Bank Of Granite 10-Q 2009 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 endedMarch 31, 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 number0-15956

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 filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

     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 April 30, 2009

Index

	Begins
	on Page
Part I — Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets March 31, 2009 and December 31, 2008		3
Condensed Consolidated Statements of Income Three Months Ended March 31, 2009 and 2008		4
Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2009 and 2008		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2009 and 2008		6
Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 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		17
Item 3. Quantitative and Qualitative Disclosures About Market Risk		31
Item 4. Controls and Procedures		31
Part II — Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		32
Item 6. Exhibits		32
Signatures		33
Exhibit Index		34
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

	March 31,			December 31,
	2009			2008
(In thousands except per share data)	(Unaudited)			(Note 1)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	25,655		$	26,164
Interest-bearing deposits		51,198			6,819
Federal funds sold		11,600			16,000
Total cash and cash equivalents		88,453			48,983
Investment securities:
Available for sale, at fair value		67,300			58,576
Held to maturity, at amortized cost		21,091			23,627
Loans		913,277			948,149
Allowance for loan losses		(26,485	)		(24,806	)
Net loans		886,792			923,343
Mortgage loans held for sale		13,751			16,770
Premises and equipment, net		18,616			19,079
Investment in bank owned life insurance		31,566			31,278
Other assets		36,800			25,299
Total assets	$	1,164,369		$	1,146,955
Liabilities and stockholders’ equity:
Deposits:
Demand accounts	$	111,970		$	117,168
NOW accounts		148,927			153,444
Money market accounts		216,303			204,108
Savings accounts		20,811			19,674
Time deposits of $100 or more		218,036			208,002
Other time deposits		293,546			289,426
Total deposits		1,009,593			991,822
Overnight and short-term borrowings		41,510			48,947
Long-term borrowings		31,066			14,075
Other liabilities		12,388			17,941
Total liabilities		1,094,557			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		30,192			30,190
Retained earnings		73,703			77,928
Accumulated other comprehensive loss, net of deferred income taxes		(1,212	)		(1,077	)
Less: Cost of common stock in treasury; 3,527 shares in 2009 and 2008		(51,852	)		(51,852	)
Total stockholders’ equity		69,812			74,170
Total liabilities and stockholders’ equity	$	1,164,369		$	1,146,955

See notes to condensed consolidated financial statements.

3

Bank of Granite Corporation

Condensed Consolidated Statements of Income

	Three Months
	Ended March 31,
(Unaudited — in thousands except per share data)	2009			2008
Interest income:
Interest and fees from loans	$	11,867		$	16,256
Interest and fees from mortgage banking		1,260			1,152
Federal funds sold		6			13
Interest-bearing deposits		17			112
Investments:
U.S. Treasury		1			43
U.S. Government agencies		398			782
States and political subdivisions		299			365
Other		145			181
Total interest income		13,993			18,904
Interest expense:
Time deposits of $100 or more		1,878			2,553
Other time and savings deposits		4,084			5,122
Overnight and short-term borrowings		314			724
Long-term borrowings		195			212
Total interest expense		6,471			8,611
Net interest income		7,522			10,293
Provision for loan losses		3,770			1,411
Net interest income after provision for loan losses		3,752			8,882
Other income:
Service charges on deposit accounts		1,232			1,386
Other service fees and commissions		70			169
Mortgage banking income		624			1,043
Securities gains (losses)		(1,013	)		59
Other		572			621
Total other income		1,485			3,278
Other expenses:
Salaries and wages		4,788			4,566
Employee benefits		980			1,474
Occupancy expense, net		539			630
Equipment expense		617			616
Other		2,538			2,373
Total other expenses		9,462			9,659
Income (loss) before income taxes		(4,225	)		2,501
Income taxes		—			786
Net income (loss)	$	(4,225	)	$	1,715
Per share amounts:
Net income (loss) — Basic	$	(0.27	)	$	0.11
Net income (loss) — Diluted		(0.27	)		0.11
Cash dividends		—			0.13
Book value		4.52			7.48
Tangible book value		4.51			6.77

See notes to condensed consolidated financial statements.

4

Bank of Granite Corporation

Condensed Consolidated Statements of Comprehensive Income

	Three Months
	Ended March 31,
(Unaudited — in thousands)	2009			2008
Net income (loss)	$	(4,225	)	$	1,715
Items of other comprehensive income (loss):
Items of other comprehensive income (loss), before tax:
Unrealized gains on securities available for sale		759			701
Reclassification adjustment for securities gains (losses) included in net income		(1,013	)		59
Prior service cost and net actuarial loss — SERP		42			—
Other comprehensive income (loss), before tax		(212	)		760
Change in deferred income taxes related to change in unrealized gains or losses on securities available for sale		103			(303	)
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		(135	)		457
Comprehensive income (loss)	$	(4,360	)	$	2,172

See notes to condensed consolidated financial statements.

5

Bank of Granite Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity

	Three Months
	Ended March 31,
(Unaudited — in thousands except per share data)	2009			2008
Common stock, $1.00 par value per share
At beginning of period	$	18,981		$	18,965
At end of period		18,981			18,965
Capital surplus
At beginning of period		30,190			30,053
Stock-based compensation expense		2			4
At end of period		30,192			30,057
Retained earnings
At beginning of period		77,928			118,196
Net income (loss)		(4,225	)		1,715
Dividends		—			(2,007	)
At end of period		73,703			117,904
Accumulated other comprehensive income (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		(151	)		457
Net change in prior service cost and net actuarial loss — SERP, net of deferred income taxes		16			—
At end of period		(1,212	)		360
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	$	69,812		$	115,434
Shares issued
At beginning of period		18,981			18,965
At end of period		18,981			18,965
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			15,438

See notes to condensed consolidated financial statements.

