Bank Of Granite 10-Q 2010 Q1 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 March 31, 2010

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

Post Office Box 128, Granite Falls, N.C.	28630
(Address of principal executive offices)	(Zip Code)

(828) 496-2000

(Registrant’s telephone number, including area code)

     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 filero(Do not check if a smaller reporting company) Smaller Reporting Companyþ

     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, $1.00 par value
15,454,641 shares outstanding as of April 30, 2010

Index

	Begins
	on Page
Part I — Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets March 31, 2010 and December 31, 2009		3
Condensed Consolidated Statements of Income (Loss) Three Months Ended March 31, 2010 and 2009		4
Condensed Consolidated Statements of Comprehensive Income (Loss) Three Months Ended March 31, 2010 and 2009		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2010 and 2009		6
Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2010 and 2009		7
Notes to Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3. Quantitative and Qualitative Disclosures About Market Risk		26
Item 4T. Controls and Procedures		26
Part II — Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		26
Item 6. Exhibits		27
Signatures		28
Exhibit Index		29
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)

	March 31,			December 31,
	2010			2009
	(Unaudited)			(Note 1)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	51,801		$	71,611
Interest-bearing deposits		1,369			1,763
Total cash and cash equivalents		53,170			73,374
Investment securities:
Available for sale, at fair value		250,442			190,921
Loans		715,432			775,019
Allowance for loan losses		(30,346	)		(27,837	)
Net loans		685,086			747,182
Premises and equipment, net		15,181			15,556
Accrued interest receivable		4,252			3,917
Investment in bank owned life insurance		4,141			4,106
Other assets		24,189			25,028
Total assets	$	1,036,461		$	1,060,084
Liabilities and stockholders’ equity:
Deposits:
Interest-bearing	$	846,479		$	856,932
Noninterest-bearing		104,325			109,673
Total deposits		950,804			966,605
Overnight and short-term borrowings		25,000			20,000
Long-term borrowings		15,000			20,000
Accrued interest payable		1,541			1,701
Other liabilities		4,367			4,692
Total liabilities		996,712			1,012,998
Stockholders’ equity:
Common stock, $1.00 par value per share
Authorized - 25,000 shares
Issued - 18,981 shares in 2010 and 2009
Outstanding - 15,454 shares in 2010 and 2009		18,981			18,981
Capital surplus		30,195			30,195
Retained earnings		42,965			52,308
Accumulated other comprehensive loss, net of deferred income taxes		(540	)		(2,546	)
Less: Cost of common stock in treasury; 3,527 shares in 2010 and 2009		(51,852	)		(51,852	)
Total stockholders’ equity		39,749			47,086
Total liabilities and stockholders’ equity	$	1,036,461		$	1,060,084

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
	Ended March 31,
	2010			2009
Interest income:
Interest and fees from loans	$	10,203		$	13,127
Federal funds sold		—			6
Interest-bearing deposits		39			17
Investments:
U.S. Treasury		—			1
U.S. Government agencies		2,026			398
States and political subdivisions		—			299
Other		23			145
Total interest income		12,291			13,993
Interest expense:
Time deposits of $100 or more		1,396			1,878
Other time and savings deposits		2,282			4,084
Overnight and short-term borrowings		127			314
Long-term borrowings		121			195
Total interest expense		3,926			6,471
Net interest income		8,365			7,522
Provision for loan losses		12,100			3,770
Net interest income (loss) after provision for loan losses		(3,735	)		3,752
Other income:
Service charges on deposit accounts		1,256			1,232
Other service fees and commissions		84			70
Securities gains (losses)		6			(17	)
Other-than-temporary impairment losses		—			(996	)
Other		308			1,196
Total other income		1,654			1,485
Other expenses:
Salaries and wages		2,215			4,788
Employee benefits		391			980
Equipment and occupancy expense, net		967			1,156
FDIC assessments		745			471
Other real estate owned		1,128			198
Other		1,816			1,869
Total other expenses		7,262			9,462
Loss before income tax benefit		(9,343	)		(4,225	)
Net loss	$	(9,343	)	$	(4,225	)
Per share amounts:
Net loss — basic and diluted	$	(0.60	)	$	(0.27	)

See notes to condensed consolidated financial statements.

