Bank Of Granite 10-Q 2009 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended     September 30, 2009

OR

o 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)

     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.Yesþ       Noo

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso       Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero  Accelerated filero  Non-accelerated filer  þ
(Do not check if a smaller reporting company) Smaller reporting companyo 

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso      Noþ

     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
15,454,841 shares outstanding as of October 31, 2009

Index

	Begins
	on Page
Part I — Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets September 30, 2009 and December 31, 2008		3
Condensed Consolidated Statements of Income (Loss) Three Months Ended September 30, 2009 and 2008 And Nine Months Ended September 30, 2009 and 2008		4
Condensed Consolidated Statements of Comprehensive Income (Loss) Three Months Ended September 30, 2009 and 2008 And Nine Months Ended September 30, 2009 and 2008		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended September 30, 2009 and 2008		6
Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2009 and 2008		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3. Quantitative and Qualitative Disclosures About Market Risk		39
Item 4. Controls and Procedures		40
Part II — Other Information
Item 1A. Risk Factors		40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 6. Exhibits		41
Signatures		42
Exhibit Index		43
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

Item 1. Financial Statements

Bank of Granite Corporation

Condensed Consolidated Balance Sheets
  (In thousands except per share data)

	September 30,			December 31,
	2009			2008
	(Unaudited)			(Note 1)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	36,046		$	26,164
Interest-bearing deposits		1,948			6,819
Federal funds sold		—			16,000
Total cash and cash equivalents		37,994			48,983
Investment securities:
Available for sale, at fair value		100,213			58,576
Held to maturity, at amortized cost		—			23,627
Loans		827,926			948,149
Allowance for loan losses		(23,962	)		(24,806	)
Net loans		803,964			923,343
Mortgage loans held for sale		—			16,770
Premises and equipment, net		16,963			19,079
Investment in bank owned life insurance		17,466			31,278
Other assets		33,069			25,299
Total assets	$	1,009,669		$	1,146,955
Liabilities and stockholders’ equity:
Deposits:
Demand accounts	$	114,822		$	117,168
NOW accounts		130,019			153,444
Money market accounts		168,658			204,108
Savings accounts		19,946			19,674
Time deposits of $100 or more		189,724			208,002
Other time deposits		269,190			289,426
Total deposits		892,359			991,822
Overnight and short-term borrowings		23,991			48,947
Long-term borrowings		20,049			14,075
Other liabilities		11,316			17,941
Total liabilities		947,715			1,072,785
Stockholders’ equity:
Common stock, $1.00 par value per share Authorized - 25,000 shares Issued - 18,981 shares in 2009 and 2008 Outstanding - 15,454 shares in 2009 and 2008		18,981			18,981
Capital surplus		30,195			30,190
Retained earnings		65,452			77,928
Accumulated other comprehensive loss, net of deferred income taxes		(822	)		(1,077	)
Less: Cost of common stock in treasury; 3,527 shares in 2009 and 2008		(51,852	)		(51,852	)
Total stockholders’ equity		61,954			74,170
Total liabilities and stockholders’ equity	$	1,009,669		$	1,146,955

See notes to condensed consolidated financial statements.

3

Bank of Granite Corporation

Condensed Consolidated Statements of Income (Loss)
  (Unaudited — in thousands except per share data)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Interest income:
Interest and fees from loans	$	11,730		$	14,276		$	35,438		$	45,152
Interest and fees from mortgage banking		81			1,017			1,660			3,461
Federal funds sold		—			21			8			46
Interest-bearing deposits		18			67			41			326
Investments:
U.S. Treasury		1			43			18			129
U.S. Government agencies		1,247			471			2,378			1,738
States and political subdivisions		—			315			364			1,018
Other		59			157			309			473
Total interest income		13,136			16,367			40,216			52,343
Interest expense:
Time deposits of $100 or more		1,555			2,031			5,207			6,837
Other time and savings deposits		3,077			4,084			10,619			13,373
Overnight and short-term borrowings		129			611			580			1,938
Long-term borrowings		180			155			588			534
Total interest expense		4,941			6,881			16,994			22,682
Net interest income		8,195			9,486			23,222			29,661
Provision for loan losses		4,760			3,581			12,863			13,437
Net interest income after provision for loan losses		3,435			5,905			10,359			16,224
Other income:
Service charges on deposit accounts		1,439			1,416			4,031			4,269
Other service fees and commissions		119			198			351			557
Mortgage banking income		31			862			881			2,891
Securities gains (losses)		(34	)		(62	)		985			—
Other-than-temporary impairment losses		—			(649	)		(996	)		(649	)
Other		604			729			1,694			1,807
Total other income		2,159			2,494			6,946			8,875
Other expenses:
Salaries and wages		3,065			4,208			11,286			13,574
Employee benefits		798			66			2,665			2,497
Equipment and occupancy expense, net		1,055			1,224			3,322			3,780
FDIC assessments		500			720			2,879			895
Other real estate owned		1,770			154			3,095			792
Other		2,136			2,403			6,534			7,305
Total other expenses		9,324			8,775			29,781			28,843
Loss before income tax benefit		(3,730	)		(376	)		(12,476	)		(3,744	)
Income tax benefit		—			(105	)		—			(1,826	)
Net loss	$	(3,730	)	$	(271	)	$	(12,476	)	$	(1,918	)
Per share amounts:
Net loss — Basic	$	(0.24	)	$	(0.02	)	$	(0.81	)	$	(0.12	)
Net loss — Diluted		(0.24	)		(0.02	)		(0.81	)		(0.12	)
Cash dividends		—			0.00			—			0.26

See notes to condensed consolidated financial statements.

4

Bank of Granite Corporation

Condensed Consolidated Statements of Comprehensive Income (Loss)
  (Unaudited — in thousands)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2009			2008			2009			2008
Net loss	$	(3,730	)	$	(271	)	$	(12,476	)	$	(1,918	)
Items of other comprehensive loss:
Items of other comprehensive income (loss), before tax:
Unrealized gains (losses) on securities available for sale		1,469			(1,611	)		(185	)		(1,978	)
Reclassification adjustment for available for sale securities gains included in net income		34			716			493			654
Prior service cost and net actuarial loss — SERP		41			—			124			—
Other comprehensive income (loss), before tax		1,544			(895	)		432			(1,324	)
Change in deferred income taxes related to change in unrealized gains or losses on securities available for sale		(593	)		357			(119	)		528
Change in deferred income taxes related to prior service cost and net actuarial loss — SERP		(16	)		—			(58	)		—
Items of other comprehensive income (loss), net of tax		935			(538	)		255			(796	)
Comprehensive loss	$	(2,795	)	$	(809	)	$	(12,221	)	$	(2,714	)

See notes to condensed consolidated financial statements.

5

Bank of Granite Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity
  (Unaudited — in thousands except per share data)

	Nine Months
	Ended September 30,
	2009			2008
Common stock, $1.00 par value per share
At beginning of period	$	18,981		$	18,965
Par value of shares issued under stock option plan		—			16
At end of period		18,981			18,981
Capital surplus
At beginning of period		30,190			30,053
Surplus of shares issued under stock option plan		—			104
Stock-based compensation expense		5			11
Tax benefit from nonqualifying dispositions of stock options		—			8
At end of period		30,195			30,176
Retained earnings
At beginning of period		77,928			118,196
Net loss		(12,476	)		(1,918	)
Dividends		—			(4,017	)
At end of period		65,452			112,261
Accumulated other comprehensive loss, net of deferred income taxes
At beginning of period		(1,077	)		(97	)
Net change in unrealized gains or losses on securities available for sale, net of deferred income taxes		189			(796	)
Net change in prior service cost and net actuarial loss — SERP, net of deferred income taxes		66			—
At end of period		(822	)		(893	)
Cost of common stock in treasury
At beginning of period		(51,852	)		(51,852	)
At end of period		(51,852	)		(51,852	)
Total stockholders’ equity	$	61,954		$	108,673
Shares issued
At beginning of period		18,981			18,965
Shares issued under stock option plan		—			16
At end of period		18,981			18,981
Common shares in treasury
At beginning of period		(3,527	)		(3,527	)
At end of period		(3,527	)		(3,527	)
Total shares outstanding		15,454			15,454

See notes to condensed consolidated financial statements.

6

Bank of Granite Corporation

Condensed Consolidated Statements of Cash Flows
  (Unaudited — in thousands)

	Nine Months
	Ended September 30,
	2009			2008
Increase (decrease) in cash & cash equivalents:
Cash flows from operating activities:
Net losses	$	(12,476	)	$	(1,918	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		1,357			1,433
Provision for loan losses		12,863			13,437
Stock-based compensation expense		5			11
Investment security premium amortization, net		788			158
Acquisition premium amortization, net		19			37
Deferred income taxes		(78	)		(2,206	)
Losses (gains) on sales or calls of securities available for sale		(503	)		5
Gains on sales or calls of securities held to maturity		(482	)		(5	)
Impairment losses on securities		996			649
Originations of loans held for sale		(82,177	)		(201,872	)
Proceeds from loans held for sale		99,924			205,105
Gains on loans held for sale		(977	)		(2,602	)
Gains on disposal or sale of equipment		(4	)		(10	)
Losses on disposal or sale of premises		6			39
Losses on disposal or sale of other real estate		2,547			613
Increase in cash surrender value of bank owned life insurance		(874	)		(895	)
Decrease in other assets		2,428			12,040
Decrease in accrued interest receivable		285			1,796
Decrease in accrued interest payable		(856	)		(846	)
Increase (decrease) in other liabilities		(5,646	)		1,073
Net cash provided by operating activities		17,145			26,042
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of securities available for sale		46,774			54,652
Proceeds from sales, maturities, calls and paydowns of securities held to maturity		24,103			6,009
Proceeds from sales of securities available for sale		128,527			275
Purchase of securities available for sale		(217,905	)		(5,100	)
Net decrease (increase) in loans		87,092			(14,909	)
Proceeds from redemption of bank owned life insurance		14,686			—
Capital expenditures		—			(5,319	)
Proceeds from sale of fixed assets		757			10
Proceeds from sale of other real estate		6,252			855
Net cash provided by investing activities		90,286			36,473
Cash flows from financing activities:
Net decrease in demand, NOW, money market and savings deposits		(60,949	)		(36,154	)
Net increase (decrease) in time deposits		(38,514	)		33,337
Net decrease in overnight and short-term borrowings		(24,956	)		(47,018	)
Net increase (decrease) in long-term borrowings		5,999			(1,000	)
Proceeds from shares issued under stock option plan		—			120
Tax benefit on shares issued under stock option plan		—			8
Dividends paid		—			(6,024	)
Net cash used in financing activities		(118,420	)		(56,731	)
Net increase (decrease) in cash equivalents		(10,989	)		5,784
Cash and cash equivalents at beginning of period		48,983			33,324
Cash and cash equivalents at end of period	$	37,994		$	39,108

See notes to condensed consolidated financial statements.