6

Bank of Granite Corporation

Condensed Consolidated Statements of Cash Flows

	Three Months
	Ended March 31,
(Unaudited — in thousands)	2009			2008
Increase (decrease) in cash & cash equivalents:
Cash flows from operating activities:
Net income (loss)	$	(4,225	)	$	1,715
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		478			448
Provision for loan losses		3,770			1,411
Stock-based compensation expense		2			4
Investment security premium amortization, net		31			48
Acquisition premium amortization, net		8			14
Deferred income taxes		—			401
Losses (gains) on sales or calls of securities available for sale		17			(59	)
Impairment losses on securities		996			—
Originations of loans held for sale		(81,200	)		(71,196	)
Proceeds from loans held for sale		85,353			63,979
Losses (gains) on loans held for sale		(1,134	)		567
Gains on disposal or sale of equipment		(1	)		—
Losses on disposal or sale of premises		6			—
Losses on disposal or sale of other real estate		53			20
Increase in cash surrender value of bank owned life insurance		(289	)		(287	)
Decrease (increase) in other assets		(277	)		15
Decrease (increase) in accrued interest receivable		(399	)		1,376
Decrease in accrued interest payable		(70	)		(305	)
Increase (decrease) in other liabilities		(5,442	)		5,629
Net cash provided by (used in) operating activities		(2,323	)		3,780
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of securities available for sale		10,000			49,200
Proceeds from maturities, calls and paydowns of securities held to maturity		2,530			2,409
Proceeds from sales of securities available for sale		—			2,903
Purchase of securities available for sale		(20,016	)		(6,493	)
Net decrease (increase) in loans		21,742			(6,369	)
Investment in bank owned life insurance		1			—
Capital expenditures		(21	)		(215	)
Proceeds from sale of fixed assets		1			—
Proceeds from sale of other real estate		223			161
Net cash provided by investing activities		14,460			41,596
Cash flows from financing activities:
Net increase in demand, NOW, money market and savings deposits		3,617			10,114
Net increase in time deposits		14,154			29,614
Net decrease in overnight and short-term borrowings		(7,437	)		(23,737	)
Net increase (decrease) in long-term borrowings		16,999			(5,000	)
Dividends paid		—			(2,007	)
Net cash provided by financing activities		27,333			8,984
Net increase in cash equivalents		39,470			54,360
Cash and cash equivalents at beginning of period		48,983			33,324
Cash and cash equivalents at end of period	$	88,453		$	87,684

See notes to condensed consolidated financial statements.

7

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements

March 31, 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 March 31, 2009, and the condensed consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the three-month periods ended March 31, 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 period ended March 31, 2008 have been reclassified to conform to the presentation for the period ended March 31, 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 three months ended March 31, 2009, except as described in Note 7 below.

2. EARNINGS PER SHARE

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

	Three Months
	Ended March 31,
(Shares in thousands)	2009		2008
Weighted average shares outstanding		15,454		15,438
Potentially dilutive effect of stock options		—		19
Weighted average shares outstanding, including potentially dilutive effect of stock options		15,454		15,457

8

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

For the three-month periods ended March 31, 2009 and 2008, 91 thousand shares and 89 thousand shares, respectively, attributable to outstanding stock options, were excluded from the calculation of diluted earnings per common share because their inclusion would have been anti-dilutive.

3. 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. Management does not anticipate any significant losses will result from these transactions. The unfunded portion of loan commitments and standby letters of credit as of March 31, 2009 and December 31, 2008 were as follows:

	March 31,		December 31,
	2009		2008
(In thousands)	(Unaudited)		(Note 1)
Financial instruments whose contract amounts represent credit risk
Unfunded commitments to extend credit	$	149,705	$	162,958
Standby letters of credit		5,340		4,998

The Company’s risk management policy provides for the use of derivatives and financial instruments in managing certain risks. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes.

During the first quarter of 2009 Granite Mortgage changed its business model from lender/seller to a broker operation and was in the process of liquidating its pipeline loans and completing the closing of the remaining related derivative positions as of March 31, 2009. The amounts related to the derivative positions were not material to the consolidated financial statements.

Forward commitments and options to sell mortgage-backed securities as of March 31, 2009 and December 31, 2008 were $5.2 million and $14.7 million, respectively.

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.

9

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

4. 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 pension cost for this plan for the three months ended March 31, 2009 are as follows:

	Three Months
	Ended March 31,
(In thousands)	2009
Service cost	$	159
Interest cost		121
Amortization of net obligation at transition		41
Total net periodic pension cost	$	321

Amounts are not set forth for the first quarter of 2008 as the plan was revised in the fourth quarter of 2008 and comparable amounts were not recorded. The total pension expense for the first quarter of 2008 was $189 thousand.

5. REGULATORY RESTRICTIONS

At March 31, 2009, the Company was “well” capitalized based on regulatory minimum capital requirements except for the total risk-based capital ratio, which was “adequately” capitalized on a consolidated basis and slightly below the “adequately” capitalized level of capital for Bank-only. However, in May 2009 the Company invested $1.5 million in additional capital into the Bank, primarily in the form of performing loans distributed from Granite Mortgage, which increased the Bank-only total risk-based capital ratio to an “adequately” capitalized level.

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, 2009:

							Minimum Regulatory
	Actual						Requirement
							Adequately			Well
	Consolidated			Bank			Capitalized			Capitalized
Leverage capital ratios		6.07	%		5.67	%		4.00	%		5.00	%
Risk-based capital ratios:
Tier 1 capital		7.23	%		6.65	%		4.00	%		6.00	%
Total capital		8.50	%		7.92	%		8.00	%		10.00	%

10

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
     (Unaudited)

One impact of not meeting the regulatory requirements for being classified as “well” capitalized is that the Company’s and the Bank’s abilities to acquire needed funding through sources such as brokered deposits, Federal Home Loan Bank advances and unsecured federal funds credit lines could be limited or on less favorable terms. Furthermore, bank holding companies and banks with capital ratios below “well” capitalized levels are subject to greater regulatory monitoring and scrutiny. In addition, the Company’s reputation in its deposit service areas could be damaged, which could further tighten its liquidity.

On September 1, 2008, in connection with the Bank’s most recent examination by the FDIC, the Bank’s Board of Directors entered into a Memorandum of Understanding (“MOU”) with the FDIC addressing matters raised in the examination such as management of capital, liquidity, risk, and asset quality. The MOU requires, among other things, that the Bank report regularly to its regulators about its operations, financial condition, and efforts to mitigate risk. The MOU also requires that the Bank remain “well” capitalized, using the definitions described above, and to report to the regulators if it falls below the “well” capitalized level, and further to take steps to return to “well” capitalized status within 120 days. Certain components of the operating loss for 2008 and the first quarter of 2009 caused the Bank’s total capital ratio to decline considerably below the “well” capitalized level. The operating loss was caused principally by continued high levels of loan losses; the significant decline in the net interest income resulting from Federal Reserve rate reductions; and the impact of providing a valuation allowance against the Bank’s deferred tax assets in the fourth quarter of 2008. The Bank has communicated with its regulators about the failure to meet the “well” capitalized level as of December 31, 2008 and March 31, 2009 and, for the total risk-based capital ratio, the “adequately” capitalized level as of March 31, 2009, and about plans to increase its capital levels back to the well capitalized level. Management believes it has developed a plan to achieve these capital levels, and the plan is being implemented. There is no assurance, however, that the well capitalized level can be achieved by the Bank, or that if it is achieved it can be maintained if operating results do not improve. A failure to maintain compliance with the terms of the MOU with the Bank’s regulators, including the failure to return to and maintain well capitalized status, could result in further adverse regulatory actions.