4

Bank of Granite Corporation

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

	Three Months
	Ended March 31,
	2010			2009
Net loss	$	(9,343	)	$	(4,225	)
Items of other comprehensive loss:
Items of other comprehensive income (loss), before tax:
Change in unrealized gains on securities available for sale		3,447			759
Reclassification adjustment for available for sale securities gains (losses) included in net income		6			(1,013	)
Prior service cost and net actuarial loss — SERP		—			42
Other comprehensive income (loss), before tax		3,453			(212	)
Change in deferred income taxes related to change in unrealized gains or losses on securities available for sale		(1,447	)		103
Change in deferred income taxes related to prior service cost and net actuarial loss — SERP		—			(26	)
Items of other comprehensive income (loss), net of tax		2,006			(135	)
Comprehensive loss	$	(7,337	)	$	(4,360	)

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)

	Three Months
	Ended March 31,
	2010			2009
Common stock, $1.00 par value per share
At beginning of period	$	18,981		$	18,981
At end of period		18,981			18,981
Capital surplus
At beginning of period		30,195			30,190
Stock-based compensation expense		—			2
At end of period		30,195			30,192
Retained earnings
At beginning of period		52,308			77,928
Net loss		(9,343	)		(4,225	)
At end of period		42,965			73,703
Accumulated other comprehensive loss, net of deferred income taxes
At beginning of period		(2,546	)		(1,077	)
Net change in unrealized gains or losses on securities available for sale, net of deferred income taxes		2,006			(151	)
Net change in prior service cost and net actuarial loss — SERP, net of deferred income taxes		—			16
At end of period		(540	)		(1,212	)
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	$	39,749		$	69,812

See notes to condensed consolidated financial statements.

6

Bank of Granite Corporation

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

	Three Months
	Ended March 31,
	2010			2009
Increase (decrease) in cash & cash equivalents:
Cash flows from operating activities:
Net loss	$	(9,343	)	$	(4,225	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		375			478
Provision for loan losses		12,100			3,770
Investment security premium amortization, net		418			31
Acquisition premium amortization, net		—			8
Losses (gains) on sales or calls of securities available for sale		(6	)		17
Impairment losses on securities		—			996
Originations of loans held for sale		—			(81,200	)
Proceeds from loans held for sale		—			85,353
Gains on loans held for sale		—			(1,134	)
Losses on writedowns or sale of other real estate		824			53
Losses on disposal of miscellaneous assets		—			7
Increase in cash surrender value of bank owned life insurance		(35	)		(289	)
Increase in other assets		(88	)		(277	)
Increase in accrued interest receivable		(335	)		(399	)
Decrease in accrued interest payable		(160	)		(70	)
Decrease in other liabilities		(324	)		(5,442	)
Net cash provided by (used in) operating activities		3,426			(2,323	)
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of securities available for sale		16,446			10,000
Proceeds from sales, maturities, calls and paydowns of securities held to maturity		—			2,530
Proceeds from sales of securities available for sale		10,302			—
Purchase of securities available for sale		(83,229	)		(20,016	)
Net decrease in loans		47,744			21,742
Capital expenditures, net of proceeds from sale of miscellaneous assets		—			(19	)
Proceeds from sale of other real estate		908			223
Net cash provided by (used in) investing activities		(7,829	)		14,460
Cash flows from financing activities:
Net increase (decrease) in demand, NOW, money market and savings deposits		(18,999	)		3,617
Net increase in time deposits		3,198			14,154
Net increase (decrease) in overnight and short-term borrowings		5,000			(7,437	)
Net increase (decrease) in long-term borrowings		(5,000	)		16,999
Net cash provided by (used in) financing activities		(15,801	)		27,333
Net increase (decrease) in cash equivalents		(20,204	)		39,470
Cash and cash equivalents at beginning of period		73,374			48,983
Cash and cash equivalents at end of period	$	53,170		$	88,453

See notes to condensed consolidated financial statements.

7

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)

1. UNAUDITED FINANCIAL STATEMENTS

Bank of Granite Corporation’s (the “Company’s” or the “Holding Company’s” ) condensed consolidated balance sheet as of March 31, 2010, and the condensed consolidated statements of income (loss) and comprehensive income (loss), changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 2010 and 2009 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, 2009 included in the condensed consolidated financial statements and related notes were derived from the audited consolidated financial statements.

Certain amounts for the periods ended March 31, 2009 have been reclassified to conform to the presentation for the periods ended March 31, 2010.

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, 2009 audited consolidated financial statements and notes thereto included in the Company’s 2009 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 which discontinued its origination activities during 2009. Because we now operate, manage, and, likewise, direct our corporate governance activities as a single reporting banking segment, we no longer have any reportable segments.