7

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements
September 30, 2009
  (Unaudited)

1. UNAUDITED FINANCIAL STATEMENTS

Bank of Granite Corporation’s (the “Company’s” or the “Holding Company’s”) condensed consolidated balance sheet as of September 30, 2009, and the condensed consolidated statements of income (loss) and comprehensive income (loss) for the three and nine-month periods ended September 30, 2009 and 2008, and the condensed consolidated statements of changes in stockholders’ equity and cash flows for the nine-month periods ended September 30, 2009 and 2008 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. Amounts as of December 31, 2008 included in the condensed consolidated financial statements and related notes were derived from the audited consolidated financial statements.

Certain amounts for the periods ended September 30, 2008 have been reclassified to conform to the presentation for the periods ended September 30, 2009.

The unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. 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 condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2008 audited consolidated financial statements and notes thereto included in the Company’s 2008 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, 2008 on file with the Securities and Exchange Commission. There were no changes in significant accounting policies during the nine months ended September 30, 2009 except as described in Note 8 below.

2. REGULATORY CAPITAL AND REGULATORY MATTERS

Regulatory Actions

As we reported in our Form 8-K filed with the SEC on September 4, 2009, the Bank entered into a Stipulation and Consent (“Consent”) to the issuance of an Order to Cease and Desist (“Order”) by the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks (“The Commissioner”). Based on our Consent, the FDIC and the Commissioner jointly issued the Order on August 27, 2009.

The Order is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plan and policies designed to enhance the safety and soundness of the Bank.

8

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

Among other things, the Order requires the Bank to:

• Assure the on-going participation of the Bank’s Board of Directors in the affairs of the Bank;

• Have and retain qualified management of the Bank, and assess management and staffing needs, qualifications and performance;

• Present a written capital plan to the FDIC and the Commissioner within 30 days of the Order by which the Bank would achieve a Tier 1 Leverage Capital Ratio of not less than 8 percent and Total Risk-Based Capital Ratio of not less than 12 percent during the life of the Order;

• Formulate and implement a plan to reduce the Bank’s risk exposure in assets classified “Substandard or Doubtful” in the FDIC’s most recent report of examination by 20 percent in 180 days; 40 percent in 360 days; 65 percent in 540 days and by 75 percent in 720 days;

• Analyze and reduce credit concentrations in the Bank’s loan portfolio;

• Within 60 days, ensure full implementation of effective lending and collection policies;

• Cease to extend additional credit to any borrower who has a loan or extension of credit with the Bank that is classified as “Loss” or “Doubtful”;

• Within 45 days, adopt and implement a plan regarding the Bank’s liquidity, contingent funding and asset liability management, and review and revise the plan on a quarterly basis;

• Not pay cash dividends without the prior written consent of the FDIC and the Commissioner;

• Neither renew, roll-over nor increase the amount of brokered deposits above the amount outstanding at the date of the Order without obtaining a waiver from the FDIC.

Capital Matters

The Order, as set forth above, requires the Bank to achieve and maintain Tier 1 Leverage Capital Ratio of not less than 8 percent and a Total Risk-Based Capital of not less than 12 percent for the life of the Order.

The Bank has been less than “well” capitalized throughout 2009. To date the Bank’s capital preservation activities have included balance sheet restructuring that has included curtailing lending activity, surrendering bank owned life insurance policies, and reorganizing the securities portfolio to minimize risk and related capital requirements. While such restructuring activities have definitively enhanced the Bank’s capital position, there is a limit of progress to be made on these fronts.

In order to achieve compliance with the terms of the Order, the Company will further need to either raise capital, sell additional assets to deleverage, or combination of both. The ability of the Company to accomplish these goals is significantly constricted by the current economic environment. (See Subsequent Events Note 3.)

The Company has engaged outside advisors and has pursued numerous capital enhancing transactions. The activity continues, and the Company is currently reviewing multiple indications of interest. There can be no assurance that the ongoing activities or any other measures will allow the Bank to meet the capital levels set forth in the Order. The Company cannot predict the regulatory response, if any, to the inability to achieve the capital ratios required in the Order.

9

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

The minimum capital requirements to be characterized as “well” capitalized and “adequately” capitalized, as defined by regulatory guidelines, and the Company’s actual capital ratios on a consolidated and Bank-only basis were as follows as of September 30, 2009:

							Minimum Regulatory
	Actual						Requirement
							Adequately			Well			Pursuant to
	Consolidated			Bank			Capitalized			Capitalized			Order
Leverage capital ratios		5.82	%		5.62	%		4.00	%		5.00	%		8.00	%
Risk-based capital ratios:
Tier 1 capital		7.47	%		7.19	%		4.00	%		6.00	%		8.00	%
Total capital		8.75	%		8.47	%		8.00	%		10.00	%		12.00	%

Liquidity and Other Matters

The Bank has reported on matters requiring current response in the Order, and the progress made to comply with the Order. The Board is monitoring compliance activities and the development of information for impending submissions required by the Order.

In recent months, including the period since the issuance of the Order, the Bank’s liquidity has diminished and alternative funding sources contracted. The Company has limited alternative funding sources, other than the Federal Reserve Discount window, and that availability is considered on a case by case basis. In addition to the capital enhancement efforts outlined above, the Company is also pursuing loan sales, additional bank owned life insurance policy surrenders and aggressively pursuing loan payoffs in the current period. There can be no assurance that these efforts will provide the Bank with adequate liquidity on an ongoing basis, which creates a significant operating risk. (See Note 3 Subsequent Events.)

The Bank’s securities portfolio is currently 90 percent pledged to the FHLB and public fund deposits.

Additionally, because of the Company’s liquidity and capital positions, the FDIC and the Commissioner may take other and further regulatory actions against the Bank that could, among other things, materially adversely impact the Company’s stockholders.

3. SUBSEQUENT EVENTS

The Bank’s SERP Plan was curtailed effective October 31, 2009. Details of the plan amendment are set forth in the Company’s Form 8-K dated November 5. The benefit liability for the SERP was reduced by approximately $4.0 million and the curtailment gain to be recognized in the fourth quarter will approximate $1.5 million.

In November, bank owned life insurance policies (BOLI) of approximately $13.0 million have been surrendered. This transaction will improve the Bank’s liquidity and have a positive effect on capital to the extent the funds are invested in assets with a lower risk rating.

10

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

Additionally, the Worker, Homeownership and Business Assistance Act of 2009 (the Act) legislation was signed into law on November 6, 2009 and sets forth that small companies who have not received TARP assistance can carryback tax losses from 2008 or 2009 to tax years extending back to 2003. The Company has not reflected any tax benefit for losses through the nine months ended September 30, 2009. The benefit of the expanded loss carryback rules which could approximate $4.0 million, relating to operating losses of the nine months ended September 30, 2009, will be recorded in the fourth quarter of 2009. The refund will also supplement the Bank’s liquidity.

4. 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,
(Shares in thousands)	2009		2008		2009		2008
Weighted average shares outstanding		15,454		15,454		15,454		15,446
Potentially dilutive effect of stock options		—		—		—		—
Weighted average shares outstanding, including potentially dilutive effect of stock options		15,454		15,454		15,454		15,446

The levels of outstanding stock options are insignificant and are not included for any period because their inclusion would be anti-dilutive.

5. COMMITMENTS AND CONTINGENCIES

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. The unfunded portion of loan commitments and standby letters of credit as of September 30, 2009 and December 31, 2008 were as follows:

	September 30,		December 31,
(In thousands)	2009		2008
Financial instruments whose contract amounts represent credit risk
Unfunded commitments to extend credit	$	120,194	$	162,958
Standby letters of credit		3,195		4,998

As previously reported, Granite Mortgage curtailed its origination activity in the first quarter of 2009 and ceased origination activities in the second quarter.

Granite Mortgage had no forward commitments and options to sell mortgage-backed securities as of September 30, 2009 and $14.7 million as of December 31, 2008.

11

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

Subsequent events have been evaluated through November 16, 2009, which is the date of issuance of these financial statements.

Legal Proceedings

The nature of the businesses of the Company’s subsidiaries ordinarily results in a certain amount of litigation. The Company’s subsidiaries are involved in various legal proceedings, all of which are considered incidental to the normal conduct of business. Management believes that the liabilities, if any, arising from these proceedings will not have a material adverse effect on the consolidated financial position or consolidated results of operations of the Company.

6. POSTRETIREMENT EMPLOYEE BENEFIT PLANS

The Bank sponsors a non-tax qualified, unfunded salary continuation plan (“Officers’ SERP”). The Officers’ SERP benefits are generally based on a final pay concept and a first to occur event related to change of control, retirement or death. Components of the net periodic SERP cost for this plan for the three and nine months ended September 30, 2009 are as follows:

	Three Months		Nine Months
	Ended Sept. 30,		Ended Sept. 30,
(In thousands)	2009		2009
Service cost	$	159	$	477
Interest cost		121		362
Amortization of net obligation at transition		41		124
Total net periodic SERP cost	$	321	$	963

Amounts are not set forth for the comparable periods of 2008 as the plan was revised in the fourth quarter of 2008 and comparable amounts were not recorded. The total SERP expense for the three and nine-month periods ended September 30, 2008 was $313 thousand and $814 thousand, respectively. (See Note 3 Subsequent Events.)