In response to the capital, liquidity and operations issues, the Company has intensified capital restoration initiatives, which previously included dividend suspension and reduced lending activities and now include the consideration of asset reduction through branch disposals or bulk loan sales. Additional activities to restructure the Company’s balance sheet to generate more liquid assets and change the capital risk rating profile by changing the investment portfolio composition are ongoing, and the Company’s current business plan is designed to be responsive to the issue.

Operationally, the Company continues to evaluate its overhead expenses and rationalize expenses to the expected reduced level of activity. At the same time, the Company’s efforts to resolve the high level of non-performing assets result in increased expense. Together with the continued economic decline, the Company continues to face challenges to improving core-operating results.

11

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

6. 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

The Mortgage Banking segment brokers mortgage loan products for other financial institutions. Mortgage loan products include fixed-rate and adjustable-rate government and conventional loans for the purpose of constructing, purchasing or refinancing owner-occupied properties. The Mortgage Banking segment earns fee income from its mortgage activities. During the first quarter of 2009 Granite Mortgage changed its business model from a lender/seller to that of a broker operation.

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.

12

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

The following table presents selected financial information for reportable business segments as of and for the three-month periods ended March 31, 2009 and 2008.

	Three Months
	Ended March 31,
(In thousands)	2009			2008
COMMUNITY BANKING
Net interest income	$	6,459		$	9,543
Provision for loan losses		3,746			1,399
Noninterest income		1,345			2,235
Noninterest expense		7,259			7,847
Income (loss) before income taxes (benefits)		(3,201	)		2,532
Net income (loss)		(3,201	)		1,821
Identifiable segment assets		1,136,774			1,188,946
MORTGAGE BANKING
Net interest income	$	1,062		$	842
Provision for loan losses		24			12
Noninterest income		624			1,043
Noninterest expense		2,177			1,685
Income (loss) before income taxes		(515	)		188
Net income (loss)		(515	)		113
Identifiable segment assets		25,058			42,083
OTHER
Net interest income (expense)	$	1		$	(92	)
Noninterest income (securities losses)		(484	)		—
Noninterest expense		26			127
Loss before income taxes (benefits)		(509	)		(219	)
Net loss		(509	)		(219	)
Identifiable segment assets		2,537			4,595
TOTAL SEGMENTS
Net interest income	$	7,522		$	10,293
Provision for loan losses		3,770			1,411
Noninterest income		1,485			3,278
Noninterest expense		9,462			9,659
Income (loss) before income taxes (benefits)		(4,225	)		2,501
Net income (loss)		(4,225	)		1,715
Identifiable segment assets		1,164,369			1,235,624

13

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

7. NEW ACCOUNTING STANDARDS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations” (“SFAS No. 141(R)”), which 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 SFAS No.157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 141(R) is effective prospectively for fiscal years beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company adopted SFAS No. 141(R) 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 SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”), which amends ARB No. 51 to establish accounting and reporting standards for a noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 also amends certain of ARB No. 51’s consolidation procedures for consistency with the requirements of SFAS No. 141 (revised 2007), “Business Combinations”. SFAS No. 160 is 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 SFAS No. 160 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 SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”), 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. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company adopted SFAS No. 161 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 FASB Staff Position (“FSP”) FAS 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods. This FSP shall be effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company is currently evaluating the impact on its financial statements of adopting FSP FAS 107-1 and APB 28-1.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments”, to amend the other-than-temporary impairment guidance in U.S. GAAP 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 FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. The FSP shall be 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 is currently evaluating the impact on its financial statements of adopting FSP FAS 115-2 and FAS 124-2.

14

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

Also in April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, to provide additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements”, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. It shall be effective for interim and annual reporting periods ending after June 15, 2009, and shall be applied prospectively. Early adoption is permitted for periods ending after March 15, 2009. The Company is currently evaluating the impact on its financial statements of adopting FSP FAS 157-4.

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 release of Final FSP FAS 115-2 and FAS 124-2. 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 is currently considering this interpretative guidance for the disclosures in its interim financial statements.

8. FAIR VALUE MEASUREMENTS — SFAS NO. 157

Investment Securities Available for Sale

The Company’s securities portfolio available for sale is generally of high credit quality, and most of the fair value measurements for the first quarter of 2009 were estimated using matrices that were determined to be Level 2 measurements, Significant Other Observable Inputs. 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 table reflects investment securities available for sale measured at fair value on a recurring basis at March 31, 2009 and December 31, 2008:

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	March 31, 2009		(Level 1)		(Level 2)		(Level 3)
Investment securities available for sale	$	67,300	$	23,726	$	43,574	$	—
	Dec 31, 2008		(Level 1)		(Level 2)		(Level 3)
Investment securities available for sale	$	58,576	$	1,643	$	56,933	$	—

15

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

Mortgage Loans Held for Sale

Granite Mortgage’s mortgage loans held for sale are carried at the lower of cost or fair value. Under either accounting basis, the value of these loans is susceptible to declines in market value. Recent market events have affected the value and liquidity of mortgage loans, to varying degrees depending on the nature and credit quality of the mortgage loans. The loans held for sale were valued based on observable market data of similar assets, where available, as well as current performance data of the underlying loans. In instances when significant valuation assumptions were not readily observable in the market, instruments were valued based on the best available data in order to approximate fair value. Management limits the size and the Company’s overall exposure to these assets, as well as actively monitoring the estimated market and economic value of these assets and determining the most advantageous approach to managing these assets. The fair values for March 31, 2009 and December 31, 2008 were determined to be Level 2 measurements, Significant Other Observable Inputs. Recognized gains and losses were reported as mortgage banking income in noninterest income.

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 March 31, 2009 and December 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS No. 157, 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 or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. At March 31, 2009 and December 31, 2008, all impaired loans were determined to be 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 an observable market price or a current appraised value and is recorded as nonrecurring Level 2. When an appraised value is not available or is not current, or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the other real estate as nonrecurring Level 3. At March 31, 2009, the fair value measurements for other real estate were determined to be Level 3 measurements.