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, 2009 on file with the Securities and Exchange Commission. There were no changes in significant accounting policies during the three months ended March 31, 2010 except as described in Note 6 below.

2. REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS

Regulatory Actions

In 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 the Company’s Consent, the FDIC and the Commissioner jointly issued the Order on August 27, 2009.

On November 11, 2009, the Company entered into a Memorandum of Understanding (“FRB Memorandum”) with the Federal Reserve Bank of Richmond (“FRB”).

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)
March 31, 2010
(Unaudited)

Among other things, the Order requires the Bank to:

• Present a written capital plan to the FDIC and the Commissioner 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 a plan to improve the Bank’s earnings and evaluate the plan quarterly;

• Formulate and implement a plan to reduce the Bank’s risk exposure in assets classified “Substandard or Doubtful”;

• Reduce the real estate credit concentrations in the Bank’s loan portfolio;

• Develop a plan to improve the Bank’s liquidity; monitor contingent funding needs and improve 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.

The FRB Memorandum requires the Company to obtain FRB approval before paying dividends, taking dividends from its Bank, incurring debt or purchasing/redeeming Company stock. The FRB Memorandum requires the submission of a capital plan to maintain adequate capital on a consolidated basis and at its Bank. The Company must furnish periodic progress reports to the FRB regarding its compliance with the FRB Memorandum. The FRB Memorandum will remain in effect until modified or terminated by the FRB.

The Bank reports regularly to its regulators on matters of compliance with the Order, and the progress made to comply with the Order. The Company believes it is in substantial compliance with all matters except the earnings and capital requirements, and continued issues with asset quality.

Going Concern Considerations

The consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business for the foreseeable future. However, the events and circumstances described herein create a substantial doubt about the Company’s ability to continue as a going concern.

The Bank has not achieved the required capital levels mandated by the Order. To date the Bank’s capital preservation activities have included balance sheet restructuring that has included curtailed lending activity; surrendering bank owned life insurance policies; reorganizing the securities portfolio to minimize the risk and related capital requirements; and curtailing the SERP pension obligation to reduce future expenses. The Company has engaged external advisors and has pursued various capital enhancing transactions and strategies throughout 2009 and the first quarter of 2010. The continuing operating loss in the quarter ended March 31, 2010 and the continuing level of problem loans have further eroded capital levels from December 31, 2009. There can be no assurance that any capital raising activities or other measures will allow the Bank to meet the capital levels required in the Order. Non-compliance with the capital requirements of the Order and the continued erosion of capital in the first quarter may cause the Bank to be subject to further enforcement actions by the FDIC or the Commissioner.

9

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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 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 March 31, 2010:

							Minimum Regulatory
	Actual						Requirement
							Adequately			Well			Pursuant to
	Consolidated			Bank			Capitalized			Capitalized			Order
Leverage capital ratios		3.82	%		3.71	%		4.00	%		5.00	%		8.00	%
Risk-based capital ratios:
Tier 1 capital		5.71	%		5.53	%		4.00	%		6.00	%		8.00	%
Total capital		7.01	%		6.83	%		8.00	%		10.00	%		12.00	%

3. EARNINGS PER SHARE

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

	Three Months
	Ended March 31,
(Shares in thousands)	2010		2009
Weighted average shares outstanding		15,454		15,454

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

4. 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 March 31, 2010 and December 31, 2009 were as follows:

	March 31,		December 31,
(In thousands)	2010		2009
Financial instruments whose contract amounts represent credit risk
Unfunded commitments to extend credit	$	94,373	$	106,122
Standby letters of credit		2,570		2,967

10

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts outstanding do not necessarily represent future cash requirements. Standby letters of credit represent conditional commitments issued by the Bank to assure the performance of a customer to a third party.

The Bank’s exposure to credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Bank uses the same credit policies for making commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each customer’s creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral held varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, inventories and accounts receivable. Management does not anticipate any significant losses as a result of these financial instruments.

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.

5. 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. The Plan activity for 2010 is summarized as follows:

(In thousands)
Beginning projected benefit obligation	$	1,695
2010 changes, net		(294	)
Ending projected benefit obligation	$	1,401

11

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

6. NEW ACCOUNTING STANDARDS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued an update to the accounting standards for the presentation on fair value disclosures. The new guidance requires disclosures about inputs and valuation techniques for Level 2 and 3 fair value measurements, clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross” presentation of activities (purchases, sales, and settlements) within the Level 3 rollforward reconciliation, which will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. The Company adopted the fair value disclosures guidance on January 1, 2010, except for the gross presentation of the Level 3 rollforward information which is not required to be adopted by the Company until January 1, 2011.