12

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

7. SEGMENT DISCLOSURES

The Company’s operations are divided into three reportable business segments: Community Banking, Mortgage Banking and Other. These operating segments have been identified based on the Company’s organizational structure. The segments require unique technology and marketing strategies and offer different products and services. Although the Company is managed as an integrated organization, individual executive managers are held accountable for the operations of these business segments.

The Company measures and presents information for internal reporting purposes in a variety of different ways. Information for the Company’s reportable segments is available based on organizational structure, product offerings and customer relationships. The internal reporting system presently utilized by management in the planning and measuring of operating activities, as well as the system to which most managers are held accountable, is based on organizational structure.

The Company emphasizes revenue growth by focusing on client service, sales effectiveness and relationship management. The segment results contained herein are presented based on internal management accounting policies that were designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. Therefore, the performance of the segments is not necessarily comparable with the Company’s consolidated results or with similar information presented by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

COMMUNITY BANKING

The Company’s Community Banking segment serves individual and business customers by offering a variety of loan and deposit products and other financial services.

MORTGAGE BANKING

During the first quarter of 2009 Granite Mortgage changed its business model from lender/seller to a broker operation. As reported in the second quarter, the origination activity in the segment has ceased. The current activity is related to the resolution of a small loan held for investment portfolio and settling existing contractual obligations.

OTHER

The Company’s Other segment represents primarily treasury and administrative activities. Included in this segment are certain investments and commercial paper issued to the Bank’s commercial sweep account customers.

13

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

The following table presents selected financial information for reportable business segments as of and for the three and nine-month periods ended September 30, 2009 and 2008.

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
(In thousands)	2009			2008			2009			2008
COMMUNITY BANKING
Net interest income	$	8,165		$	8,871		$	21,869		$	27,417
Provision for loan losses		4,869			3,556			12,924			13,376
Noninterest income		2,128			2,348			6,378			6,700
Noninterest expense		8,601			6,878			25,639			23,146
Income (loss) before income taxes (benefits)		(3,177	)		785			(10,316	)		(2,405	)
Net income (loss)		(3,177	)		760			(10,316	)		(602	)
Identifiable segment assets		1,007,426			1,125,669			1,007,426			1,125,669
MORTGAGE BANKING
Net interest income	$	56		$	703		$	1,384		$	2,541
Provision for loan losses		(109	)		25			(61	)		61
Noninterest income		31			849			880			2,878
Noninterest expense		675			1,852			3,975			5,415
Loss before income taxes		(479	)		(325	)		(1,650	)		(57	)
Net loss		(479	)		(195	)		(1,650	)		(34	)
Identifiable segment assets		2,270			31,055			2,270			31,055
OTHER
Net interest expense	$	(26	)	$	(88	)	$	(31	)	$	(297	)
Noninterest income (securities losses)		—			(703	)		(312	)		(703	)
Noninterest expense		48			45			167			282
Loss before income taxes (benefits)		(74	)		(836	)		(510	)		(1,282	)
Net loss		(74	)		(836	)		(510	)		(1,282	)
Identifiable segment assets		(27	)		3,193			(27	)		3,193
TOTAL SEGMENTS
Net interest income	$	8,195		$	9,486		$	23,222		$	29,661
Provision for loan losses		4,760			3,581			12,863			13,437
Noninterest income		2,159			2,494			6,946			8,875
Noninterest expense		9,324			8,775			29,781			28,843
Loss before income taxes (benefits)		(3,730	)		(376	)		(12,476	)		(3,744	)
Net loss		(3,730	)		(271	)		(12,476	)		(1,918	)
Identifiable segment assets		1,009,669			1,159,917			1,009,669			1,159,917

14

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

8. NEW ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standards forBusiness Combinationswhich requires all assets acquired and liabilities assumed in a business combination (with a few exceptions, such as deferred tax assets and liabilities) to be measured at fair value in accordance with the standards forFair Value Measurements and Disclosures. This update forBusiness Combinationsis effective prospectively for fiscal years beginning on or after December 15, 2008. The Company adopted this update during the first quarter of 2009, and the adoption was not applicable to its consolidated financial statements for the periods reported.

Also in December 2007, the FASB issued an update to the accounting standards forConsolidation to establish accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This update forConsolidationalso amends certain procedures for consistency with the requirements ofBusiness Combinations. This update forConsolidationis effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The standard should be applied prospectively. Presentation and disclosure requirements should be applied retrospectively to comparative financial statements. Earlier adoption is prohibited. The Company adopted this update during the first quarter of 2009, and the adoption was not applicable to its consolidated financial statements for the periods reported.

In March 2008, the FASB issued an update to the accounting standards forDerivatives and Hedging which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This update forDerivatives and Hedgingis effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company adopted this update during the first quarter of 2009, and the adoption did not have a material effect on its consolidated financial statements.

In April 2009, the FASB issued an update to the accounting standards forFinancial Instrumentsto require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This update forFinancial Instrumentsalso requires those disclosures in summarized financial information at interim reporting periods. This update is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this update during the second quarter of 2009.

In April 2009, the FASB issued an update to the accounting standards forInvestment in Debt and Equity Securitiesto amend the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This update forInvestment in Debt and Equity Securitiesdoes not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This update is effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted this update during the second quarter of 2009.

15

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

Also in April 2009, the FASB issued an update to the accounting standards forFair Value Measurements and Disclosuresto provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This update forFair Value Measurements and Disclosuresalso includes guidance on identifying circumstances that indicate a transaction is not orderly. It is effective for interim and annual reporting periods ending after June 15, 2009, and should be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company adopted this update during the second quarter of 2009, and the adoption did not have a material effect on its consolidated financial statements.

The Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 111, “Other Than Temporary Impairment of Certain Investments in Equity Securities” (“SAB No. 111”), in April 2009 in response to the FASB’s April 2009 update to the accounting standards forInvestment in Debt and Equity Securities. SAB No. 111 amends and replaces “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities”, (“Topic 5.M”), in the SEC’s Staff Accounting Bulletin series. With the amendments in SAB No. 111, debt securities are excluded from the scope of Topic 5.M, but the SEC staff’s views on equity securities are still included within the topic. According to the revision to Topic 5.M, the SEC does not interpret the FASB’s use of the term other-than-temporary to mean permanent. The Company has considered this interpretative guidance for the disclosures in its interim financial statements.

In May 2009, the FASB issued an update to the accounting standards forSubsequent Eventswhich sets forth the circumstances under which an entity should recognize events occurring after the balance sheet date and the disclosures that should be made. Also, this update forSubsequent Events requires disclosure of the date through which the entity has evaluated subsequent events (for public companies, and other companies that expect to widely distribute their financial statements, this date is the date of financial statement issuance, and for nonpublic companies, the date the financial statements are available to be issued). The effective date is for interim and annual periods ending after June 15, 2009. The Company adopted this update during the second quarter of 2009, and the adoption did not have a material effect on its consolidated financial statements.

In June 2009, the FASB issued an update to the accounting standards forTransfers and Servicing which eliminates the concept of a qualifying special purpose entity (QSPE), changes the requirements for derecognizing financial assets, and requires additional disclosures, including information about continuing exposure to risks related to transferred financial assets. This update forTransfers and Servicingis effective for financial asset transfers occurring after the beginning of fiscal years beginning after November 15, 2009. The disclosure requirements must be applied to transfers that occurred before and after the effective date. The Company is currently evaluating the impact on its financial statements of adopting this update.

Also in June 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01, an update to the accounting standards forGenerally Accepted Accounting Principles— amendments based on “The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles.” The Codification became the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities and supersedes all non-SEC accounting and reporting standards. This update is effective for financial statements issued for interim and annual financial statements ending after September 15, 2009. The Company adopted this update during the third quarter of 2009, and the adoption did not have a material effect on its consolidated financial statements.

16

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

9. FAIR VALUE MEASUREMENTS AND DISCLOSURES

Investment Securities Available for Sale

A significant portion of the Company’s available for sale investment portfolio is government guaranteed, and the fair value measurements for the third quarter of 2009 were estimated using independent pricing sources that were determined to be Level 2 measurements, Significant Other Observable Inputs, for the U.S. Government agency, mortgage-backed and a portion of the equity securities. The remaining equity securities were Level 1 measurements from quoted prices in active markets. Unrealized gains and losses on securities available for sale are reflected in accumulated other comprehensive income and recognized gains and losses are reported as securities gains and losses in noninterest income.

The following tables reflect investment securities available for sale measured at fair value on a recurring basis at September 30, 2009 and December 31, 2008:

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2009
U.S. Government agency	$	1,557	$	—	$	1,557	$	—
GNMA Mortgage-backed securities		95,803		—		95,803		—
Equities		2,853		1,038		1,815		—
Total investment securities available for sale	$	100,213	$	1,038	$	99,175	$	—
December 31, 2008
U.S. Government agency	$	46,063	$	—	$	46,063	$	—
State and local		5,416		—		5,416		—
Equities		7,097		1,643		5,454		—
Total investment securities available for sale	$	58,576	$	1,643	$	56,933	$	—

17

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

Impaired Loans

The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with accounting standards for fair value measurements and disclosures, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price, the Company records the impaired loan as nonrecurring Level 2. When appraised values are used, or management determines the fair value of the collateral is impaired below the appraised value, the Company records the impaired loan as nonrecurring Level 3. At September 30, 2009, all impaired loan values were determined to be based on Level 3 measurements.