16

Bank of Granite Corporation
Notes to Condensed Consolidated Financial Statements (continued)
March 31, 2009
   (Unaudited)

The following table reflects certain loans and other real estate measured at fair value on a nonrecurring basis at March 31, 2009 and December 31, 2008:

			Fair Value Measurements at
			Reporting Date Using
			Quoted Prices		Significant
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Fair Value at		Identical Assets		Inputs		Inputs
(In thousands)	March 31, 2009		(Level 1)		(Level 2)		(Level 3)
Mortgage loans held for sale	$	13,751	$	—	$	13,751	$	—
Impaired loans (1)		26,735		—		—		26,735
Other real estate owned		17,566		—		—		17,566
Total assets	$	58,052	$	—	$	13,751	$	44,301
	Dec 31, 2008		(Level 1)		(Level 2)		(Level 3)
Mortgage loans held for sale	$	16,770	$	—	$	16,770	$	—
Impaired loans (1)		35,298		—		—		35,298
Total assets	$	52,068	$	—	$	16,770	$	35,298

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

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, 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.

17

Overview

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-month period ended March 31, 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.

Our net loss of $4.2 million for the three-month period ended March 31, 2009, compared to net income of $1.7 million for the same period in 2008, primarily resulted from a decline in net interest income largely attributable to lower loan income, a higher loan loss provision and an other-than-temporary impairment loss on investments in securities available for sale. The decline in loan income was principally due to a combination of lower loan yields on our variable rate loans and higher levels of nonperforming assets. Our net interest margin decreased primarily related to continued rate reductions without comparable decreases in funding costs. We had a slight decrease in other expenses for the first quarter of 2009 compared to 2008. An income tax benefit relating to the net loss for the first quarter of 2009 was not recorded because it is more likely than not that the tax benefit will not be realized.

During the first quarter of 2009 Granite Mortgage changed its business model from lender/seller to a broker operation primarily because of the cost of outside funding. As a result of the change, the mortgage pipeline was liquidating at March 31. Derivative activity associated with pipeline management was also in process of closing existing positions. The liquidating pipeline reduced the related level of warehouse borrowing. At March 31, 2009, Granite Mortgage’s warehouse borrowing was $11.9 million, and this amount was subsequently paid in full in April 2009. Also, as a result of this change, a significant part of Granite Mortgage’s net loss for the three months ended March 31, 2009 was attributable to severance payments and the final settlement of employment contracts.

Financial Highlights for
   the Quarterly Periods

	Three Months
	Ended March 31,
(In thousands except per share amounts)	2009			2008			% change
Earnings
Net interest income	$	7,522		$	10,293			-26.9	%
Provision for loan losses		3,770			1,411			167.2	%
Other income		1,485			3,278			-54.7	%
Other expense		9,462			9,659			-2.0	%
Net income (loss)		(4,225	)		1,715			-346.4	%
Per share
Net income (loss)
- Basic	$	(0.27	)	$	0.11			-345.5	%
- Diluted		(0.27	)		0.11			-345.5	%
Average for period
Assets	$	1,167,664		$	1,214,147			-3.8	%
Loans		938,745			948,732			-1.1	%
Deposits		1,003,380			988,626			1.5	%
Stockholders’ equity		74,432			117,681			-36.8	%
Ratios
Return on average assets		-1.47	%		0.57	%
Return on average equity		-23.02	%		5.86	%
Average equity to average assets		6.37	%		9.69	%
Efficiency ratio (1)		103.21	%		70.16	%

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

18

Critical Accounting Policies

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The critical accounting and reporting policies include our accounting for securities, loans, the allowance for loan losses, and income taxes. In particular, our accounting policies relating to the allowance for loan losses and investment securities involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or consolidated results of operations. Please see the discussions below under the captions “Provisions and Allowance for Loan Losses” and “Investment Securities-Valuation.” See also Note 1 in the “Notes to Consolidated Financial Statements” under Item 8, “Financial Statements & Supplementary Data” in our Annual Report on Form 10-K for the year ended December 31, 2008 on file with the Securities and Exchange Commission for additional information regarding all of our critical and significant accounting policies.

LOANS — Loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances adjusted for any deferred fees or costs. Substantially all loans earn interest on the level yield method based on the daily outstanding balance.

PROVISIONS AND ALLOWANCE FOR LOAN LOSSES — The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to a balance considered adequate to absorb probable losses incurred in the portfolio at the date of the financial statements.

Management’s determination of the adequacy of the allowance for loan loss is based on ongoing quarterly assessments of the collectibility and historical loss experience of the loan portfolio. We also evaluate other factors and trends in the economy related to specific loan groups in the portfolio, trends in delinquencies and results of periodic loan reviews.

The methodology for determining the allowance for loan losses is based on historical loss rates, current credit grades, specific allocation for impaired loans and an unallocated amount. 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 management to be uncollectible. We periodically revise historical loss factors for different segments of the portfolio to be more reflective of current market conditions.

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 SFAS No. 114, “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. Our policy for the recognition of interest income on impaired loans is the same as our interest recognition policy for all non-accrual loans. Accrued interest is reversed to income to the extent it relates to the current year and charged off otherwise.

The evaluations described above are inherently subjective, as they require the use of material estimates. Unanticipated future adverse changes in borrower or economic conditions could result in material adjustments to our allowance for loan losses that could adversely impact our earnings in future periods.

19

INVESTMENT SECURITIES-VALUATION — Securities not classified as either “held to maturity” securities or trading securities, and equity securities not classified as trading securities, are classified as “available for sale securities” and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of consolidated stockholders’ equity. The fair values of these securities are based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Available for sale and held to maturity securities are reviewed quarterly for possible other-than-temporary impairment. The review is inherently subjective as it requires material estimates and judgments, including an analysis of the facts and circumstances of each individual investment such as the length of time the fair value has been below cost, the expectation for that security’s performance, the credit worthiness of the issuer and our intent and ability to hold the security to maturity. Declines in the fair value of the individual securities below their costs that are other-than-temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in consolidated earnings as realized losses.

MORTGAGE LOANS HELD FOR SALE — We originate certain residential mortgage loans with the intent to sell. Mortgage loans held for sale are reported at the lower of cost or market value on an aggregate loan portfolio basis. Gains or losses realized on sales of mortgage loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the carrying value of the loans sold, adjusted for any servicing assets or liabilities related to the loans sold. Gains and losses on sales of mortgage loans are included in other noninterest income. As discussed above, during the first quarter of 2009, Granite Mortgage changed its business model from lender/seller to a broker operation, thereby discontinuing the need for derivative activity associated with mortgage pipeline management.