7. 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 first quarter of 2010 were estimated using independent pricing sources that were determined to be Level 2 measurements, Significant Other Observable Inputs, for the U.S. Government agencies and mortgage-backed securities. The 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.

12

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

The following tables reflect investment securities available for sale measured at fair value on a recurring basis at March 31, 2010 and December 31, 2009:

			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)
March 31, 2010
U.S. Government agencies	$	42,319	$	—	$	42,319	$	—
Government agency mortgage-backed securities		206,969		—		206,969		—
Equities		1,154		1,154		—		—
Total investment securities available for sale	$	250,442	$	1,154	$	249,288	$	—
December 31, 2009
U.S. Government agencies	$	42,051	$	—	$	42,051	$	—
Government agency mortgage-backed securities		147,831		—		147,831		—
Equities		1,039		1,039		—		—
Total investment securities available for sale	$	190,921	$	1,039	$	189,882	$	—

The Company utilizes a third party pricing service to provide valuations on its securities portfolio. Despite most of these securities being U.S. Government agency debt obligations and agency mortgage-backed securities, and equity securities traded in active markets, third party valuations are determined based on the characteristics of a security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the Company considers these fair value measurements as Level 2. No securities were transferred between Level 1 and Level 2 during the first quarter of 2010.

Impaired Loans

Loans considered impaired are loans for which, based on current information and events, it is probable that the creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are subject to nonrecurring fair value adjustments to reflect write-downs that are based on the market price or current appraised value of the collateral, adjusted to reflect local market conditions or other economic factors. After evaluating the underlying collateral, the fair value of the impaired loans is recorded by allocating specific reserves from the allowance for loan losses to the loans.

13

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

Thus, the fair value reflects the loan balance less the specifically allocated reserve. Impaired loans for which no reserve has been specifically allocated are not included in the table below. At March 31, 2010, all impaired loan values were determined to be based on Level 3 measurements.

Other Real Estate Owned

Other real estate owned is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan losses at the time of foreclosure. Updated appraisals or evaluations are obtained at least annually for all other real estate owned properties. These appraisals are used to update fair value estimates. A provision is charged to earnings for subsequent losses on other real estate owned when these updates indicate such losses have occurred. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors beyond our control, and future declines in the value of the real estate could result in a charge to earnings. The recognition of sales and sales gains is dependent upon whether the nature and terms of the sales, including possible future involvement of the Company, if any, meet certain defined requirements. If those requirements are not met, sale and gain recognition is deferred. At March 31, 2010, 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 March 31, 2010 and December 31, 2009:

			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)
March 31, 2010
Impaired loans (1)	$	39,385	$	—	$	—	$	39,385
Other real estate owned		13,755		—		—		13,755
Total assets	$	53,140	$	—	$	—	$	53,140
December 31, 2009
Impaired loans (1)	$	26,788	$	—	$	—	$	26,788
Other real estate owned		13,235		—		—		13,235
Total assets	$	40,023	$	—	$	—	$	40,023

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

14

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

8. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and fair values of investment securities at March 31, 2010 and December 31, 2009 were as follows:

	Amortized		Gross Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
Type and Contractual Maturity
AVAILABLE FOR SALE
At March 31, 2010:
U.S. Government agencies due:
Within 1 year	$	1,529	$	7	$	—	$	1,536
After 5 years but within 10 years		37,162		—		604		36,558
After 10 years		4,358		—		133		4,225
Total U.S. Government agencies		43,049		7		737		42,319
Government agency mortgage-backed securities due:
After 10 years		206,735		1,367		1,133		206,969
Others*:
Common stocks and mutual funds		871		283		—		1,154
Total available for sale	$	250,655	$	1,657	$	1,870	$	250,442

* Others include investments in common stocks, preferred stocks and mutual funds.

Sales and calls of securities available for sale for the three months ended March 31, 2010 resulted in proceeds of $26.7 million, $27 thousand in realized gains and $21 thousand in realized losses.

As of March 31, 2010, accumulated other comprehensive losses, net of deferred income taxes, included unrealized net losses of $929 thousand, net of deferred income tax benefit of $389 thousand, related to securities available for sale.

Sales and calls of securities available for sale for the three months ended March 31, 2009 resulted in proceeds of $10.0 million, $17 thousand in realized losses and no realized gains. The amortized cost of certain equity securities were written down by $582 thousand in the first quarter of 2009, and certain debt securities were written down $414 thousand in the first quarter of 2009, for credit related declines in value deemed to be other-than-temporary, resulting in a charge to earnings. Calls of securities held to maturity resulted in proceeds of $2.5 million for the three months ended March 31, 2009 and no gains or losses.

