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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                   September 30, 2004

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
incorporation or organization) 		  (I.R.S. Employer Identification No.)
     
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 [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)   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
13,364,032 shares outstanding as of October 31, 2004

Exhibit Index begins on page 38

1

Table of Contents

Index

         
    Begins
    on Page
Part I — Financial Information
        
       
    3  
    4  
    5  
    6  
    7  
    9  
    15  
    33  
    33  
       
    34  
    35  
    37  
    38  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2

2

Table of Contents

Item 1. Financial Statements

Bank of Granite Corporation

Consolidated Condensed Balance Sheets
(unaudited)
                 
    September 30,   December 31,
    2004
   2003
Assets:
                
Cash and cash equivalents:
                
Cash and due from banks
   $ 25,727,610     $ 29,492,515  
Interest-bearing deposits
     6,362,021       4,103,319  
 
    
 		      
 		  
Total cash and cash equivalents
     32,089,631       33,595,834  
 
    
 		      
 		  
Investment securities:
                
Available for sale, at fair value
     103,889,703       97,666,795  
Held to maturity, at amortized cost
     51,567,126       61,769,566  
Loans
     753,334,505       715,844,632  
Allowance for loan losses
     (12,801,328 )     (10,798,897 )
 
    
 		      
 		  
Net loans
     740,533,177       705,045,735  
 
    
 		      
 		  
Mortgage loans held for sale
     21,393,405       23,092,846  
 
    
 		      
 		  
Premises and equipment, net
     12,850,976       12,218,566  
Accrued interest receivable
     6,505,991       5,620,834  
Investment in bank owned life insurance
     15,113,264       13,360,278  
Intangible assets
     11,337,043       11,420,092  
Other assets
     8,725,840       7,592,181  
 
    
 		      
 		  
Total assets
   $ 1,004,006,156     $ 971,382,727  
 
    
 		      
 		  
Liabilities and shareholders’ equity:
                
Deposits:
                
Demand accounts
   $ 144,648,498     $ 136,978,161  
NOW accounts
     122,301,135       102,932,609  
Money market accounts
     166,110,550       135,045,811  
Savings accounts
     27,090,081       25,977,333  
Time deposits of $100,000 or more
     148,257,060       160,780,970  
Other time deposits
     164,264,903       173,384,471  
 
    
 		      
 		  
Total deposits
     772,672,227       735,099,355  
Overnight borrowings
     23,955,759       25,205,171  
Other borrowings
     60,533,315       65,294,540  
Accrued interest payable
     1,234,579       1,296,539  
Other liabilities
     4,617,446       2,672,023  
 
    
 		      
 		  
Total liabilities
     863,013,326       829,567,628  
 
    
 		      
 		  
Shareholders’ equity:
                
Common stock, $1 par value Authorized - 25,000,000 shares Issued - 15,076,942 shares in 2004 and 14,993,493 shares in 2003 Outstanding - 13,382,150 shares in 2004 and 13,600,182 shares in 2003
     15,076,942       14,993,493  
Capital surplus
     32,308,794       31,497,057  
Retained earnings
     123,625,218       119,081,744  
Accumulated other comprehensive income, net of deferred income taxes
     527,533       768,645  
Less: Cost of common stock in treasury; 1,694,792 shares in 2004 and 1,393,311 shares in 2003
     (30,545,657 )     (24,525,840 )
 
    
 		      
 		  
Total shareholders’ equity
     140,992,830       141,815,099  
 
    
 		      
 		  
Total liabilities and shareholders’ equity
   $ 1,004,006,156     $ 971,382,727  
 
    
 		      
 		  

See notes to consolidated condensed financial statements.

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Table of Contents

Bank of Granite Corporation

Consolidated Condensed Statements of Income
(unaudited)
                                 
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
    2004
   2003
   2004
   2003
Interest income:
                                
Interest and fees from loans
   $ 11,048,885     $ 10,206,814     $ 32,466,173     $ 28,078,919  
Interest and fees from mortgage banking
     1,054,305       1,839,981       3,195,931       4,547,208  
Federal funds sold
     5,151       40,409       5,974       84,190  
Interest-bearing deposits
     26,512       19,092       49,445       61,740  
Investments:
                                