FAIR VALUE MEASUREMENTS — The Company’s fair value measurements are determined in accordance with SFAS No. 157, “Fair Value Measurements,” which we adopted during the first quarter of 2008 and apply to fair value valuations for investment securities available for sale, mortgage loans held for sale, impaired loans, and other real estate owned.

Changes in Financial Condition
March 31, 2009 Compared With December 31, 2008

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

	March 31,		December 31,
(In thousands)	2009		2008		$ Change			% Change
Total assets	$	1,164,369	$	1,146,955	$	17,414			1.5	%
Earning assets		1,078,217		1,069,941		8,276			0.8	%
Cash and cash equivalents		88,453		48,983		39,470			80.6	%
Investment securities		88,391		82,203		6,188			7.5	%
Gross loans		913,277		948,149		(34,872	)		-3.7	%
Mortgage loans held for sale		13,751		16,770		(3,019	)		-18.0	%
Other assets		36,800		25,299		11,501			45.5	%

The increase in cash and cash equivalents for the period ended March 31, 2009 compared with December 31, 2008 was primarily due to a $44.4 million increase in interest-bearing deposits, partially offset by a $4.4 million decrease in federal funds sold, principally due to efforts by the Bank to increase its liquid assets. Of the $11.5 million increase in other assets as of March 31, 2009 compared to December 31, 2008, $10.7 million relates to the increase in foreclosed properties.

20

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

	March 31,			December 31,
(In thousands)	2009			2008			$ Change			% Change
Real estate — Construction	$	133,677		$	146,167		$	(12,490	)		-8.5	%
Real estate — Mortgage		584,551			593,233			(8,682	)		-1.5	%
Commercial, financial and agricultural		186,829			199,370			(12,541	)		-6.3	%
Consumer		9,490			10,713			(1,223	)		-11.4	%
All other loans		200			258			(58	)		-22.5	%
		914,747			949,741			(34,994	)		-3.7	%
Deferred origination fees, net		(1,470	)		(1,592	)		122			-7.7	%
Total loans	$	913,277		$	948,149		$	(34,872	)		-3.7	%
Mortgage loans held for sale	$	13,751		$	16,770		$	(3,019	)		-18.0	%
The following table reflects the changes in our liabilities and equity as of March 31, 2009 compared with December 31, 2008.
	March 31,			December 31,
(In thousands)	2009			2008			$ Change			% Change
Total liabilities	$	1,094,557		$	1,072,785		$	21,772			2.0	%
Deposits		1,009,593			991,822			17,771			1.8	%
Non-interest-bearing demand deposits		111,970			117,168			(5,198	)		-4.4	%
Interest-bearing demand deposits		365,230			357,552			7,678			2.1	%
NOW accounts		148,927			153,444			(4,517	)		-2.9	%
Money market accounts		216,303			204,108			12,195			6.0	%
Savings deposits		20,811			19,674			1,137			5.8	%
Time deposits		511,582			497,428			14,154			2.8	%
Overnight and short-term borrowings		41,510			48,947			(7,437	)		-15.2	%
Long-term borrowings		31,066			14,075			16,991			120.7	%
Other liabilities		12,388			17,941			(5,553	)		-31.0	%
Total capital		69,812			74,170			(4,358	)		-5.9	%
Retained earnings		73,703			77,928			(4,225	)		-5.4	%
Accumulated other comprehensive loss		(1,212	)		(1,077	)		(135	)		12.5	%

The Company’s loan to deposit ratio was 90.46% as of March 31, 2009 compared to 95.60% as of December 31, 2008, and the Bank’s loan to deposit ratio was 88.65% compared to 93.14% when comparing the same dates.

In addition to deposits, we have sources of funding in the form of overnight and other short-term borrowings, as well as longer-term borrowings. Overnight borrowings are primarily in the form of federal funds purchased and commercial deposit products that sweep balances overnight into securities sold under agreements to repurchase or commercial paper issued by us. From December 31, 2008 to March 31, 2009, short-term borrowings decreased $3.0 million for the Bank, and $3.0 million for Granite Mortgage when comparing the same periods. The Bank’s long-term borrowings from the Federal Home Loan Bank increased $17.0 million during the first quarter of 2009.

Other liabilities of the Bank decreased $2.6 million related to the payout of accrued retirement benefits during the first quarter of 2009.

21

Liquidity, Interest Rate Sensitivity and Other Risks

The objectives of our liquidity management policy include providing adequate funds to meet the cash needs of both depositors and borrowers, as well as providing funds to meet the needs of our ongoing operations. Depositor cash needs, particularly those of commercial depositors, can fluctuate significantly depending on both business and economic cycles, while both retail and commercial deposits can fluctuate significantly based on the yields and returns available from alternative investment opportunities.

Additionally, our liquidity is affected by off-balance sheet commitments to lend in the forms of unfunded commitments to extend credit and standby letters of credit. As of March 31, 2009, such unfunded commitments to extend credit were $149.7 million, and commitments in the form of standby letters of credit totaled $5.3 million.

Neither the Company nor our subsidiaries have historically incurred off-balance sheet obligations through the use of or investment in other off-balance sheet derivative financial instruments or structured finance or special purpose entities. The Bank and Granite Mortgage both had contractual off-balance sheet obligations in the form of noncancelable operating leases as of March 31, 2009, and December 31, 2008, though such obligations and the related lease expenses were not material to our financial condition on such dates or results of operations for the periods then ended.

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 stable portion of the Bank’s liability mix and the result of ongoing consumer and commercial banking relationships. At March 31, 2009, our core deposits, defined as total deposits excluding time deposits of $100 thousand or more, totaled $791.6 million, or 78.4% of our total deposits, compared to $783.8 million, or 79.0%, of our total deposits as of December 31, 2008.

