF GRANITE CORPORATION Three Months
Statements of Consolidated Ended March 31,
Income (unaudited) 1999 1998
INTEREST INCOME:
Interest and fees on loans $ 9,468,768 $ 9,558,233
Federal funds sold 238,386 91,041
Interest-bearing deposits 3,553 2,507
Investments:
U.S. Treasury 193,283 316,861
U.S. Government agencies 731,753 507,647
States and political subdivisions 921,889 872,722
Other 232,817 195,972
----------- -----------
Total interest income 11,790,449 11,544,983
----------- -----------
INTEREST EXPENSE:
Time deposits of $100,000
or more 1,281,954 1,390,600
Other time and savings deposits 2,397,984 2,229,331
Federal funds purchased and
securities sold under
agreements to repurchase 20,726 52,238
Other borrowed funds 308,123 146,178
----------- -----------
Total interest expense 4,008,787 3,818,347
----------- -----------
Net interest income 7,781,662 7,726,636
Provision for loan losses 164,579 333,410
----------- -----------
Net interest income after
provision for loan losses 7,617,083 7,393,226
----------- -----------
OTHER INCOME:
Service charges on deposit
accounts 813,668 852,120
Other service charges, fees
and commissions 1,402,418 873,824
Other 216,300 274,273
----------- -----------
Total other income 2,432,386 2,000,217
----------- -----------
OTHER EXPENSES:
Salaries and wages 2,279,903 1,902,350
Employee benefits 429,781 412,553
Occupancy expense, net 197,264 173,323
Equipment expense 344,472 340,146
Other 1,163,270 1,005,989
----------- -----------
Total other expenses 4,414,690 3,834,361
----------- -----------
Income before income taxes 5,634,779 5,559,082
Income taxes 1,869,515 1,845,741
----------- -----------
Net income $ 3,765,264 $ 3,713,341
=========== ===========
PER SHARE AMOUNTS:
Net income - Basic $ 0.33 $ 0.32
Net income - Diluted 0.33 0.32
Cash dividends 0.09 0.08
Book value 9.41 8.59
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 4 of 18
5
BANK OF GRANITE CORPORATION Three Months
Statements of Consolidated Ended March 31,
Comprehensive Income 1999 1998
(unaudited)
Net income $ 3,765,264 $3,713,341
----------- ----------
ITEMS OF OTHER COMPREHENSIVE
INCOME:
Unrealized gains (losses) on
securities available for sale (659,738) 95,466
Less: Change in deferred income
taxes related to change in
unrealized gains or losses on
securities available for sale (263,070) 38,092
----------- ----------
Other comprehensive
income (losses), net of tax (396,668) 57,374
----------- ----------
Comprehensive income $ 3,368,596 $3,770,715
=========== ==========
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 5 of 18
6
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Ended March 31,
Cash Flows (unaudited) 1999 1998
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS:
Cash flows from operating
activities:
Interest received $ 11,551,708 $ 11,482,119
Fees and commissions received 2,432,386 2,000,217
Interest paid (4,391,351) (4,072,521)
Cash paid to suppliers and employees (5,112,327) (3,911,989)
Income taxes paid (560,598) (604,877)
------------ ------------
Net cash provided by operating activities 3,919,818 4,892,949
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities and/or calls of
securities available for sale 1,725,000 5,800,000
Proceeds from maturities and/or calls of
securities held to maturity 4,147,000 3,299,900
Purchase of securities available for sale (423,640) (8,573,523)
Purchase of securities held to maturity (7,331,669) (266,528)
Net decrease (increase) in loans 12,345,978 (16,195,205)
Capital expenditures (305,136) (338,995)
Proceeds from sale of fixed assets 15,530 --
------------ ------------
Net cash provided (used) by investing activities 10,173,063 (16,274,351)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts,
and savings accounts 651,769 19,000,739
Net decrease (increase) in certificates of deposit (1,326,825) 4,424,696
Net decrease (increase) in federal funds purchased
and securities sold under agreements to
repurchase and other borrowings 256,256 (5,184,019)
Net decrease (increase) in other borrowings (15,312,941) 12,856,161
Net proceeds from issuance of common stock 370,906 361,850
Dividend paid (1,031,991) (914,835)
Purchases of common stock for treasury (44,717) --
------------ ------------
Net cash provided (used) by financing activities (16,437,543) 30,544,592
------------ ------------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS (2,344,662) 19,163,190
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 58,294,177 27,865,357
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55,949,515 $ 47,028,547
============ ============
See notes to consolidated financial statements.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 6 of 18
7
BANK OF GRANITE CORPORATION Three Months
Consolidated Statements of Ended March 31,
Cash Flows (unaudited) - (concluded) 1999 1998
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED
BY OPERATING ACTIVITIES:
Net Income $ 3,765,264 $ 3,713,341
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 251,474 264,274
Provision for loan loss 164,579 333,410
Premium amortization, net 53,618 10,987
Deferred income taxes 12,482 (79,947)
Gain on disposal or sale of equipment (10,763) --
Increase in taxes payable 1,296,435 1,320,811
Increase in accrued interest receivable (292,359) (73,851)
Decrease in interest payable (382,564) (254,174)
Increase in other assets (495,799) (298,877)
Decrease in other liabilities (442,549) (43,025)
----------- -----------
Net adjustments to reconcile net income to
net cash provided by operating activities 154,554 1,179,608
----------- -----------
Net cash provided by operating activities $ 3,919,818 $ 4,892,949
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Increase (decrease) in unrealized gains or
losses on securities available for sale $ (659,738) $ 95,466
Decrease (increase) in deferred income taxes
on unrealized gains or losses on
securities available for sale (263,070) 38,092
Transfer from loans to other real estate owned 6,149 21,525
See notes to consolidated financial statements.
