For much of the past half-century Bank of Granite Corp. in Granite Falls, N.C., was a rock-solid performer.
It consistently delivered stellar returns on assets and equity, boasted an efficiency ratio that ranked among the industry's best, and rewarded shareholders by increasing its dividend every year. Its performance was noteworthy enough to bring the company to the attention of Warren Buffett, who in 1995 called it "the best little bank in America."
But lately fissures have started to show. Asset quality has suffered as the area's manufacturing-based economy has slowed, and now the $1.2 billion-asset Bank of Granite has fallen behind on filing its quarterly earnings reports while it has tried to get a handle on its nonperforming loans. Nasdaq Stock Market Inc. has said the stock is in danger of being delisted, and over the last year its market value has dropped by roughly 35%.
Bank of Granite's board is counting on R. Scott Anderson to reverse the bank's fortunes. Mr. Anderson, who had been president and chief operating officer, was named its chief executive late last month, succeeding the retiring Charles Snipes, a 25-year company veteran. (Mr. Snipes, 74, will remain the chairman until his company elects a nonexecutive one at its annual meeting in April.)
Mr. Anderson, who will remain the president, said his objective is "to get this difficult period behind us, clean our house, and get back to the business of being a high-performance bank."
In 2003, Bank of Granite moved into the Charlotte area with its first-ever acquisition, and Mr. Anderson said its best chance for growth is to continue to pursue opportunities in its newer markets. It is looking particularly at industries outside manufacturing, such as wholesale distribution, and health care, and it is ramping up its commercial real estate development.
Right now, though, his most pressing issue is completing the earnings restatement for the third quarter of last year.
Bank of Granite initially released earnings for that quarter Oct. 16, but in a Securities and Exchange Commission filing in November it said it had discovered "issues" in its loan portfolio that likely would require an increase to its loan-loss provision, initially reported at $1.4 million.
Mr. Anderson, 52, said that his company was "embarrassed" by the restatement. "We've always been an early reporter when it comes to earnings."
Bank of Granite plans to release its fourth-quarter and full-year earnings soon after it restates its third-quarter results, he said, and his goal is to have all the reports completed by March 31.
According to Mr. Anderson, its outside auditor required Bank of Granite to change its method of calculating loan-loss provisions from one that assigns a range of provisions based on a loan's grade — the likelihood it will go bad — to a much more rigorous one that uses the Financial Accounting Standards Board's FAS 5 and FAS 114 accounting guidelines.
Bank of Granite is waiting on its independent auditor to ratify its third-quarter provisions, Mr. Anderson said, and it has appealed to Nasdaq to hold off the delisting while the company works through its accounting issues.
For more than 50 years John A. Forlines Jr. ran Bank of Granite, and for many of those years it was the envy of the industry. Throughout the 1990s and early 2000s it consistently posted a return on assets above 2% and kept its efficiency ratio below 35%.
Mr. Buffett's Berkshire Hathaway Inc. never invested in the company, because it was too small, but it is believed that his praise of Bank of Granite helped give the stock a boost. (Mr. Forlines retired as the CEO in 2004 and as the chairman in early 2006. Mr. Snipes succeeded him in both posts.)
"Historically, they've had a very high ROA relative to peers, and very high net interest margins," said Gary Tenner, an analyst with SunTrust Robinson Humphrey Inc. "It was a bank that investors really liked."
However, investors have soured on the bank of late as chargeoffs have mounted. In its initial third-quarter report, it said it earned $4 million, but it also posted a 1,072% increase in chargeoffs from a year earlier, to $7.8 million. The chargeoffs were mainly in its commercial and industrial loan portfolio.
Mr. Anderson attributed the surge to the slow decline of Catawba County's manufacturing sector. When furniture and textile manufacturers started moving operations outside the United States a decade or so ago, many people turned to places like Bank of Granite for loans to start their own companies, but not all the new businesses succeeded.
"These are folks that reinvented themselves, manufactured other things, worked into other markets, exported — anything they could do," Mr. Anderson said. "But eventually … [the loans] started to become impaired. It was a gradual process."
Mr. Anderson said its best growth opportunities are in markets it has entered in the last five years. The 2003 acquisition of First Commerce Bank of Charlotte moved Bank of Granite into North Carolina's largest city, and since then it has added branches in Winston-Salem, Boone, Wilkesboro, and Statesville.
"They're all new markets for us, and that's where our all our growth is coming from," he said.
Mr. Tenner said that focusing on the newer markets "is something that they have to do, because there just wasn't an opportunity to grow the franchise at all where they were."
Mark Muth, an analyst at First Horizon National Corp.'s FTN Midwest Research, agreed that Bank of Granite was "dealt an ugly hand with their local economy." Still, "Scott Anderson has a great reputation in the Carolinas," he said. "The company has been a strong performer over the years, and assuming they can survive these credit quality issues, I would think they would be able to emerge on the other side of this economic downturn."
Despite the recent troubles with credit quality, Mr. Anderson said he is confident Bank of Granite will become a top performer again. He also hopes the setback will not imperil the dividend it has paid out for 217 consecutive quarters.
The dividend "is extremely important to us," he said. "That's our history, our legacy. It's sacred to our bank."