The other principal methods of funding used by the Bank are large denomination certificates of deposit, federal funds purchased, repurchase agreements and other short and intermediate term borrowings. The Bank’s policy is to emphasize core deposit growth rather than growth through purchased or brokered time deposits because core deposits tend to be a more stable source of funding, and purchased or brokered time deposits often have a higher cost of funds. However, the Bank participates in the Certificate of Deposit Account Registry Service (“CDARS”) through which the Bank’s customers may obtain fully-insured time deposits distributed among other participating banks while the Bank receives reciprocal deposits from other participating banks. The Bank’s deposits in the CDARS program totaled $45.7 million at March 31, 2009, a decrease of $7.1 million compared to December 31, 2008. Because CDARS program deposits are classified by current regulations as brokered deposits, the Bank’s ability to continue its participation in the CDARS program is based on the Bank’s regulatory capital levels as discussed above. During periods of weak demand for its deposit products, the Bank maintains credit facilities under which it may borrow on a short-term basis. As of March 31, 2009, the Bank had an unsecured line of overnight borrowing capacity with its correspondent bank, which totaled $15.0 million. In addition, the Bank uses its capacity to pledge assets to serve as collateral to borrow on a secured basis. As of March 31, 2009, the Bank had investment securities pledged to secure an overnight funding line of approximately $8.8 million with the Federal Reserve Bank. The Bank also has significant capacity to pledge its loans secured by first liens on residential and commercial real estate as collateral for additional borrowings from the Federal Home Loan Bank (“FHLB”) during periods when loan demand exceeds deposit growth or when the interest rates on such borrowings compare favorably to interest rates on deposit products. As of March 31, 2009, the Bank had a line of credit with the FHLB totaling approximately $88.0 million collateralized by its pledged residential and commercial real estate loans with $41.0 million outstanding, of which $10.0 million was in overnight and short-term borrowings and $31.0 million was in long-term borrowings, leaving approximately $47.0 million in remaining capacity to borrow.

22

Prior to March 31, 2009, Granite Mortgage temporarily funded its mortgages and construction loans, from the time of origination until the time of sale, through the use of a line of credit from one of our correspondent financial institutions. As of March 31, 2009 and December 31, 2008, this line of credit was $15.0 million and $30.0 million, respectively. As of March 31, 2009, the line was secured by approximately $11.9 million of the mortgage loans closed by Granite Mortgage. This line of credit was terminated and paid in full in April 2009. Granite Mortgage also obtained a line of credit with the Bank during the first quarter of 2009 for $9.0 million, of which $5.0 million was outstanding as of March 31, 2009, and secured by approximately $6.3 million of mortgage loans closed by Granite Mortgage.

We also have a $2.5 million unsecured line of credit from one of our correspondent banks. The line matures June 30, 2009, bearing an interest rate of one-month LIBOR plus 120 basis points, with interest payable quarterly. As of March 31, 2009, we owed $2.5 million under this line of credit. The Company was not in compliance with all of the financial covenants under this line of credit as of March 31, 2009, but has received waivers from the lender for such noncompliance.

The majority of our deposits are rate-sensitive instruments with rates that tend to fluctuate with market rates. These deposits, coupled with our short-term certificates of deposit, have increased the opportunities for deposit repricing. We place great significance on monitoring and managing our asset/liability position. Our policy for managing our interest margin (or net yield on interest-earning assets) is to maximize net interest income while maintaining a stable deposit base. Our deposit base is generally not subject to the level of volatility experienced in national financial markets in recent years; however, we do realize the importance of minimizing such volatility while at the same time maintaining and improving earnings. A common method used to manage interest rate sensitivity is to measure the difference or gap between the volume of interest-earning assets and interest-bearing liabilities repricing over a specific time period. However, this method addresses only the magnitude of funding mismatches and does not address the magnitude or relative timing of rate changes. Therefore, on a regular basis, 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.

Interest-bearing liabilities and variable rate loans are generally repriced to current market rates. Because a significant portion of our deposits are variable rate, they generally reprice more rapidly than our rate sensitive assets. During periods of rising rates, this results in decreased net interest income, assuming similar growth rates and stable product mixes in loans and deposits. The opposite occurs during periods of declining rates. While our analysis indicates that our balance sheet is liability-sensitive, the market pricing for recent periods creates a relatively inelastic environment for liabilities, thus resulting in asset-sensitivity.

We use interest sensitivity analysis to measure the sensitivity of projected earnings to changes in interest rates. The sensitivity analysis takes into account the current contractual agreements that we have on deposits, borrowings, loans, investments, and any commitments to enter into those transactions. We monitor interest sensitivity by means of computer models that incorporate the current volumes, average rates, scheduled maturities and payments, and repricing opportunities of asset and liability portfolios. Using this information, our model estimates earnings based on projected portfolio balances under multiple interest rate scenarios. In an effort to estimate the effects of pure interest-rate risk, we assume no growth in our balance sheet, because doing otherwise could have the effect of distorting the balance sheet’s sensitivity to changing interest rates. 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%, as discussed below. 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 we would undertake in response to sudden interest rate changes, we believe that these methods provide a better indication of the sensitivity of earnings to changes in interest rates than other analyses.

23

Income simulation through modeling is one tool that we use in the asset/liability management process. We also consider a number of other factors in determining our asset/liability and interest rate sensitivity management strategies. We strive to determine the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies, and any enacted or prospective regulatory changes. Our current and prospective liquidity position, current balance sheet volumes and projected growth, and accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide the information necessary to analyze interest sensitivity and to aid in the development of strategies to manage our balance sheet.

As discussed above, we simulate net interest income under varying interest rate scenarios and the theoretical impact of immediate and sustained rate changes referred to as “rate shocks.” “Rate shocks” measure the estimated theoretical impact on our tax equivalent net interest income and market value of equity from hypothetical immediate changes of plus and minus 1%, 2%, 3% and 4% as compared to the estimated theoretical impact of rates remaining unchanged. The prospective effects of these hypothetical interest rate changes are based upon numerous assumptions including relative and estimated levels of key interest rates. “Rate shocks” modeling is of limited usefulness because it does not take into account the pricing strategies we would undertake in response to the depicted sudden and sustained rate changes.

The following table summarizes the estimated theoretical impact on our tax equivalent net interest income from a gradual interest rate increase and decrease of 3%, prorated over a twelve-month period, and from hypothetical immediate and sustained interest rate increases and decreases of 1%, 2%, 3% and 4%, as compared to the estimated theoretical impact of rates remaining unchanged.