U.S. Treasury
     43,122       25,779       129,386       25,779  
U.S. Government agencies
     811,467       699,702       2,386,579       1,864,889  
States and political subdivisions
     596,750       685,510       1,906,210       2,110,913  
Other
     193,215       165,622       628,988       346,695  
 
    
 		      
 		      
 		      
 		  
Total interest income
     13,779,407       13,682,909       40,768,686       37,120,333  
 
    
 		      
 		      
 		      
 		  
Interest expense:
                                
Time deposits of $100,000 or more
     865,345       994,498       2,716,348       2,510,463  
Other deposits
     1,815,516       1,592,807       5,062,948       4,565,057  
Overnight borrowings
     90,230       52,641       295,447       159,772  
Other borrowings
     487,874       533,342       1,336,099       998,946  
 
    
 		      
 		      
 		      
 		  
Total interest expense
     3,258,965       3,173,288       9,410,842       8,234,238  
 
    
 		      
 		      
 		      
 		  
Net interest income
     10,520,442       10,509,621       31,357,844       28,886,095  
Provision for loan losses
     1,677,889       1,139,250       4,026,901       3,423,631  
 
    
 		      
 		      
 		      
 		  
Net interest income after provision for loan losses
     8,842,553       9,370,371       27,330,943       25,462,464  
 
    
 		      
 		      
 		      
 		  
Other income:
                                
Service charges on deposit accounts
     1,423,633       1,402,915       4,004,137       4,173,977  
Other service charges, fees and commissions
     199,512       251,066       617,916       696,339  
Mortgage banking income
     923,600       2,408,487       2,830,157       5,823,648  
Securities gains
     —       297       14,347       12,665  
Other
     303,301       220,923       907,179       727,519  
 
    
 		      
 		      
 		      
 		  
Total other income
     2,850,046       4,283,688       8,373,736       11,434,148  
 
    
 		      
 		      
 		      
 		  
Other expenses:
                                
Salaries and wages
     3,514,359       3,991,940       11,133,533       10,351,168  
Employee benefits
     804,367       586,163       2,573,602       1,848,937  
Occupancy expense, net
     424,226       344,625       1,259,183       843,084  
Equipment expense
     529,457       377,465       1,424,852       976,686  
Other
     1,803,565       1,870,113       5,368,021       4,657,078  
 
    
 		      
 		      
 		      
 		  
Total other expenses
     7,075,974       7,170,306       21,759,191       18,676,953  
 
    
 		      
 		      
 		      
 		  
Income before income taxes
     4,616,625       6,483,753       13,945,488       18,219,659  
Income taxes
     1,498,707       2,252,662       4,520,553       6,232,228  
 
    
 		      
 		      
 		      
 		  
Net income
   $ 3,117,918     $ 4,231,091     $ 9,424,935     $ 11,987,431  
 
    
 		      
 		      
 		      
 		  
Per share amounts:
                                
Net income — Basic
   $ 0.23     $ 0.31     $ 0.70     $ 0.90  
Net income — Diluted
     0.23       0.31       0.69       0.89  
Cash dividends
     0.12       0.12       0.36       0.34  
Book value
                     10.54       10.37  

See notes to consolidated condensed financial statements.

4

Table of Contents

Bank of Granite Corporation

Consolidated Condensed Statements of
Comprehensive Income
(unaudited)
                                 
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
    2004
   2003
   2004
   2003
Net income
   $ 3,117,918     $ 4,231,091     $ 9,424,935     $ 11,987,431  
 
    
 		      
 		      
 		      
 		  
Items of other comprehensive income:
                                
Items of other comprehensive income (loss), before tax:
                                
Unrealized gains (losses) on securities available for sale
     1,798,750       (868,997 )     (386,816 )     (403,990 )
Less: Reclassification adjustments for securities gains included in net income
     —       297       —       12,665  
Unrealized losses on mortgage derivative instruments
     (30,723 )     (405,023 )     (14,565 )     (25,010 )
 
    
 		      
 		      
 		      
 		  
Other comprehensive income (loss), before tax
     1,768,027       (1,274,317 )     (401,381 )     (441,665 )
Less: Change in deferred income taxes related to change in unrealized gains or losses on securities available for sale
     717,247       (346,630 )     (154,249 )     (166,137 )
Less: Change in deferred income taxes related to change in unrealized gains or losses on mortgage derivative instruments
     (12,387 )     (162,008 )     (6,020 )     (10,004 )
 
    
 		      
 		      
 		      
 		  
Other comprehensive income (loss), net of tax
     1,063,167       (765,679 )     (241,112 )     (265,524 )
 
    
 		      
 		      
 		      
 		  
Comprehensive income
   $ 4,181,085     $ 3,465,412     $ 9,183,823     $ 11,721,907  
 
    
 		      
 		      
 		      
 		  

See notes to consolidated condensed financial statements.