As of March 31, 2009, accumulated other comprehensive losses, net of deferred income taxes, included unrealized net gains of $482 thousand, net of deferred income taxes of $190 thousand, related to securities available for sale.

15

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(unaudited)

	Amortized		Gross Unrealized				Fair
(In thousands)	Cost		Gains		Losses		Value
Type and Contractual Maturity
AVAILABLE FOR SALE
At December 31, 2009:
U. S. Government agencies due:
Within 1 year	$	1,539	$	9	$	—	$	1,548
After 1 year but within 5 years		38,172		—		1,434		36,738
After 5 years but within 10 years		4,000		—		235		3,765
Total U.S. Government agencies		43,711		9		1,669		42,051
Government agency mortgage-backed securities due:
After 10 years		150,738		192		3,099		147,831
Others*:
Common stocks and mutual funds		853		186		—		1,039
Total available for sale	$	195,302	$	387	$	4,768	$	190,921

* Others include investments in common stocks, preferred stocks and mutual funds.

Securities with unrealized losses at March 31, 2010 and December 31, 2009 not recognized in income, all of which have been in a loss position less than 12 months were as follows:

	March 31, 2010				December 31, 2009
	Fair		Unrealized		Fair		Unrealized
(In thousands)	Value		Loss		Value		Loss
Less than 12 months:
U.S. Government agencies	$	40,783	$	737	$	40,503	$	1,669
Government agency mortgage-backed securities		129,069		1,133		124,311		3,099
Total temporarily impaired	$	169,852	$	1,870	$	164,814	$	4,768

Unrealized losses on securities have not been recognized in 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. Furthermore, it is not likely that the Company will have to sell any impaired securities before a recovery of the amortized cost.

16

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

9. 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 are imprecise. 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.

	March 31, 2010					December 31, 2009
			Estimated					Estimated
	Carrying		Fair			Carrying		Fair
(In thousands)	Amount		Value			Amount		Value
Assets:
Cash and cash equivalents	$	53,170	$	53,170		$	73,374	$	73,374
Investment securities		250,442		250,442			190,921		190,921
Bank owned life insurance		4,141		4,141			4,106		4,106
Loans (1)		685,086		690,000			747,182		752,000
Market risk/liquidity adjustment		—		(40,000	)		—		(40,000	)
Net loans		685,086		650,000			747,182		712,000
Liabilities:
Demand deposits		411,046		411,046			430,045		430,045
Time deposits		539,758		542,000			536,560		539,000
Overnight and short-term borrowings		25,000		25,000			20,000		20,000
Long-term borrowings		15,000		15,640			20,000		21,000

(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.

17

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2010
(Unaudited)

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 2010 are a function of higher credit spreads, partially offset by lower risk-free interest rates. However, the values derived from origination rates at March 31, 2010 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 March 31, 2010. 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.

The book values of cash and due from banks, interest-bearing deposits, accrued interest receivable, 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.

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 futureevents. 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 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 performance for the three-month period ended March 31, 2010. 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. The “Regulatory Matters and Going Concern Considerations” in Note 2 of the Notes to Condensed Consolidated Financial Statements addresses the significant risks and uncertainties for the Company.

18

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.

Executive Overview

The first quarter loss was $9.3 million, or $0.60 per share compared to a loss of $4.2 million, or $0.27 per share for the first quarter of 2009.

Asset quality and related credit costs are the continuing drivers of the Company’s operating performance. The external credit review in February and the regulatory review completed in April in addition to the periodic internal review of the largest and most troubled assets provide a level of assurance as to the current identification of troubled loans and the evaluation of the related risk. The result of the overall assessment is the recognition of an increase in criticized loans (loans considered troubled, however, not on non-accrual) to $157.5 million at March 31, 2010 versus $86.5 million at December 31, 2009. Nonperforming loans at $57.2 million continue at an elevated level despite $21.6 million charge-offs in the last two quarters. These conditions have necessitated the continued building of the allowance for losses as evidenced by the $12.1 million loss provision versus $9.6 million of net charge offs for the period.

Our balance sheet management continues with the active reduction of the loan portfolio and the maintenance of a stable deposit base which provides over $200.0 million of liquidity (unencumbered cash and securities) and currently provides ample operating funding.