			Estimated Resulting Theoretical Tax Equivalent Net Interest Income
			For the Twelve-months Following
			March 31, 2009					December 31, 2008
(Dollars in thousands)			Amount		% Change			Amount		% Change
3% interest rate changes prorated over a twelve-month period
	+3	%	$	37,564		0.5	%	$	32,072		0.9	%
	0	%		37,387		0.0	%		31,794		0.0	%
	-3	%		39,534		5.7	%*		34,487		8.5	%*
Hypothetical immediate and sustained rate changes of 1%, 2%, 3% and 4%
	+4	%	$	37,649		3.0	%	$	31,952		3.4	%
	+3	%		37,437		2.4	%		31,694		2.6	%
	+2	%		37,126		1.5	%		31,354		1.5	%
	+1	%		36,783		0.6	%		31,040		0.5	%
	0	%		36,564		0.0	%		30,896		0.0	%
	-1	%		36,165		-1.1	%		29,920		-3.2	%
	-2	%		n/m		n/m			n/m		n/m
	-3	%		n/m		n/m			n/m		n/m
	-4	%		n/m		n/m			n/m		n/m

* The Federal Reserve’s overnight federal funds rate target was 0% to 0.25% at March 31, 2009 and at December 31, 2008. As the overnight federal funds target rate approaches 0%, there is significantly greater compression in the spreads between yields earned on assets and rates paid on interest-bearing liabilities which effectively reduces net interest income.

24

Results of Operations
For the Three Month Period Ended March 31, 2009
Compared With the Same Period in 2008

During the three-month period ended March 31, 2009, we incurred a net loss of $4.2 million compared to net income of $1.7 million for the same period of 2008. The reduction in earnings for the three-month period of 2009 compared to 2008 was primarily due to lower net interest income, higher loan loss provision, and other-than-temporary impairment losses on investment securities available for sale.

Net Interest Income

The following table reflects the change in our net interest income for the three-month periods ended March 31, 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 March 31,
(In thousands)	2009			2008			$ Change			% Change
Interest income	$	13,993		$	18,904		$	(4,911	)		-26.0	%
Interest expense		6,471			8,611			(2,140	)		-24.9	%
Net interest income		7,522			10,293			(2,771	)		-26.9	%
Net interest margin		2.85	%		3.80	%
Yield on loans		5.55	%		7.24	%
Average prime rate		3.25	%		6.21	%
Cost of interest-bearing deposits		2.72	%		3.63	%
Cost of interest-bearing liabilities		2.73	%		3.66	%
Interest and fees from loans	$	13,127		$	17,408		$	(4,281	)		-24.6	%
Average loans
Bank		933,539			931,092			2,447			0.3	%
Granite Mortgage		30,846			35,564			(4,718	)		-13.3	%
Consolidated		958,969			966,656			(7,687	)		-0.8	%
Average loans not earning interest included in consolidated above		46,941			38,355			8,586			22.4	%
Interest on securities and overnight investments		866			1,496			(630	)		-42.1	%
Average securities and overnight investments		134,768			143,432			(8,664	)		-6.0	%
Average earning assets		1,093,737			1,110,088			(16,351	)		-1.5	%
Interest on interest-bearing deposits		5,962			7,675			(1,713	)		-22.3	%
Average interest-bearing deposits		890,276			851,211			39,065			4.6	%
Average money market deposits		210,528			252,510			(41,982	)		-16.6	%
Average time deposits		511,472			450,866			60,606			13.4	%
Interest on overnight and short-term borrowings		314			724			(410	)		-56.6	%
Average overnight and short-term borrowings
Bank		11,356			26,455			(15,099	)		-57.1	%
Granite Mortgage		23,165			28,347			(5,182	)		-18.3	%
Consolidated		45,972			80,041			(34,069	)		-42.6	%
Interest on long-term borrowings		195			212			(17	)		-8.0	%
Average long-term borrowings
Bank		26,194			12,247			13,947			113.9	%
Consolidated		26,194			14,747			11,447			77.6	%

25

We experienced growth in our average interest-bearing deposits during the first quarter of 2009; however, our average loans decreased compared to the first quarter of 2008, and our net interest margin declined 95 basis points, primarily due to the lower loan income without comparable decreases in funding costs. We had lower yields on our variable rate loans, and our net interest margin was further compressed from the continued higher levels of nonaccruing loans during the first quarter of 2009 compared to 2008. In addition, our net interest margin decreased due to the lower prime interest rate in the first quarter of 2009 compared to 2008, which resulted from rate reductions by the Federal Reserve Bank, which was partially offset by a 93 basis point decrease in our funding costs.

Mortgage originations increased during the first quarter of 2009, primarily due to lower effective borrowing costs for mortgages. The levels of mortgage origination and refinancing activities are very sensitive to changes in interest rates in that higher mortgage interest rates generally have the effect of reducing both mortgage originations and refinancings. Periods of declining rates typically result in higher mortgage originations and refinancings, at least temporarily, while sustained low mortgage interest rates eventually have the effect of reducing refinancings as the demand for such refinancings becomes satisfied.

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. We have not historically relied upon “out-of-market” or “brokered” deposits as a significant source of funding.

Our overnight borrowings are in the form of commercial paper related to the commercial deposit sweep arrangements of the Bank. Other short-term borrowings were the principal source of funding for Granite Mortgage.

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. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of seven risk grades, each grade indicating a different level of loss reserves. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Before making any changes in these risk grades, management considers assessments as determined by a third party risk assessment group (as described below), regulatory examiners and 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.

26

The Bank engages an independent third party risk assessment group to review the underwriting, documentation, risk grading analyses and other loan administration issues. The third party’s evaluation and report is shared with management, the Company’s Audit Committee and ultimately, our Board of Directors. 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.

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 SFAS No. 114, “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. Commercial loans are assigned a loan grade and the loss percentages assigned for each loan grade are determined based on periodic evaluation of actual loss experience over a period of time. 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.

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.

27

During the three-month period ended March 31, 2009, the Bank continued to resolve problem loans through charge-offs, write-downs, and, in some cases, disposition of underlying collateral and restructure. The increase in nonperforming loans in the period is indicative of the general economic weakness and instability in the mortgage credit and housing markets.

Management evaluated the period activity and the results of our allowance for loan loss estimation process and determined that the $3.8 million provision and resultant allowance for loan loss of $26.5 million was reasonable to absorb the probable losses identified in the portfolio at March 31, 2009. The allowance to gross outstanding loans was 2.90% at March 31, 2009, 2.62% at December 31, 2008, and 1.63% at March 31, 2008.

General economic trends greatly affect loan losses, and no assurances can be made that further charges to the loan loss allowance will not be significant in relation to the amount provided during a particular period or that further evaluation of the loan portfolio based on conditions then prevailing may not require sizable additions to the allowance, thus necessitating similarly sizable charges to operations.

The following table and subsequent discussion present an analysis of changes in the allowance for loan losses for the first quarters of 2009 and 2008, respectively.