Other Real Estate Owned

Other real estate owned by the Bank and Granite Mortgage resulting from foreclosures is estimated at the fair value of the collateral based on a current appraised value or other management estimate and is recorded as nonrecurring Level 3. At September 30, 2009, the fair value measurements for other real estate were determined to be Level 3 measurements.

The following tables reflect certain loans and other real estate measured at fair value on a nonrecurring basis at September 30, 2009 and December 31, 2008:

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
(In thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
September 30, 2009
Impaired loans (1)	$	23,013	$	—	$	—	$	23,013
Mortgage loans held for sale		—		—		—		—
Other real estate owned		17,426		—		—		17,426
Total assets	$	40,439	$	—	$	—	$	40,439
December 31, 2008
Impaired loans (1)	$	35,298	$	—	$	—	$	35,298
Mortgage loans held for sale		16,770		—		16,770		—
Other real estate owned		6,805		—		—		6,805
Total assets	$	58,873	$	—	$	16,770	$	42,103

(1) Net of reserves and loans carried at cost.

18

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

10. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and fair values of investment securities at September 30, 2009 and December 31, 2008 were as follows:

(Table in thousands)

	Amortized		Gross Unrealized				Fair
Type and Contractual Maturity	Cost		Gains		Losses		Value
AVAILABLE FOR SALE
At September 30, 2009:
U.S. Government agencies due:
After 1 year but within 5 years	$	1,550	$	7	$	—	$	1,557
GNMA Mortgage-backed securities due:
After 10 years		95,558		383		138		95,803
Others due:
Trust preferred stocks due after 10 years		1,227		588		—		1,815
Common stocks and mutual funds		835		203		—		1,038
Total others		2,062		791		—		2,853
Total available for sale	$	99,170	$	1,181	$	138	$	100,213

Sales and calls of securities available for sale for the nine months ended September 30, 2009 resulted in $839 thousand in realized gains and $336 thousand in realized losses. Sales of securities held to maturity with a carrying amount of $21.1 million resulted in $501 thousand in gains and $19 thousand in losses in 2009. These held to maturity securities were sold during the period in conjunction with the balance sheet restructuring plan. The amortized costs of certain equity securities were written down by $996 thousand in 2009 for other-than-temporary impairment, all of which was deemed to be credit related.

As of September 30, 2009, accumulated other comprehensive losses, net of deferred income taxes, included unrealized net gains of $1.0 million, net of deferred income taxes of $412 thousand, related to securities available for sale.

19

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (unaudited)

(Table in thousands)

	Amortized		Gross Unrealized				Fair
Type and Contractual Maturity	Cost		Gains		Losses		Value
AVAILABLE FOR SALE
At December 31, 2008:
U. S. Government agencies due:
Within 1 year	$	20,899	$	340	$	—	$	21,239
After 1 year but within 5 years		24,611		218		5		24,824
Total U.S. Government agencies		45,510		558		5		46,063
State and local due:
After 1 year but within 5 years		1,847		37		—		1,884
After 5 years but within 10 years		847		4		4		847
After 10 years		2,788		—		103		2,685
Total state and local		5,482		41		107		5,416
Others due:
After 10 years		2,693		210		—		2,903
Equity securities		4,155		39		—		4,194
Total others		6,848		249		—		7,097
Total available for sale	$	57,840	$	848	$	112	$	58,576
HELD TO MATURITY
At December 31, 2008:
State and local due:
Within 1 year	$	6,454	$	50	$	—	$	6,504
After 1 year but within 5 years		12,654		404		—		13,058
After 5 years but within 10 years		2,938		133		—		3,071
After 10 years		1,581		78		—		1,659
Total state and local		23,627		665		—		24,292
Total held to maturity	$	23,627	$	665	$	—	$	24,292

20

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

Securities with unrealized losses at September 30, 2009 and December 31, 2008 not recognized in income, all of which have been in a loss position less than 12 months were as follows:

	September 30, 2009				December 31, 2008
	Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss
Less than 12 months:
U.S. Government agencies	$	—	$	—	$	1,995	$	(5	)
State and local		—		—		985		(60	)
12 months or more:
State and local		—		—		2,128		(47	)
GNMA Mortgage-backed securities		27,607		138		—		—
Total temporarily impaired	$	27,607	$	138	$	5,108	$	(112	)

Declines in the fair value of available-for-sale and held-to-maturity securities that are deemed to be other-than-temporarily impaired are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of unrealized loss.

Unrealized losses on securities have not been recognized into income because management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to decreases in market interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market interest rates decline.

11. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value, is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity or contracts that convey or impose on an entity the contractual right or obligation to either receive or deliver cash for another financial instrument. These fair value estimates are based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price for which an asset could be sold or liability could be settled. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, it has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The fair value estimates are determined in accordance with the accounting standards forFair Value Measurements and Disclosures.

21

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
September 30, 2009
  (Unaudited)

	September 30, 2009					December 31, 2008
			Estimated					Estimated
	Carrying		Fair			Carrying		Fair
(In thousands)	Amount		Value			Amount		Value
Assets:
Cash and cash equivalents	$	37,994	$	37,994		$	48,983	$	48,983
Investment securities		100,213		100,213			82,203		82,868
Bank owned life insurance		17,466		17,466			31,278		31,278
Mortgage loans held for sale		—		—			16,770		16,949
Loans (1)		803,964		790,574			923,343		929,447
Market risk/liquidity adjustment		—		(50,000	)		—		(45,000	)
Net loans		803,964		740,574			923,343		884,447
Liabilities:
Demand deposits		433,445		433,445			494,394		494,394
Time deposits		458,914		464,266			497,428		509,447
Overnight and short-term borrowings		23,991		23,991			48,947		48,947
Long-term borrowings		20,049		20,991			14,075		15,158

(1) Loan fair values are based on a hypothetical exit price, which does not represent the estimated intrinsic value of the loan if held for investment. The assumptions used are expected to approximate those that a market participant purchasing the loans would use to value the loans, including a market risk premium and liquidity discount.

Estimating the fair value of the loan portfolio when loan sales and trading markets are illiquid, are for certain loan types, or are nonexistent, requires significant judgment. Therefore, the estimated fair value can vary significantly depending on a market participant’s ultimate considerations and assumptions. The final value yields a market participant’s expected return on investment that is indicative of the current distressed market conditions, but it does not take into consideration the Company’s estimated value from continuing to hold these loans or its lack of willingness to transact at these estimated values.

The Company estimated fair value based on estimated future cash flows discounted at current origination rates for loans with similar terms and credit quality. The estimated values in 2009 are a function of higher credit spreads, partially offset by lower risk-free interest rates. However, the values derived from origination rates at September 30, 2009 likely do not represent exit prices due to the distressed market conditions; therefore, incremental market risks and liquidity discounts ranging from 2% to 25%, depending on the nature of the loans, were subtracted to reflect the illiquid and distressed market conditions as of September 30, 2009. The discounted value is a function of a market participant’s required yield in the current environment and is not a reflection of the expected cumulative losses on the loans.

22

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (concluded)
September 30, 2009
  (Unaudited)

The book values of cash and due from banks, federal funds sold, interest-bearing deposits, accrued interest receivable, overnight borrowings, accrued interest payable and other liabilities are considered to be equal to fair values as a result of the short-term nature of these items. The fair values of investment securities are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. The fair value of time deposits, other borrowings, commitments and guarantees is estimated based on present values using applicable risk-adjusted spreads to the U.S. Treasury curve to approximate current entry-value interest rates applicable to each category of such financial instruments.

Demand deposits are shown at their face value.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Disclosures About Forward Looking Statements

The discussions included in Part I of this document contain statements that may be deemed forward looking statements within the meaning of the Private Securities Litigation Act of 1995, including Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from these statements. For the purposes of these discussions, any statements that are not statements of historical fact may be deemed to be forward looking statements. Such statements are often characterized by the use of qualifying words such as “expects,” “anticipates,” “believes,” “estimates,” “plans,” “projects,” or other statements concerning opinions or judgments of our Company and our management about future events. The accuracy of such forward looking statements could be affected by certain factors, including but not limited to, the financial success or changing conditions or strategies of our customers or vendors, fluctuations in interest rates, actions of government regulators, the availability of capital and personnel, failure to comply with regulatory orders, and general economic conditions. For additional factors that could affect the matters discussed in forward looking statements, see the “Risk Factors” section below and in the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Introduction

Management’s Discussion and Analysis is provided to assist in understanding and evaluating our results of operations and financial condition. The following discussion is intended to provide a general overview of our performance for the three and nine-month periods ended September 30, 2009. Readers seeking more in-depth information should read the more detailed discussions below as well as the condensed consolidated financial statements and related notes included under Item 1 of this quarterly report. All information presented is consolidated data unless otherwise specified. Uncertainty and future events could cause changes in accounting estimates that have material effects on the financial position and results of operations in future periods.

23

Overview

The Company reported a net loss of $3.7 million, or $0.24 per share for the quarter ended September 30, 2009, compared to a net loss of $0.3 million, or $0.02 per share, reported for the third quarter of 2008. For the nine months ended September 30, 2009, the Company reported a net loss of $12.5 million, or $0.81 per share, compared to a net loss of $1.9 million, or $0.12 per share for the comparable period of 2008.

As a result of our continuing losses, our capital levels, the high levels of nonperforming assets, and other matters outlined more specifically in Note 2 to the financial statements in Item 1 of this report, the FDIC and the Commissioner jointly issued the Bank an Order to Cease and Desist (the “Order”). The following sections of this discussion highlight specific measures related to the Order.

Performance Summary

The Order requires the Bank to formulate plans to improve the Bank’s earnings performance and to submit periodic budgets and plans to increase capital. In the current period, the net interest income has increased on a linked quarter basis as a result of declining funding costs and increased focus of risk adjusted loan pricing. Personnel costs and other operating costs, exclusive of other real estate owned expenses and credit costs, have also declined on a linked quarter basis.