The net interest income continues to increase marginally on a linked quarter basis and the net interest margin is stable. The Company’s cost, excluding credit costs, continue to decrease.

The following sections of this discussion provide more detail regarding current and prior year matters. Additionally, Note 2, “Regulatory Matters and Going Concern Consideration,” in the “Notes to Consolidated Financial Statements” discusses the regulatory and capital levels in significantly more detail.

Results of Operations
For the Three Month Period Ended March 31, 2010
Compared With the Same Period in 2009

Financial Highlights for	Three Months
the Quarterly Periods	Ended March 31,
(In thousands except per share amounts)	2010			2009			% change
Earnings
Net interest income	$	8,365		$	7,522			11.2	%
Provision for loan losses		12,100			3,770			221.0	%
Other income		1,654			1,485			11.4	%
Other expense		7,262			9,462			-23.3	%
Net loss		(9,343	)		(4,225	)		121.1	%

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Performance Summary

Net interest income

Net interest income for the first quarter increased to $8.4 million from $8.2 million for the fourth quarter. The continuing increase and the increase from the first quarter of 2009 reflect the Company’s focus on risk based pricing for the loan portfolio in combination with the continuing decline in deposit costs as certificates of deposit from higher rate periods continue to mature and be replaced at lower rates. Loan yields for the quarter ended March 31, 2010 were 5.52% compared to 6.08% from the 2009 period — a decline of 56 basis points. The decline in deposits costs for the same period was 96 basis points, resulting in the 11.2% increase in net interest income from the 2009 period.

Provision for loan losses

The $12.1 million provision for losses in the first quarter of 2010 follows the $15.9 million provision for the fourth quarter of 2009 and is discussed in the Executive Overview and is outlined in more detail in Provision for Loan Losses, Allowance for Loan Losses and Discussion of Asset Quality. The provision for loan losses was $3.8 million in the first quarter of 2009.

Other noninterest income

Other noninterest income primarily includes fees on deposit accounts which have been very consistent at $1.3 million in the first quarter compared to $1.2 million in the 2009 period. The significant item of change between the periods is the $1.0 million in other-than-temporary impairment charge for investments in 2009, which related to investments by the Corporation in Trust Preferred Securities of major banking companies. All of the related investments were sold in 2009. Other income decreased by $624 thousand for the three months ended March 31, 2010 because mortgage related income is included in the 2009 period. No other component of other income, such as checkcard income, safe deposit rentals or increase in bank owned life insurance values, is significant for any period.

Noninterest expense

Noninterest expenses of $7.3 million are lower compared to the fourth quarter of $13.2 million, primarily because of the $5.0 million OREO writedowns in the fourth quarter. The personnel costs of $2.6 million are $3.2 million lower versus the same period for 2009 because of continued staff reduction; the inclusion of the SERP retirement costs in the early periods of 2009 ($321 thousand); and the mortgage company personnel costs reflected in the 2009 period ($1.7 million). All other costs are marginally lower than the 2009 amounts and reflect management’s focus on expense control.

Income taxes

The Company is not able to recognize any income tax benefit for the current losses. The prior period and current operating losses have eliminated the ability to assert any current or future tax benefits.

20

Changes in Financial Condition
March 31, 2010 Compared With December 31, 2009

The following table reflects the changes in our assets and liabilities as of March 31, 2010 compared with December 31, 2009.

	March 31,		December 31,
(In thousands)	2010		2009		$ Change			% Change
Total assets	$	1,036,461	$	1,060,084	$	(23,623	)		-2.2	%
Earning assets		967,243		967,703		(460	)		0.0	%
Cash and cash equivalents		53,170		73,374		(20,204	)		-27.5	%
Investment securities		250,442		190,921		59,521			31.2	%
Gross loans		715,432		775,019		(59,587	)		-7.7	%
Investment in bank owned life insurance		4,141		4,106		35			0.9	%
Other assets		24,189		25,028		(839	)		-3.4	%
Total liabilities	$	996,712	$	1,012,998	$	(16,286	)		-1.6	%
Deposits		950,804		966,605		(15,801	)		-1.6	%
Non-interest-bearing demand deposits		104,325		109,673		(5,348	)		-4.9	%
Interest-bearing demand deposits		286,998		301,578		(14,580	)		-4.8	%
NOW accounts		127,644		145,833		(18,189	)		-12.5	%
Money market accounts		159,354		155,745		3,609			2.3	%
Savings deposits		19,723		18,794		929			4.9	%
Time deposits		539,758		536,560		3,198			0.6	%
Overnight and short-term borrowings		25,000		20,000		5,000			25.0	%
Long-term borrowings		15,000		20,000		(5,000	)		-25.0	%
Other liabilities		4,367		4,692		(325	)		-6.9	%

The changes in the Company’s balance sheet for the quarter ended March 31, 2010 are reflective of the continued deleveraging of the Bank and changing the risk based asset mix.