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 7 of 18
8
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements
March 31, 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 March 31, 1999 and
December 31, 1998, and the results of its operations and its cash flows for the
three month periods ended March 31, 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.
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 1998
Annual Report to Shareholders on file with the Securities and Exchange
Commission.
2. Earnings per share have been computed using the weighted average number of
shares of common stock and potentially dilutive common stock equivalents
outstanding as follows:
Three Months
1999 1998
Weighted average shares
outstanding 11,483,161 11,453,219
Potentially dilutive effect of
stock options 31,906 42,249
---------- ----------
Weighted average shares
outstanding, including
potentially dilutive effect of
stock options 11,515,067 11,495,468
========== ==========
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, 1999 and December 31, 1998 were as
follows:
MARCH 31, December 31,
1999 1998
Unfunded commitments $63,855,914 $60,929,611
Letters of credit 2,526,513 3,901,923
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 8 of 18
9
BANK OF GRANITE CORPORATION
Notes to Consolidated Financial Statements - (concluded)
March 31, 1999
4. New Accounting Standards - Financial Accounting Standard ("FAS") No. 134,
"Accounting for Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise," establishes
accounting and reporting standards for certain mortgage banking activities. It
conforms the subsequent accounting for securities retained after the
securitization of other types of assets. FAS No. 134 was adopted in the first
quarter of 1999.
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 June 15, 1999. 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, March 31, 1999, page 9 of 18
10
BANK OF GRANITE CORPORATION
Management's Discussion and Analysis
CHANGES IN FINANCIAL CONDITION
MARCH 31, 1999 COMPARED WITH DECEMBER 31, 1998
Total assets decreased $12,597,625, or 2.08%, from December 31, 1998 to
March 31, 1999. Earning assets decreased $23,996,544, or 4.19%, over the same
three month period. Loans, the largest earning asset, decreased $12,347,953, or
3.20%, over the same period, primarily because of a $16,425,583 decrease at
March 31, 1999 in the level of mortgage loans on the Company's mortgage banking
subsidiary. The decrease in federal funds sold of $12,850,000, or 33.29%, was
partially offset by a $10,473,882 increase in cash and due from banks, while
investment securities increased $1,169,953, or 0.79%. Deposits decreased
$675,056, or 0.15%, from December 31, 1998 to March 31, 1999.
Noninterest-bearing demand deposits decreased $3,091,788, or 3.36%, over the
same three month period. Savings, NOW and money market deposits increased
$3,743,557, or 3.03%, while total time deposits decreased $1,326,825, or 0.55%,
over the same period. The loan to deposit ratio was 81.49% as of March 31, 1999
compared to 84.06% as of December 31, 1998. Also from December 31, 1998 to March
31, 1999, other borrowings decreased $15,312,941, or 42.12%, primarily due to
payments on temporary borrowings used to fund mortgage origination activity.
Common stock outstanding increased 29,154 shares, or 0.25%, from December 31,
1998 to March 31, 1999, primarily due to shares issued in connection with the
exercise of stock options. Earnings retained were $2,733,273 for the first three
months of 1999, after paying cash dividends of $1,031,991. Accumulated other
comprehensive income, net of deferred income taxes decreased $396,668, or
52.20%, from December 31, 1998 to March 31, 1999. From December 31, 1998 through
March 31, 1999, the Company repurchased, under its treasury stock program, 2,000
shares of its common stock at an average price of $22.36 because of lower market
prices of its stock. 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, March 31, 1999, page 10 of 18
11
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 MARCH 31, 1999
COMPARED WITH THE SAME PERIOD IN 1998
Interest income and expense were higher for the three month period ended
March 31, 1999. During the first three months of 1999, interest income increased
$245,466, or 2.13%, from the same period last year. The increase is primarily
attributable to higher investment security volumes partially offset by lower
interest rates on loans. The prime rate during the three month period averaged
7.75% compared to 8.50% during the same period in 1998. Gross loans averaged
$376,807,852 compared to $367,805,172 last year, an increase of $9,002,680, or
2.45%. Investment interest increased $186,540, or 9.85%, due to growth in the
investment portfolio. Interest expense increased $190,440, or 4.99%, primarily
because of growth in interest-bearing deposits and other borrowings.