A significant part of Granite Mortgage’s net loss for the nine months ended September 30, 2009 was attributable to severance payments and the final settlement of employment contracts as a result of the cessation of mortgage origination activities.

	Three Months
Financial Highlights for the Quarterly Periods	Ended September 30,
(In thousands except per share amounts)	2009			2008			% change
Earnings
Net interest income	$	8,195		$	9,486			-13.6	%
Provision for loan losses		4,760			3,581			32.9	%
Other income		2,159			2,494			-13.4	%
Other expense		9,324			8,775			6.3	%
Net loss		(3,730	)		(271	)		n/m
Per share
Net loss
- Basic	$	(0.24	)	$	(0.02	)		n/m
- Diluted		(0.24	)		(0.02	)		n/m
Average for period
Assets	$	1,077,224		$	1,181,505			-8.8	%
Loans		845,122			958,033			-11.8	%
Deposits		944,395			980,633			-3.7	%
Stockholders’ equity		65,096			110,616			-41.2	%
Ratios
Return on average assets		-1.37	%		-0.09	%
Return on average equity		-22.73	%		-0.97	%
Average equity to average assets		6.04	%		9.36	%
Efficiency ratio (1)		90.05	%		72.22	%

(1) Calculated by dividing noninterest expense by the sum of net interest income and noninterest income.

24

	Nine Months
Financial Highlights for the Year-to-Date Periods	Ended September 30,
(In thousands except per share amounts)	2009			2008			% change
Earnings
Net interest income	$	23,222		$	29,661			-21.7	%
Provision for loan losses		12,863			13,437			-4.3	%
Other income		6,946			8,875			-21.7	%
Other expense		29,781			28,843			3.3	%
Net loss		(12,476	)		(1,918	)		550.5	%
Per share
Net loss
- Basic	$	(0.81	)	$	(0.12	)		575.0	%
- Diluted		(0.81	)		(0.12	)		575.0	%
Average for period
Assets	$	1,127,850		$	1,200,537			-6.1	%
Loans		894,524			955,173			-6.3	%
Deposits		979,893			986,273			-0.6	%
Stockholders’ equity		69,876			114,614			-39.0	%
Ratios
Return on average assets		-1.48	%		-0.21	%
Return on average equity		-23.87	%		-2.24	%
Average equity to average assets		6.20	%		9.55	%
Efficiency ratio (1)		98.08	%		73.80	%

(1) Calculated by dividing noninterest expense by the sum of net interest income and noninterest income.

Changes in Financial Condition

September 30, 2009 Compared With December 31, 2008

The following table reflects the changes in our assets as of September 30, 2009 compared with December 31, 2008.

	September 30,		December 31,
(In thousands)	2009		2008		$ Change			% Change
Total assets	$	1,009,669	$	1,146,955	$	(137,286	)		-12.0	%
Earning assets		930,087		1,069,941		(139,854	)		-13.1	%
Cash and cash equivalents		37,994		48,983		(10,989	)		-22.4	%
Investment securities		100,213		82,203		18,010			21.9	%
Gross loans		827,926		948,149		(120,223	)		-12.7	%
Mortgage loans held for sale		—		16,770		(16,770	)		n/a
Investment in bank owned life insurance		17,466		31,278		(13,812	)		-44.2	%
Other assets		33,069		25,299		7,770			30.7	%

The Company and the Bank’s low capital levels at December 31, 2008, and continuing through 2009, caused the Bank to initiate a balance sheet restructuring program that has continued throughout the 2009 period-to-date. Curtailment of real estate lending throughout 2009, coupled with very low loan demand and aggressive resolution of problem loans, are the major factors contributing to the $120.2 million decrease in loans in the period since December 31, 2008.

25

The Order also requires the Bank to formulate and execute a plan to reduce the commercial real estate concentration, included in the “Real estate — Mortgage” caption in the table below. The lending curtailment and other activities cited above have reduced the concentration from $206.0 million at December 31, 2008 to $184.2 million at September 30, 2009.

While the investment portfolio has increased by $18.0 million in the nine months since December 31, 2008, the restructuring activity added liquidity in the form of investments which approximate $100.2 million at September 30, 2009. Current period liquidity activity, which is detailed in the Consolidated Statements of Cash Flows in the financial statements under Item 1, required the sale of approximately $58.0 million securities to fund deposit withdrawals in the three-month period ended September 30, 2009.

The $13.8 million decrease in investment in bank owned life insurance as of September 30, 2009 compared to December 31, 2008 relates to the surrender of certain policies in conjunction with the overall balance sheet restructuring plan that has been in place for all of 2009. The $7.7 million increase in other assets as of September 30, 2009 compared to December 31, 2008, primarily relates to the increase in foreclosed properties.

Loans at September 30, 2009 and December 31, 2008 were as follows:

	September 30,			December 31,
(In thousands)	2009			2008			$ Change			% Change
Real estate — Construction	$	83,084		$	146,167		$	(63,083	)		-43.2	%
Real estate — Mortgage		583,494			593,233			(9,739	)		-1.6	%
Commercial, financial and agricultural		155,144			199,370			(44,226	)		-22.2	%
Consumer		7,155			10,713			(3,558	)		-33.2	%
All other loans		253			258			(5	)		-1.9	%
		829,130			949,741			(120,611	)		-12.7	%
Deferred origination fees, net		(1,204	)		(1,592	)		388			-24.4	%
Total loans	$	827,926		$	948,149		$	(120,223	)		-12.7	%
Mortgage loans held for sale	$	—		$	16,770		$	(16,770	)		n/a

The following table reflects the changes in our liabilities and equity as of September 30, 2009 compared with December 31, 2008.

	September 30,			December 31,
(In thousands)	2009			2008			$ Change			% Change
Total liabilities	$	947,715		$	1,072,785		$	(125,070	)		-11.7	%
Deposits		892,359			991,822			(99,463	)		-10.0	%
Non-interest-bearing demand deposits		114,822			117,168			(2,346	)		-2.0	%
Interest-bearing demand deposits		298,677			357,552			(58,875	)		-16.5	%
NOW accounts		130,019			153,444			(23,425	)		-15.3	%
Money market accounts		168,658			204,108			(35,450	)		-17.4	%
Savings deposits		19,946			19,674			272			1.4	%
Time deposits		458,914			497,428			(38,514	)		-7.7	%
Overnight and short-term borrowings		23,991			48,947			(24,956	)		-51.0	%
Long-term borrowings		20,049			14,075			5,974			42.4	%
Other liabilities		11,316			17,941			(6,625	)		-36.9	%
Total capital		61,954			74,170			(12,216	)		-16.5	%
Retained earnings		65,452			77,928			(12,476	)		-16.0	%
Accumulated other comprehensive loss		(822	)		(1,077	)		255			-23.7	%

26

The Company’s deposits have decreased $99.5 million in the nine-month period ended September 30, 2009, with $81.7 million of the decline in the current three-month period. The Bank has been prohibited from renewing or acquiring any brokered deposits throughout 2009. The only brokered deposits were deposits in the national CDARS program, which is designed to provide FDIC insurance to deposits that exceed $250 thousand. As a result of the restrictions, CDARS deposits (which are classified as time deposits) declined from $52.8 million at December 31, 2008 to $22.3 million at September 30, 2009. The additional decrease of approximately $69.0 million has related to all categories of deposits, and the acceleration in the decrease (deposits declined $70.0 million in September) coincided with the Bank’s announcement of the Order as outlined in more detail in Note 2 to the financial statements in Item 1.

The Company’s loan to deposit ratio was 92.78% as of September 30, 2009 compared to 95.60% as of December 31, 2008, and the Bank’s loan to deposit ratio was 92.22% compared to 93.14% when comparing the same dates.

From December 31, 2008 to September 30, 2009, short-term borrowings decreased $20.8 million for Granite Mortgage, and $2.5 million for the holding company, partially offset by the $7.0 million increase in the Bank. The Bank’s long-term borrowings from the Federal Home Loan Bank increased $6.0 million during the first nine months of 2009.

Other liabilities decreased $6.6 million, primarily related to the reduction of loan origination activities for Granite Mortgage, and the Bank’s payout of accrued retirement benefits during the first nine months of 2009.

Liquidity, Interest Rate Sensitivity and Other Risks

The Company’s historical liquidity management process included anticipating operating cash requirements, evaluating time deposit maturities, monitoring loan to deposit ratios, and correlating these activities to an overall periodic internal liquidity measure. The evaluation of the asset mix was to maintain a securities portfolio sufficient to provide short-term liquidity in periods of unusual fluctuations. The activity also included the Granite Mortgage operations, which were always separately funded.

The current liquidity management processes relate primarily to the Bank. The liquidity requirements of the Bank are primarily met through two categories of funding. The first is core deposits, which includes demand deposits, savings accounts and certificates of deposits. We consider these to be a more stable portion of the Bank’s liability mix and the result of ongoing consumer and commercial banking relationships. At September 30, 2009, our core deposits, defined as total deposits excluding time deposits of $100 thousand or more, totaled $702.6 million, or 78.7% of our total deposits, compared to $783.8 million, or 79.0%, of our total deposits as of December 31, 2008.

As discussed elsewhere, we have been restructuring the Bank’s balance sheet throughout 2009. The historically stable deposit base has decreased by approximately $100.0 million in 2009, and a significant part of that decrease was in the three-month period ended September 30, 2009. The Bank has been able to fund the deposit decrease through funding primarily derived from the balance sheet restructuring activities throughout 2009.

During the period since September 30, 2009, the Bank’s aggregate deposits have stabilized and currently average $890.0 million. The stabilization and continued loan pay downs and other actions have resulted in the Bank’s internal liquidity measure, (which is based on cash balances plus the amount of unpledged securities, divided by total deposits), increasing from 5.00% at September 30 to 8.30% at November 13.