	Three Months
	Ended March 31,
(In thousands)	2009			2008
Allowance for loan losses, beginning of period	$	24,806		$	17,673
Net charge-offs:
Loans charged off:
Real estate		1,493			1,153
Commercial, financial and agricultural		1,326			3,322
Credit cards and related plans		19			2
Installment loans to individuals		20			73
Demand deposit overdraft program		47			53
Total charge-offs		2,905			4,603
Recoveries of loans previously charged off:
Real estate		130			139
Commercial, financial and agricultural		636			795
Credit cards and related plans		3			—
Installment loans to individuals		17			14
Demand deposit overdraft program		28			30
Total recoveries		814			978
Net charge-offs		2,091			3,625
Loss provisions charged to operations		3,770			1,411
Allowance for loan losses, end of period	$	26,485		$	15,459
Ratio of annualized net charge-offs during the period to average loans during the period		0.90	%		1.54	%
Allowance coverage of annualized net charge-offs		312.32	%		106.03	%
Allowance as a percentage of loans		2.90	%		1.63	%

28

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

	March 31,			December 31,
(In thousands)	2009			2008
Nonperforming assets:
Nonaccrual loans	$	37,881		$	50,591
Restructured loans		5,409			—
Loans past due 90 days or more and still accruing interest		434			114
Total nonperforming loans		43,724			50,705
Foreclosed properties		17,567			6,805
Total nonperforming assets	$	61,291		$	57,510
Nonperforming loans to total loans		4.79	%		5.35	%
Allowance coverage of nonperforming loans		60.57	%		48.92	%
Nonperforming assets to total assets		5.26	%		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 first quarters of 2009 and 2008 that would have been recorded was approximately $535 thousand and $482 thousand, respectively. The interest charged-off on such loans, prior to being placed on nonaccrual status, was approximately $95 thousand and $256 thousand, for the first quarters of 2009 and 2008, respectively.

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.

All of our investment in impaired loans, $34.0 million at March 31, 2009 is included in nonaccruing loans in the table above, and the related loan loss allowance was $7.2 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 $38.3 million for the first three months of 2009, and $25.3 million for the first three months of 2008.

Changes in foreclosed properties for the three months ended March 31, 2009 were as follows:

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

29

Noninterest Income and Expenses

The following table reflects the changes in our noninterest income and expenses for the three-month periods ended March 31, 2009 and 2008.

	Three Months
	Ended March 31,
(In thousands)	2009			2008			$ Change			% Change
Total noninterest income
Bank	$	1,345		$	2,235		$	(890	)		-39.8	%
Granite Mortgage		624			1,043			(419	)		-40.2	%
Consolidated		1,485			3,278			(1,793	)		-54.7	%
Fees on deposit accounts		1,232			1,386			(154	)		-11.1	%
Other service fees and commissions		70			169			(99	)		-58.6	%
Annuity commissions		47			51			(4	)		-7.8	%
Mortgage banking income		624			1,043			(419	)		-40.2	%
Mortgage loan originations		81,200			71,196			10,004			14.1	%
Securities gains/losses		(1,013	)		59			(1,072	)		0.0	%
Other noninterest income		572			621			(49	)		-7.9	%
Total noninterest expenses
Bank		7,259			7,847			(588	)		-7.5	%
Granite Mortgage		2,177			1,685			492			29.2	%
Consolidated		9,462			9,659			(197	)		-2.0	%
Personnel expenses
Bank		4,039			4,884			(845	)		-17.3	%
Granite Mortgage		1,727			1,153			574			49.8	%
Consolidated		5,768			6,040			(272	)		-4.5	%
Salaries and wages
Bank		3,177			3,514			(337	)		-9.6	%
Granite Mortgage		1,611			1,052			559			53.1	%
Consolidated		4,788			4,566			222			4.9	%
Employee benefits
Bank		862			1,370			(508	)		-37.1	%
Granite Mortgage		116			101			15			14.9	%
Consolidated		980			1,474			(494	)		-33.5	%
Noninterest expenses other than for personnel
Bank		3,220			2,963			257			8.7	%
Granite Mortgage		450			532			(82	)		-15.4	%
Consolidated		3,694			3,619			75			2.1	%
Occupancy expense, net
Bank		420			508			(88	)		-17.3	%
Granite Mortgage		119			122			(3	)		-2.5	%
Consolidated		539			630			(91	)		-14.4	%
Equipment expense
Bank		542			527			15			2.8	%
Granite Mortgage		75			89			(14	)		-15.7	%
Consolidated		617			616			1			0.2	%
Other noninterest expenses
Bank		2,258			1,928			330			17.1	%
Granite Mortgage		256			321			(65	)		-20.2	%
Consolidated		2,538			2,373			165			7.0	%
Income taxes		—			786			(786	)		n/a
Effective income tax rates		—			31.43	%

30

For the quarter ended March 31, 2009, securities losses increased $1.1 million, of which $1.0 million related to the write-down for other-than-temporary impairment of the Company’s equity securities available for sale.

Granite Mortgage’s compensation expense increased $559 thousand for the first quarter of 2009 due to contract and severance payments related to staff reductions during the quarter. This increase was partially offset by a decrease in the Bank’s compensation expense due to reduced staffing and suspension of performance based incentives. The Bank’s employee benefits decreased $508 thousand for the first quarter of 2009, primarily due to suspension of employer’s profit-sharing contribution.

For the first quarter of 2009, the Bank’s other noninterest expenses increased $330 thousand, primarily due to an increase of $442 thousand in FDIC deposit insurance premiums and $146 thousand in collection expense, partially offset by a $284 thousand decrease in outside services.

An income tax benefit relating to the net loss for the first quarter of 2009 was not recorded because it is more likely than not that the tax benefit will not be realized during the current year.

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 3 under “Notes to Consolidated Condensed Financial Statements.”

Contractual Obligations

As of March 31, 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 3 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.”

Item 4. Controls and Procedures

As of March 31, 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.

31

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, 2009.

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	Severance Agreement and Release In Full, dated February 23, 2009, between Granite Mortgage, Inc. and Gary L. Lackey filed as Exhibit 10.1 to our Current Report on Form 8-K dated February 23, 2009 is incorporated herein 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 2.
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

32

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 11, 2009	/s/ Kirby A. Tyndall
	Kirby A. Tyndall
	Chief Financial Officer and Principal Accounting Officer

33

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	Severance Agreement and Release In Full between Granite Mortgage, Inc. and Gary L. Lackey	*
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 2.

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