Interest-bearing deposits averaged $363,184,821 compared to $340,786,404 last
year, an increase of $22,398,417, or 6.57%. Other borrowings averaged
$27,633,927 compared to $14,597,033 last year, an increase of $13,036,894, or
89.31%. 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.
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 11 of 18
12
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, 1999, management determined a charge to operations of
$164,579 would bring the loan loss reserve to a balance considered to be
adequate to absorb estimated potential losses in the portfolio. At March 31,
1999 the loan loss reserve was 1.30% of net loans outstanding.
At March 31, 1999 and 1998, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 was $1,914,021 ($1,775,317 of which
was on a non-accrual basis) and $1,315,688 ($988,751 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 March 31, 1999 and
1998, respectively. The related allowance for loan losses determined in
accordance with SFAS No. 114 for these loans was $624,922 and $571,281 at March
31, 1999 and 1998, respectively. For the three months ended March 31, 1999 and
1998, the Company recognized interest income on those impaired loans of
approximately $64,739 and $8,262, respectively.
For the three months ended March 31, 1999, total noninterest income was
$2,432,386, up $432,169, or 21.61%, from $2,000,217 earned in the first three
months of 1998. Fees on deposit accounts were $813,668 during the first three
months of 1999, down $38,452, or 4.51%, from $852,120 in the same period of
1998. Also for the year-to-date period, other service fees and commissions were
$1,402,418, up $528,594, or 60.49%, from $873,824 in 1998. 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 $216,300 during the three months
ended March 31, 1999, down $57,973, or 21.14%, from $274,273 in the same period
of 1998. Management continued to place emphasis on nontraditional banking
services such as annuities, life insurance, and sales of mortgage and small
business loans, which produced $1,249,455 in nontraditional fee income during
the first three months of 1999, up 49.08% from 1998.
Total noninterest expenses were $4,414,690 during the first three months of
1999, up $580,329, or 15.13%, from $3,834,361 in the same period of 1998. The
increases in the various overhead captions were primarily associated with
meeting the higher demand for mortgage banking services and opening of two new
retail offices in March and May of 1998. Salaries and wages were $2,279,903
during the first three months of 1999, up $377,553, or 19.85%, from $1,902,350
in the same period of 1998, while profit sharing and employee benefits were
$429,781 up $17,228, or 4.18%, from $412,553. First quarter occupancy expenses
were $197,264, up $23,941, or 13.81%, from $173,323 in 1998, and equipment
expenses were $344,472, up $4,326, or 1.27%, from $340,146 in the same period of
1998. Other noninterest expenses were $1,163,270 for the three months ended
March 31, 1999, up $157,281, or 15.63%, from $1,005,989 in the same period of
1998. Income tax expense was $1,869,515 in 1999, up $23,774, or 1.29%, from
$1,845,741 in 1998. Net income was $3,765,264 during the first three months of
1999, up $51,923, or 1.40%, from $3,713,341 earned in the same period of 1998.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 12 of 18
13
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 left unaddressed, 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 are being or will be evaluated for
Year 2000 compliance.
During 1998, the Company substantially 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 is
planned to be completed by June 30, 1999, which should allow ample time in the
remainder 1999 for validation and follow-up. The Company is also developing
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 plans to provide similar updates during 1999.
(continued on next page)
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 13 of 18
14
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 quarter of 1999.
During the three months ended March 31, 1999, the Company spent
approximately $39,200 on its Year 2000 preparations, of which approximately
$11,000 were capitalized new equipment and software and approximately $28,200
were expensed against 1999 earnings. This brings the Company's cumulative costs
of Year 2000 preparations to approximately $125,200, of which $33,000 were
capitalized and $92,200 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 $24,800, of
which an estimated $9,000 is anticipated to be capitalized and an estimated
$15,800 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
Private Securities Litigation Reform Act of 1995. For the purposes of these
discussions, any statements that are not statements of historical fact may be
deemed to be forward looking statements. 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, March 31, 1999, page 14 of 18
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
No reports on Form 8-K have been filed for the quarter ended March 31,
1999.
Items 1,2,3,4 and 5 are inapplicable and are omitted.
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 15 of 18
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: May 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, March 31, 1999, page 16 of 18
17
BANK OF GRANITE CORPORATION
Exhibit Index
Begins
on Page
--------
Exhibit 27 - Financial Data Schedule (March 31, 1999) 18
Bank of Granite Corporation, Form 10-Q, March 31, 1999, page 17 of 18