27

Additionally, outside sources of funding have contracted as the Bank’s credit standing has declined. The FHLB of Atlanta has required that securities be pledged as collateral for the $40.0 million of advances. These requirements and the pledging of investment securities to collateralize public funds has resulted in more than 90% of investment securities being pledged at September 30, 2009.

The Bank’s primary outside funding source is the Federal Reserve Discount window, and the Bank has posted approximately $30.0 million of loans, which would provide approximately $18.0 million to $20.0 million of emergency funding if necessary.

The Company or the Bank do not have any off-balance sheet investments or obligations. The Bank does have $120.2 million of unfunded loan commitments and $3.2 million of standby letters of credit as of September 30, 2009. Based on our current evaluation, a significant amount of the commitments are not likely to be funded in the near term because of the funding terms or low customer demand.

The management of interest rate risk and the overall asset/liability position is integrated with the liquidity management process. Currently less than 10% of the Bank’s loans are directly related to market interest rates. The remaining loans are fixed rate or relate to the Bank’s independent index which relates more directly to the Bank’s operating footprint. The regulatory Order limits the Bank’s participation in the national markets for deposits and requires that local rates conform to rates that are not more than 75 basis points above the average local market rates for all products. The restriction does not currently prevent the Bank from offering competitive rates.

While we believe the conditions outlined limit the current exposure to market interest rates, we prepare 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. We simulate the effects of interest rate changes on our earnings by assuming no change in interest rates as our base case scenario and either (1) gradually increasing or decreasing interest rates by 3% over a twelve-month period or (2) immediately increasing or decreasing interest rates by 1%, 2%, 3% and 4%. These simulations indicate that net interest income will vary by less than two percent when interest rates rise or decline by 300 basis points.

Capital Resources

The Company meets regulatory guidelines for “well” capitalized for the Leverage Capital Ratio and Tier 1 Capital. The Company is “adequately” capitalized for the Total Capital measure. As referenced in Note 2 to the financial statements, the Bank is currently operating under a regulatory Order that requires Tier 1 Capital of 8% and Total Capital of 12%. The Company has restructured the Bank’s balance sheet, made additional capital contributions, curtailed lending, and is pursuing other capital improvement activities relating to the sale of assets or the Bank. These activities are continuing; however, there can be no assurance that the capital levels required in the Order can be attained.

Results of Operations

For the Three-Month Period Ended September 30, 2009 Compared
With the Same Period in 2008 and for the Nine-Month Period
Ended September 30, 2009 Compared With the Same Period in 2008

During the three-month period ended September 30, 2009, we incurred a net loss of $3.7 million compared to a net loss of $271 thousand for the same period of 2008. The reduction in earnings for the third quarter of 2009 compared to 2008 was primarily due to lower net interest income and higher provision for loan losses. For the first nine months of 2009, we incurred a net loss of $12.5 million compared to a net loss of $1.9 million for the first nine months of 2008. The increase in losses incurred for the nine-month period of 2009 compared to the same period of 2008 was primarily due to lower net interest income, increases in FDIC deposit insurance premiums and expenses relating to foreclosed properties, and a reduction of income tax benefits, partially offset by a decrease in compensation expense.

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Net Interest Income for the Quarterly Periods

The following table reflects the change in our net interest income for the three-month periods ended September 30, 2009 and 2008. For a discussion of our asset-sensitivity and the related effects on our net interest income and net interest margins, please see “Liquidity, Interest Rate Sensitivity and Other Risks” above.

	Three Months
	Ended September 30,
(In thousands)	2009			2008			$ Change			% Change
Interest income	$	13,136		$	16,367		$	(3,231	)		-19.7	%
Interest expense		4,941			6,881			(1,940	)		-28.2	%
Net interest income		8,195			9,486			(1,291	)		-13.6	%
Net interest margin		3.28	%		3.56	%
Yield on loans		5.54	%		6.26	%
Average prime rate		3.25	%		5.00	%
Cost of interest-bearing deposits		2.21	%		2.87	%
Cost of interest-bearing liabilities		2.22	%		2.96	%
Interest and fees from loans	$	11,811		$	15,293		$	(3,482	)		-22.8	%
Average loans
Bank		843,999			942,790			(98,791	)		-10.5	%
Granite Mortgage		3,634			29,181			(25,547	)		-87.5	%
Consolidated		845,122			971,971			(126,849	)		-13.1	%
Average loans not earning interest included in consolidated above		44,898			45,381			(483	)		-1.1	%
Interest on securities and overnight investments		1,325			1,074			251			23.4	%
Average securities and overnight investments		146,550			108,187			38,363			35.5	%
Average earning assets		991,672			1,080,158			(88,486	)		-8.2	%
Interest on interest-bearing deposits		4,632			6,115			(1,483	)		-24.3	%
Average interest-bearing deposits		832,020			848,080			(16,060	)		-1.9	%
Average money market deposits		202,014			234,327			(32,313	)		-13.8	%
Average time deposits		474,350			453,884			20,466			4.5	%
Interest on overnight and short-term borrowings		129			611			(482	)		-78.9	%
Average overnight and short-term borrowings
Bank		11,633			13,706			(2,073	)		-15.1	%
Granite Mortgage		2,513			22,850			(20,337	)		-89.0	%
Consolidated		26,646			63,428			(36,782	)		-58.0	%
Interest on long-term borrowings		180			155			25			16.1	%
Average long-term borrowings
Bank		28,597			14,555			14,042			96.5	%
Consolidated		26,097			14,555			11,542			79.3	%

29

We experienced a decline in our average loans and average interest-bearing deposits during the third quarter of 2009, compared to the same quarter of 2008. Our net interest margin declined 28 basis points, primarily due to the lower loan prime interest rate in the third quarter of 2009 compared to 2008, resulting from rate reductions by the Federal Reserve Bank, which was partially offset by a 74 basis point decrease in our funding costs. We had lower yields on our variable rate loans; however, our decrease in net interest margin was partially offset by lower levels of nonaccruing loans during the third quarter of 2009 compared to 2008.

Time deposits generally pay higher rates of interest than most other types of deposits. We believe that the increase in time deposits may be attributable in large part to higher rates on our time deposit products relative to our other deposit products. We have not historically relied upon “out-of-market” or “brokered” deposits as a significant source of funding although the reciprocal deposits we hold under the CDARS program discussed above are considered “brokered” deposits under regulations.

Our overnight borrowings are in the form of commercial paper related to the commercial deposit sweep arrangements of the Bank. Short-term borrowings from the Bank were the principal source of funding for Granite Mortgage during the third quarter of 2009.

30

Net Interest Income for the Year-to-Date Periods

The following table reflects the change in our net interest income for the nine-month periods ended September 30, 2009 and 2008. For a discussion of our asset-sensitivity and the related effects on our net interest income and net interest margins, please see “Liquidity, Interest Rate Sensitivity and Other Risks” above.

	Nine Months
	Ended September 30,
(In thousands)	2009			2008			$ Change			% Change
Interest income	$	40,216		$	52,343		$	(12,127	)		-23.2	%
Interest expense		16,994			22,682			(5,688	)		-25.1	%
Net interest income		23,222			29,661			(6,439	)		-21.7	%
Net interest margin		2.98	%		3.67	%
Yield on loans		5.50	%		6.68	%
Average prime rate		3.25	%		5.43	%
Cost of interest-bearing deposits		2.44	%		3.17	%
Cost of interest-bearing liabilities		2.45	%		3.23	%
Interest and fees from loans	$	37,098		$	48,613		$	(11,515	)		-23.7	%
Average loans
Bank		891,345			938,580			(47,235	)		-5.0	%
Granite Mortgage		14,808			33,739			(18,931	)		-56.1	%
Consolidated		902,084			972,319			(70,235	)		-7.2	%
Average loans not earning interest included in consolidated above		48,089			43,791			4,298			9.8	%
Interest on securities and overnight investments		3,118			3,730			(612	)		-16.4	%
Average securities and overnight investments		149,776			126,049			23,727			18.8	%
Average earning assets		1,051,860			1,098,368			(46,508	)		-4.2	%
Interest on interest-bearing deposits		15,826			20,210			(4,384	)		-21.7	%
Average interest-bearing deposits		867,890			851,108			16,782			2.0	%
Average money market deposits		208,852			244,501			(35,649	)		-14.6	%
Average time deposits		496,072			451,228			44,844			9.9	%
Interest on overnight and short-term borrowings		580			1,938			(1,358	)		-70.1	%
Average overnight and short-term borrowings
Bank		10,883			18,358			(7,475	)		-40.7	%
Granite Mortgage		10,693			26,900			(16,207	)		-60.2	%
Consolidated		33,336			72,538			(39,202	)		-54.0	%
Interest on long-term borrowings		588			534			54			10.1	%
Average long-term borrowings
Bank		28,627			12,651			15,976			126.3	%
Consolidated		27,797			14,321			13,476			94.1	%

Even though we experienced growth in our average interest-bearing deposits during the first nine months of 2009 compared to the same period in 2008, our net interest margin declined 69 basis points, primarily due to lower yields on our variable rate loans, higher nonperforming assets, and lower prime interest rates during 2009 compared to 2008, which was partially offset by lower levels of nonaccruing loans at September 30, 2009 compared to 2008. Our cost of funds decreased 78 basis points in the first nine months of 2009.

31

Provisions for Loan Losses, Allowance for Loan Losses and Discussions of Asset Quality

The risks inherent in our loan portfolio, including the adequacy of the allowance or reserve for loan losses, are significant estimates that are based on assumptions by our management regarding, among other factors, general and local economic conditions, which are difficult to predict. In estimating these risks and the related loss reserve levels, we also consider the financial conditions of specific borrowers and credit concentrations with specific borrowers, groups of borrowers, and industries.

We use several measures to assess and monitor the credit risks in our loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectibility becomes doubtful. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan as well as the level of reserves deemed appropriate for the loan. Furthermore, loans and commitments of $500 thousand or more made during the month, as well as commercial loans past due 30 days or more, are reviewed monthly by the Loan Committee of the Bank’s Board of Directors.