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Table of Contents

Bank of Granite Corporation

Consolidated Condensed Statements of Changes in
Shareholders’ Equity (unaudited)

                 
    Nine Months
    Ended September 30,
    2004
   2003
Common stock, $1 par value
                
At beginning of period
   $ 14,993,493     $ 14,420,986  
Par value of shares issued under stock option plans
     83,449       559,899  
 
    
 		      
 		  
At end of period
     15,076,942       14,980,885  
 
    
 		      
 		  
Capital surplus
                
At beginning of period
     31,497,057       20,694,133  
Surplus of shares issued under stock option plans
     811,737       10,567,619  
 
    
 		      
 		  
At end of period
     32,308,794       31,261,752  
 
    
 		      
 		  
Retained earnings
                
At beginning of period
     119,081,744       109,982,826  
Net income
     9,424,935       11,987,431  
Cash dividends paid
     (4,881,461 )     (4,567,662 )
 
    
 		      
 		  
At end of period
     123,625,218       117,402,595  
 
    
 		      
 		  
Accumulated other comprehensive income, net of deferred income taxes
                
At beginning of period
     768,645       995,539  
Net change in unrealized gains or losses on securities available for sale, net of deferred income taxes
     (232,567 )     (250,518 )
Net change in unrealized gains or losses on mortgage derivative instruments, net of deferred income taxes
     (8,545 )     (15,006 )
 
    
 		      
 		  
At end of period
     527,533       730,015  
 
    
 		      
 		  
Cost of common stock in treasury
                
At beginning of period
     (24,525,840 )     (18,650,642 )
Cost of common stock repurchased
     (6,019,817 )     (3,962,561 )
 
    
 		      
 		  
At end of period
     (30,545,657 )     (22,613,203 )
 
    
 		      
 		  
Total shareholders’ equity
   $ 140,992,830     $ 141,762,044  
 
    
 		      
 		  
Shares issued
                
At beginning of period
     14,993,493       14,420,986  
Shares issued under stock option plans
     83,449       559,899  
 
    
 		      
 		  
At end of period
     15,076,942       14,980,885  
 
    
 		      
 		  
Common shares in treasury
                
At beginning of period
     (1,393,311 )     (1,087,312 )
Common shares repurchased
     (301,481 )     (220,172 )
 
    
 		      
 		  
At end of period
     (1,694,792 )     (1,307,484 )
 
    
 		      
 		  
Total shares outstanding
     13,382,150       13,673,401  
 
    
 		      
 		  

See notes to consolidated condensed financial statements.

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Table of Contents

Bank of Granite Corporation

Consolidated Condensed Statements of Cash Flows
(unaudited)

                 
    Nine Months
    Ended September 30,
    2004
   2003
Increase (decrease) in cash & cash equivalents:
                
Cash flows from operating activities:
                
Net Income
   $ 9,424,935     $ 11,987,431  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation
     967,060       641,251  
Provision for loan loss
     4,026,901       3,423,631  
Investment security premium amortization, net
     375,883       298,536  
Acquisition discount accretion, net
     (167,186 )     (100,944 )
Deferred income taxes
     (893,418 )     (85,769 )
Gains on sales or calls of securities available for sale
     —       (2,278 )
Gains on calls of securities held to maturity
     (14,347 )     (9,965 )
Net decrease (increase) in mortgage loans held for sale
     1,684,876       (5,439,328 )
Gains on disposal or sale of equipment
     (1,500 )     (38,255 )
Losses (gains) on disposal or sale of other real estate
     (77,310 )     33,858  
Increase in taxes payable
     1,086,990       55,160  
Increase in accrued interest receivable
     (885,157 )     (581,539 )
Decrease in accrued interest payable
     (61,960 )     (327,113 )
Increase in cash surrender value of bank owned life insurance
     (437,986 )     (314,573 )
Increase in other assets
     (746,453 )     (2,189,746 )
Increase (decrease) in other liabilities
     858,433       (2,159,461 )
 