The loan portfolio contracted $59.6 million in the quarter due to continued aggressive problem loan resolution; the pay off of three large relationships whose borrower requirements exceeded the Bank’s current risk tolerance; and the significantly declining demand of quality loan opportunities. The loan to deposit ratio at March 31, 2010 was 75.2% compared to 80.2% at December 31, 2009.

The proceeds from the loan portfolio reduction and the funds available from a successful deposit campaign in the fourth quarter were deployed as investment security purchases ($59.5 million). As set forth in the financial statement footnotes, the securities portfolio is predominately government backed mortgage securities or government agency single maturity bonds.

The Bank’s deposits decreased $15.8 million in the first quarter. While the offered deposit rates are competitive in the market, the aggressive marketing and rate posture of the preceding quarter was moderated. The Bank has been notified that the state of North Carolina is a high cost deposit market, and that allows the Bank to borrow in relation to the local market offered rates as compared to more restrictive national market rate caps. The issue has no effect currently, however, it could allow the Bank more flexibility in pricing deposits in the future.

21

Liquidity and Asset/Liability Management

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. In evaluating our asset mix, we have sought to maintain a securities portfolio sufficient to provide short-term liquidity in periods of unusual fluctuations.

As outside funding sources have been withdrawn or restricted to current levels of outstandings, our liquidity management has focused on insuring adequate internal funding by the Bank.

The Bank’s primary internal sources of liquidity are customer deposits, cash and balances due from other Banks, and unencumbered investment securities. These funds, together with loan repayments, are used to fund continuing operations. Additionally, retail and commercial deposit balances fluctuate significantly, and we target liquidity levels to meet those periodic declines. The Bank’s liquidity (cash + unencumbered securities / total deposits) was approximately $216.0 million, or 22.7% of total deposits at March 31, 2010.

As of March 31, 2010, our core deposits, defined as total deposits excluding time deposits of $100 thousand or more, totaled $700.2 million, or 73.6% of our total deposits, compared to $719.0 million, or 74.4%, of our total deposits as of December 31, 2009.

Certificates of deposit of $100 thousand or more represented 26.4% and 25.6%, respectively, of the Bank’s total deposits at March 31, 2010 and December 31, 2009. Management believes that a sizeable portion of the Bank’s time deposits are relationship-oriented. Brokered certificates of deposit totaled $6.4 million and $8.2 million at March 31, 2010 and December 31, 2009, respectively. While the Bank appreciates the need to pay competitive rates to retain these deposits, other subjective factors also influence deposit retention. Based upon prior experience, the Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

The Company utilizes an independent asset/liability modeling tool as its primary interest rate management guide. The periodic analysis considers the current contractual agreements for deposits, borrowings, loans, investments and any commitments to enter these transactions. Additionally current and projected volumes, scheduled payments and maturities and likely management pricing strategies in various rate scenarios are considered. Although these methods are subject to the accuracy of the assumptions that underlie the process and do not take into account the pricing strategies that management would undertake in response to sudden interest rate changes, the Company believes that these methods provide a better indication of the sensitivity of earnings to changes in interest rates than other analyses.

The objective of the Bank’s asset/liability management process is focused on providing relative stability and reduction of volatility for the Bank’s net interest income through various scenarios of changes in interest rates. The process attempts to balance the need for stability and predictability of net interest income against competing needs such as balance sheet mix constraints, overall earnings targets and the risk/return relationships between liquidity, interest rate risk, market risk and capital adequacy. The Bank maintains an asset/liability management policy approved by the Bank’s Board of Directors. This policy and the analysis process undertaken by management and the Board’s Asset/Liability Management Committee (“ALCO”) provides guidelines to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a range around an “earnings neutral position”, which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

22

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.

In the current environment, the Bank is generally investing available funds in securities, primarily securities issued by U.S. governmental agencies, to manage liquidity and to limit any credit risk and risk based asset allocation.

The gap analysis that we conducted for the current balance sheet indicates the Company is liability sensitive. However, the flexibility provided by the small percentage of loans tied to market rates versus the Bank’s index and the general flexibility in deposit pricing results in management’s most likely pricing action producing increased net interest income in moderately increasing or decreasing interest rate scenarios. (Which is more indicative of an asset sensitive balance sheet.) Under a moderate rising rate environment the Company’s interest rate risk is moderate and net interest income would be expected to increase 10%.