Large commercial loans that exhibit probable or observed credit weaknesses are subject to individual review for impairment. When individual loans are impaired, the impairment allowance is measured in accordance with “Accounting By Creditors for Impairment of a Loan.” The predominant measurement method for the Bank is the evaluation of the fair value of the underlying collateral. Allowance levels are estimated for other commercial loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk. The Bank aggregates non-graded retail type loans into pools of similar credits and reviews the historical loss experience associated with these pools as the criteria to allocate the allowance to each category.

The allowance for loan losses is comprised of three components: specific reserves, general reserve and unallocated reserves. Generally, all loans with outstanding balances of $250 thousand or greater that have been identified as impaired are reviewed periodically in order to determine whether a specific allowance is required. When the value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects the best estimate of probable losses that exist within the portfolios of loans that have not been specifically identified. The general allowance for the commercial loan portfolio is established considering several factors including: current loan grades, historical loss rates, estimated future cash flows available to service the loan, and the results of individual loan reviews and analyses. The allowance for loan losses for consumer loans, mortgage loans, and leases is determined based on past due levels and historical projected loss rates relative to each portfolio.

The unallocated allowance is determined through our assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects our acknowledgement of the imprecision and subjectivity that underlie the assessment of credit risk.

32

The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by us to be uncollectible. Recoveries during the period are credited to the allowance for loan losses.

We consider the allowance for loan losses adequate to cover the estimated losses inherent in our loan portfolio as of the date of the financial statements. We believe we have established the allowance in accordance with accounting principles generally accepted in the United States of America and in consideration of the current economic environment. Although we use the best information available to make evaluations, significant future additions to the allowance may be necessary based on changes in economic and other conditions, thus adversely affecting our operating results. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s loan portfolio. Such agencies may require adjustments to the allowances for loan losses based on their judgments.

Management is continuing to closely monitor the value of real estate serving as collateral for our loans and foreclosed real estate, especially raw land, lots, and land under development, because of management’s concern that the low level of real estate sales activity will continue to have a negative impact on the value of real estate collateral and real estate owned. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact, the financial condition of certain of our borrowers. In many situations, adverse market conditions have placed stress on borrower liquidity levels, and collateral values have declined.

No assurance can be given, however, that adverse economic circumstances of other events, including additional loan review, changing market conditions, future regulatory examination findings or changes in borrowers’ financial conditions, will not result in increased losses in the loan portfolio or in the need for increases in the allowance for loan losses or further writedowns on other real estate owned.

During the nine-month period ended September 30, 2009, the Bank continued to resolve problem loans through charge-offs, write-downs, and, in some cases, disposition of underlying collateral and restructure. The increased level of charge-offs in the third quarter relate primarily to the determination that estimated impairments on several large loans were determined to be uncollectible amounts and the loans were partially charged off. The charge-offs and transfer of loans to other real estate were the primary reasons the nonaccrual loans decreased in the nine-month period.

33

The following table and subsequent discussion present an analysis of changes in the allowance for loan losses for the third quarters and year-to-date periods of 2009 and 2008, respectively.

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
(In thousands)	2009			2008			2009			2008
Allowance for loan losses, beginning of period	$	22,787		$	18,833		$	24,806		$	17,673
Net charge-offs:
Loans charged off:
Real estate		2,587			257			12,946			5,863
Commercial, financial and agricultural		1,173			1,329			3,248			6,216
Credit cards and related plans		10			3			38			7
Installment loans to individuals		35			71			69			174
Demand deposit overdraft program		37			52			120			151
Total charge-offs		3,842			1,712			16,421			12,411
Recoveries of loans previously charged off:
Real estate		29			682			647			1,095
Commercial, financial and agricultural		204			134			1,969			1,617
Credit cards and related plans		2			—			6			1
Installment loans to individuals		8			11			35			67
Demand deposit overdraft program		14			24			57			74
Total recoveries		257			851			2,714			2,854
Net charge-offs		3,585			861			13,707			9,557
Loss provisions charged to operations		4,760			3,581			12,863			13,437
Allowance for loan losses, end of period	$	23,962		$	21,553		$	23,962		$	21,553
Ratio of annualized net charge-offs during the period to average loans during the period		1.68	%		0.36	%		2.05	%		1.34	%
Allowance coverage of annualized net charge-offs		168.47	%		629.23	%		130.75	%		168.83	%
Allowance as a percentage of loans								2.89	%		2.26	%

Nonperforming assets at September 30, 2009 and December 31, 2008 were as follows:

	September 30,			December 31,
(In thousands)	2009			2008
Nonperforming assets:
Nonaccrual loans	$	37,909		$	50,591
Restructured loans		3,838			—
Loans past due 90 days or more and still accruing interest		625			114
Total nonperforming loans		42,372			50,705
Other real estate owned		17,426			6,805
Total nonperforming assets	$	59,798		$	57,510
Nonperforming loans to total loans		5.12	%		5.35	%
Allowance coverage of nonperforming loans		56.55	%		48.92	%
Nonperforming assets to total assets		5.92	%		5.01	%

If interest from nonaccrual loans, including impaired loans had been recognized in accordance with the original terms of the loans, the estimated gross interest income for the third quarters of 2009 and 2008 that would have been recorded was approximately $582 thousand and $796 thousand, respectively. The interest income recognized on such loans, prior to being placed on nonaccrual status, was approximately $400 thousand and $506 thousand, for the third quarters of 2009 and 2008, respectively.

34

For the comparable year-to-date periods, interest income of approximately $1.2 million in 2009 and $1.8 million in 2008 would have been recognized in accordance with the original terms of the nonaccrual loans, while the interest income recognized, prior to being placed on nonaccrual status, for the year-to-date period of 2009 was approximately $588 thousand, and approximately $302 thousand for the same period of 2008.

We classify loans as nonaccrual when the loan is statutorily past due, or we believe the loan may be impaired, and the accrual of interest on such loans is discontinued. The recorded accrued interest receivable deemed uncollectible is reversed to the extent it was accrued in the current year or charged-off to the extent it was accrued in previous years. A loan classified as nonaccrual is returned to accrual status when the obligation has been brought current, it has been performed in accordance with its contractual terms, and the ultimate collection of principal and interest is no longer considered doubtful. Restructured loans are modified in accordance with troubled debt restructuring guidelines. The loans are performing in accordance with their current terms. Restructured loans are reported in the nonperforming assets classification at least through the end of the year of the restructure.

All of our investment in impaired loans, $33.5 million at September 30, 2009 is included in nonaccruing loans in the table above, and the related loan loss allowance was $6.7 million. At December 31, 2008 our investment in impaired loans was $42.6 million, and the related loan loss allowance was $5.4 million. The average recorded balance of impaired loans was $38.0 million for the first nine months of 2009 and $26.9 million for the first nine months of 2008.

In addition to the nonaccrual loans, the Bank has potential problem loans of approximately $39.2 million at September 30, 2009. Potential problem loans are loans as to which management had serious doubts as to the ability of the borrowers to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, nonperforming assets. Management defines potential problem loans as those loans graded substandard in the Bank’s grading system. These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect the Bank’s interests. Of the Bank’s $59.8 million nonperforming assets at September 30, 2009, approximately $22.0 million is unimproved land or residential lots in various stages of development.

Changes in other real estate owned for the nine months ended September 30, 2009 were as follows:

	Nine Months
	Ended September 30,
(In thousands)	2009
Balance at beginning of period	$	6,805
Additions		19,420
Proceeds from sale		(6,252	)
Write-downs and net gain (loss) on sale		(2,547	)
Balance at end of period	$	17,426

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Noninterest Income and Expenses for the Quarterly Periods

The following table reflects the changes in our noninterest income and expenses for the three-month periods ended September 30, 2009 and 2008.

	Three Months
	Ended September 30,
(In thousands)	2009			2008			$ Change			% Change
Total noninterest income
Bank	$	2,128		$	2,348		$	(220	)		-9.4	%
Granite Mortgage		31			849			(818	)		-96.3	%
Consolidated		2,159			2,494			(335	)		-13.4	%
Fees on deposit accounts		1,439			1,416			23			1.6	%
Other service fees and commissions		119			198			(79	)		-39.9	%
Annuity commissions		34			61			(27	)		-44.3	%
Mortgage banking income		31			862			(831	)		-96.4	%
Mortgage loan originations		—			62,579			(62,579	)		n/a
Securities gains/losses		(34	)		(75	)		41			-54.7	%
Other-than-temporary impairment losses		—			(636	)		636			n/a
Other noninterest income		604			729			(125	)		-17.1	%
Total noninterest expenses
Bank		8,601			6,878			1,723			25.1	%
Granite Mortgage		675			1,852			(1,177	)		-63.6	%
Consolidated		9,324			8,775			549			6.3	%
Personnel expenses
Bank		3,476			3,111			365			11.7	%
Granite Mortgage		387			1,159			(772	)		-66.6	%
Consolidated		3,863			4,274			(411	)		-9.6	%
Salaries and wages
Bank		2,685			3,142			(457	)		-14.5	%
Granite Mortgage		380			1,066			(686	)		-64.4	%
Consolidated		3,065			4,208			(1,143	)		-27.2	%
Employee benefits
Bank		791			(31	)		822			n/m
Granite Mortgage		7			93			(86	)		-92.5	%
Consolidated		798			66			732			n/m
Noninterest expenses other than for personnel
Bank		5,125			3,767			1,358			36.0	%
Granite Mortgage		288			693			(405	)		-58.4	%
Consolidated		5,461			4,501			960			21.3	%
Equipment and occupancy expense, net
Bank		974			997			(23	)		-2.3	%
Granite Mortgage		81			227			(146	)		-64.3	%
Consolidated		1,055			1,224			(169	)		-13.8	%
Other noninterest expenses
Bank		4,151			2,770			1,381			49.9	%
FDIC Assessment		500			720			(220	)		-30.6	%
Other real estate owned		1,733			19			1,714			n/m
Other		1,918			2,031			(113	)		-5.6	%
Granite Mortgage		207			466			(259	)		-55.6	%
Other real estate owned		37			135			(98	)		0.0	%
Other		170			331			(161	)		-48.6	%
Consolidated		4,406			3,277			1,129			34.5	%
Income tax benefit		—			(105	)		105			n/a
Effective income tax rates		—			27.93	%

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For the quarter ended September 30, 2009, Granite Mortgage’s other income decreased $831 thousand, primarily as a result of a $62.6 million decline in mortgage originations as Granite Mortgage discontinued its mortgage origination activities. Granite Mortgage’s compensation expense decreased $686 thousand for the third quarter of 2009 due to staff reductions during the first nine months of 2009. Also, the Bank’s compensation expense decreased $457 thousand due to reduced staffing in 2009. The Bank’s employee benefits increased $822 thousand, primarily related to reversal of accrued profit sharing contribution of $547 thousand in the third quarter of 2008.