    
 		      
 		  
Net cash provided by operating activities
     15,139,761       5,190,896  
 
    
 		      
 		  
Cash flows from investing activities:
                
Proceeds from maturities, calls and paydowns of securities available for sale
     18,034,015       22,932,567  
Proceeds from maturities, calls and paydowns of securities held to maturity
     10,161,475       10,549,425  
Proceeds from sales of securities available for sale
     4,530,000       812,635  
Purchase of securities available for sale
     (29,494,310 )     (41,848,998 )
Net increase in loans
     (39,776,722 )     (48,998,095 )
Investment in bank owned life insurance
     (1,315,000 )     —  
Capital expenditures
     (1,599,470 )     (1,412,647 )
Proceeds from sale of fixed assets
     1,500       235,909  
Proceeds from sale of other real estate
     743,791       243,854  
Cash received in acquisition, net of cash paid
     —       13,272,682  
 
    
 		      
 		  
Net cash used in investing activities
     (38,714,721 )     (44,212,668 )
 
    
 		      
 		  
Cash flows from financing activities:
                
Net increase in demand, NOW, money market and savings deposits
     59,216,350       37,514,254  
Net increase (decrease) in time deposits
     (21,192,362 )     11,522,294  
Net increase (decrease) in overnight borrowings
     (1,249,412 )     1,000,549  
Net increase (decrease) in other borrowings
     (4,699,727 )     4,617,030  
Net proceeds from shares issued under stock option plans
     895,186       166,834  
Dividends paid
     (4,881,461 )     (4,567,662 )
Purchases of common stock for treasury
     (6,019,817 )     (3,962,561 )
 
    
 		      
 		  
Net cash provided by financing activities
     22,068,757       46,290,738  
 
    
 		      
 		  
Net increase (decrease) in cash equivalents
     (1,506,203 )     7,268,966  
Cash and cash equivalents at beginning of period
     33,595,834       33,384,612  
 
    
 		      
 		  
Cash and cash equivalents at end of period
   $ 32,089,631     $ 40,653,578  
 
    
 		      
 		  

See notes to consolidated condensed financial statements.

(continued on next page)

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Bank of Granite Corporation

Consolidated Condensed Statements of Cash Flows
(unaudited) — (concluded)

                 
    Nine Months
    Ended September 30,
    2004
   2003
Supplemental disclosure of cash flow information:
                
Cash paid during the period for:
                
Interest
   $ 6,213,837     $ 8,120,227  
Income taxes
     4,562,975       6,521,025  
Noncash investing and financing activities:
                
Transfer from loans to other real estate owned
     779,499       2,134,038  

See notes to consolidated condensed financial statements.

8

Table of Contents

Bank of Granite Corporation

Notes to Consolidated Condensed Financial Statements
September 30, 2004
(unaudited)

1. UNAUDITED FINANCIAL STATEMENTS

The consolidated condensed balance sheet as of September 30, 2004, the consolidated condensed statements of income and of comprehensive income for the three and nine month periods ended September 30, 2004 and 2003, and the consolidated condensed statements of changes in shareholders’ equity and of cash flows for the nine month periods ended September 30, 2004 and 2003 are unaudited and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the interim period financial statements.

The unaudited interim consolidated condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim consolidated condensed financial statements should be read in conjunction with the Company’s December 31, 2003 audited consolidated financial statements and notes thereto included in the Company’s 2003 Annual Report on Form 10-K.

The consolidated financial statements include the Company’s two wholly-owned subsidiaries, Bank of Granite (the “Bank”), a full service commercial bank, and Granite Mortgage, Inc. (“Granite Mortgage”), a mortgage banking company.

The accounting policies followed are set forth in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 on file with the Securities and Exchange Commission. There were no changes in significant accounting policies during the nine months ended September 30, 2004.

2. EARNINGS PER SHARE

Earnings per share have been computed using the weighted average number of shares of common stock and potentially dilutive common stock equivalents outstanding as follows:

                                 
    Three Months   Nine Months
    Ended September 30,   Ended September 30,
(in shares)
   2004
   2003
   2004
   2003
Weighted average shares outstanding
     13,426,381       13,617,019       13,523,453       13,369,884  
Potentially dilutive effect of stock options
     42,076       75,391       49,878       67,136