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. 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 the accounting standard entitledAccounting 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 reserves 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.

23

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.

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.

Management is continuing to closely monitor the value of real estate serving as collateral for our loans, especially lots and land under development, due to continued concern that the low level of real estate sales activity will continue to have a negative impact on the value of real estate collateral. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact, the financial condition and liquidity position of certain of our borrowers. Additionally, the value of commercial real estate collateral may come under further pressure from weak economic conditions and prevailing unemployment levels.

We believe that our allowance is an adequate estimation of probable losses incurred in our loan portfolio at March 31, 2010. No assurance can be given, however, that adverse economic circumstances or other events, including additional and continued loan review, 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 of other real estate owned.

The following table and subsequent discussion present an analysis of changes in the allowance for loan losses for the first quarters of 2010 and 2009, respectively.

	Three Months
	Ended March 31,
(In thousands)	2010			2009
Allowance for loan losses, beginning of period	$	27,837		$	24,806
Net charge-offs:
Loans charged off:
Real estate, commercial, financial and agricultural		10,068			2,819
Consumer loans		42			86
Total charge-offs		10,110			2,905
Recoveries of loans previously charged off:
Real estate, commercial, financial and agricultural		490			766
Consumer loans		29			48
Total recoveries		519			814
Net charge-offs		9,591			2,091
Loss provisions charged to operations		12,100			3,770
Allowance for loan losses, end of period	$	30,346		$	26,485
Ratio of annualized net charge-offs during the period to average loans during the period		5.18	%		0.90	%
Allowance coverage of annualized net charge-offs		78.02	%		312.32	%
Allowance as a percentage of loans		4.24	%		2.90	%

24

Nonperforming assets at March 31, 2010 and December 31, 2009 were as follows:

	March 31,			December 31,
(In thousands)	2010			2009
Nonperforming assets:
Nonaccrual loans	$	46,430		$	40,736
Restructured loans — nonaccrual		10,825			12,404
Total nonperforming loans		57,255			53,140
Other real estate owned		13,755			13,235
Total nonperforming assets	$	71,010		$	66,375
Restructured loans — accruing	$	9,046		$	13,284
Loans past due 90 days or more and still accruing interest		4,215			1,195
Nonperforming loans to total loans		8.00	%		6.86	%
Allowance coverage of nonperforming loans		53.00	%		52.38	%
Nonperforming assets to total assets		6.85	%		6.26	%

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 first quarters of 2010 and 2009 that would have been recorded was approximately $825 thousand and $535 thousand, respectively.

We classify loans as nonaccrual when the loan is 90 days 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 for a sufficient period of time, and the ultimate collection of principal and interest is no longer considered doubtful. Of the Bank’s $57.3 million in nonperforming loans at March 31, 2010, approximately $11.5 million are single family homes, unimproved land or residential lots in various stages of development. The remaining population consists of loans to a variety of small business operations that are in default.

All of our investment in impaired loans, $51.5 million at March 31, 2010 is included in nonaccruing loans in the table above, and the related loan loss allowance was $9.0 million. At December 31, 2009, our investment in impaired loans was $38.9 million, and the related loan loss allowance was $7.7 million. The average recorded balance of impaired loans was $41.2 million for the first three months of 2010 and $38.3 million for the first three months of 2009.

In addition to the nonaccrual loans, the Bank has potential problem loans of approximately $157.5 million at March 31, 2010. 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.

25

Changes in other real estate owned for the three months ended March 31, 2010 and 2009 were as follows:

	Three Months
	Ended March 31,
(In thousands)	2010			2009
Balance at beginning of period	$	13,235		$	6,805
Additions		2,252			11,037
Proceeds from sale		(908	)		(223	)
Write-downs and net gain (loss) on sale		(824	)		(53	)
Balance at end of period	$	13,755		$	17,566

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 in Note 4 under “Notes to Condensed Consolidated Financial Statements.”

Contractual Obligations

As of March 31, 2010, 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, 2009. See also Note 4 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

Not applicable.

Item 4T. Controls and Procedures

As of March 31, 2010, 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 2 — Unregistered Sales of Equity Securities and Use of Proceeds

There were no share repurchase transactions for the three months ended March 31, 2010.

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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)
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 3.
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: May 13, 2010	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	*
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 3.

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