For the third quarter of 2009, the Bank’s other noninterest expenses increased $1.4 million, primarily due to an increase of $1.7 million in expenses related to foreclosed properties.

During the third quarter of 2008, the Company incurred losses of $649 thousand for the write-down of equity securities available for sale for other-than-temporary impairment.

An income tax benefit relating to the net loss for the third quarter of 2009 was not recorded because it is more likely than not that the tax benefit would not be realized. (See Note 3 Subsequent Events and discussion in the following section regarding fourth quarter income taxes.)

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Noninterest Income and Expenses for the Year-to-Date Periods

The following table reflects the changes in our noninterest income and expenses for the nine-month periods ended September 30, 2009 and 2008.

	Nine Months
	Ended September 30,
(In thousands)	2009			2008			$ Change			% Change
Total noninterest income
Bank	$	6,378		$	6,700		$	(322	)		-4.8	%
Granite Mortgage		880			2,878			(1,998	)		-69.4	%
Consolidated		6,946			8,875			(1,929	)		-21.7	%
Fees on deposit accounts		4,031			4,269			(238	)		-5.6	%
Other service fees and commissions		351			557			(206	)		-37.0	%
Annuity commissions		119			174			(55	)		-31.6	%
Mortgage banking income		881			2,891			(2,010	)		-69.5	%
Mortgage loan originations		82,177			201,872			(119,695	)		-59.3	%
Securities gains/losses		985			(649	)		1,634			-251.8	%
Other-than-temporary impairment losses		(996	)		—			(996	)		0.0	%
Other noninterest income		1,694			1,807			(113	)		-6.3	%
Total noninterest expenses
Bank		25,639			23,146			2,493			10.8	%
Granite Mortgage		3,975			5,415			(1,440	)		-26.6	%
Consolidated		29,781			28,843			938			3.3	%
Personnel expenses
Bank		11,318			12,418			(1,100	)		-8.9	%
Granite Mortgage		2,628			3,642			(1,014	)		-27.8	%
Consolidated		13,951			16,071			(2,120	)		-13.2	%
Salaries and wages
Bank		8,812			10,221			(1,409	)		-13.8	%
Granite Mortgage		2,474			3,353			(879	)		-26.2	%
Consolidated		11,286			13,574			(2,288	)		-16.9	%
Employee benefits
Bank		2,506			2,197			309			14.1	%
Granite Mortgage		154			289			(135	)		-46.7	%
Consolidated		2,665			2,497			168			6.7	%
Noninterest expenses other than for personnel
Bank		14,321			10,728			3,593			33.5	%
Granite Mortgage		1,347			1,773			(426	)		-24.0	%
Consolidated		15,830			12,772			3,058			23.9	%
Equipment and occupancy expense, net
Bank		2,877			3,123			(246	)		-7.9	%
Granite Mortgage		445			657			(212	)		-32.3	%
Consolidated		3,322			3,780			(458	)		-12.1	%
Other noninterest expenses
Bank		11,444			7,605			3,839			50.5	%
FDIC Assessment		2,879			895			1,984			221.7	%
Other real estate owned		2,770			647			2,123			328.1	%
Other		5,795			6,063			(268	)		-4.4	%
Granite Mortgage		902			1,116			(214	)		-19.2	%
Other real estate owned		325			145			180			124.1	%
Other		577			971			(394	)		-40.6	%
Consolidated		12,508			8,992			3,516			39.1	%
Income tax benefit		—			(1,826	)		1,826			n/a
Effective income tax rates		—			0

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Net securities losses of $11 thousand for the nine-month period of 2009 include $1.0 million of other-than-temporary impairment losses on securities, offset by net gains on the sales of securities available for sale during the period.

Granite Mortgage’s other income decreased $2.0 million, primarily as a result of a $119.7 million decline in mortgage originations as Granite Mortgage’s mortgage origination activities declined during the nine-month period of 2009.

Of the $2.2 million decrease in compensation expense for the first nine months of 2009 compared to 2008, $1.4 million relates to reduced staffing of the Bank and $879 thousand for Granite Mortgage.

The Bank’s other noninterest expenses increased $3.8 million for the first nine months of 2009, primarily due to the $2.1 million increase for expenses related to foreclosed properties and the $2.0 million increase in FDIC deposit insurance premiums.

An income tax benefit relating to the net loss for the first nine months of 2009 was not recorded because it is more likely than not that the tax benefit would not be realized during the current year based on enacted tax law as of September 30, 2009. However, in November 2009, a new tax law was enacted and signed into law which will enable the Company to carryback operating losses for the preceding five years. It is expected that the Company will record a fourth quarter tax benefit of approximately $4.0 million relating to its operating losses for the nine months ended September 30, 2009. The Company is further expected to have $14.0 million of loss carryback available for any additional fourth quarter 2009 operating losses, representing prior year income taxes paid of $4.0 million. Any unused loss carryback will expire in this one-time carryback window.

Off-Balance Sheet Arrangements

We have off-balance sheet commitments to lend in the forms of unfunded commitments to extend credit and standby letters of credit. Further discussions of off-balance sheet arrangements are included above under “Liquidity, Interest Rate Sensitivity And Other Risks” and in Note 5 under “Notes to Consolidated Condensed Financial Statements.”

Contractual Obligations

As of September 30, 2009, there were no material changes to contractual obligations in the form of long-term borrowings and operating lease obligations as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008. See also Note 5 under “Notes to Condensed Consolidated Financial Statements” for changes in other commitments in the form of commitments to extend credit and standby letters of credit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, above, under the caption “Liquidity, Interest Rate Sensitivity and Other Risks.”

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Item 4. Controls and Procedures

As of September 30, 2009, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. During the period covered by this Quarterly Report, no change in our internal control over financial reporting has occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

Item 1A — Risk Factors

The following are additions to the Risk Factors included in our 2008 Annual Report on Form 10-K:

Failure to comply with regulatory orders could result in adverse actions and restrictions.

Effective August 27, 2009, the Company is operating under an Order to Cease and Desist with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Order requires the Bank to report to the regulators at least quarterly to address, among other things, the ongoing management and oversight of the Bank, an increase in the Bank’s capital levels, a reduction in the Bank’s classified assets, a reduction in concentrations of credit and improvement in the Bank’s earnings. Failure to comply with the Order could result in further adverse regulatory actions and restrictions upon our activities.

Further decline in market value of Company stock could trigger delisting on the stock exchange.

The market value of the Company’s stock traded on the NASDAQ Global Select Market^SM has declined below $1.00 per share since the beginning of October 2009. The Company has received notice that it has a 180 day grace period for the bid price to exceed $1.00 per share for 10 consecutive days. If the Company’s stock price does not meet this criteria, the stock could be delisted.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

There were no share repurchase transactions for the three months ended September 30, 2009.

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Item 6 — Exhibits

Exhibits incorporated by reference into this filing were filed with the Securities and Exchange Commission. We provide these documents through our Internet site at www.bankofgranite.com or by mail upon written request.

3.1	Bank of Granite Corporation’s Restated Certificate of Incorporation, filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q dated May 9, 2006, is incorporated herein by reference.
3.2	Bank of Granite Corporation’s Amended and Restated Bylaws, filed as Exhibit 3.1 to our Current Report on Form 8-K dated April 28, 2008, is incorporated herein by reference.
4.1	Form of stock certificate for Bank of Granite Corporation’s common stock, filed as Exhibit 4.1 to our Registration Statement on Form S-4 (Registration Statement No. 333-104233) dated April 1, 2003, is incorporated herein by reference.
4.2	Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation of Bank of Granite Corporation (included in Exhibit 3.1 hereto)
10.1	Issuance of an Order to Cease and Desist with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks filed as Exhibit 10.1 to our Current Report on Form 8-K dated August 27, 2009 is incorporated by reference.
11.	Schedule of Computation of Net Income Per Share
	The information required by this item is set forth under Item 1 of Part I, Note 4.
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1	Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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Signatures

Pursuant to the requirements of the Securities 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 16, 2009	By:	/s/ Jerry A. Felts
		Jerry A. Felts
		Chief Financial Officer and Principal Accounting Officer

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Exhibit Index

		Begins
		on Page
3.1	Certificate of Incorporation, as amended	*
3.2	Amended and Restated Bylaws of the Registrant	*
4.1	Form of stock certificate for Bank of Granite Corporation’s common stock	*
4.2	Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation of Bank of Granite Corporation	*
10.1	Order to Cease and Desist with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks	*
11.	Schedule of Computation of Net Income Per Share	**
31.1	Certification Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002	Filed herewith
31.2	Certification Pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002	Filed herewith
32.1	Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2	Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith

*	Incorporated herein by reference.
**	The information required by this item is set forth under Item 1 of Part I, Note 4.

43