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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the fiscal year ended December 31, 2009
 Commission
file number 0-15956
 Bank of Granite Corporation
  Delaware
    
    56-1550545(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)P.O. Box 128, Granite Falls, N.C.
    
    28630(Address of principal executive offices)
    
    (Zip Code)
 (828) 496-2000
  (Title of each class)
    
    Name of each exchange on which registeredCommon Stock, $1.00 Par Value Per Share
    
    The NASDAQ Stock Market, LLC
  None
 
 o þ
 o þ
 þ o
 o o
 þ
  Large accelerated filer o   
    Accelerated filer o
    Non-accelerated filer o
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ




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##### 



2009Form 10-KPagePART IItem 1  Business
    
    
    3Item 1A     Risk Factors
    
    
    9Item 1B     Unresolved Staff Comments
    
    
    13Item 2   Properties
    
    
    13Item 3   Legal Proceedings
    
    
    14Item 4   Removed and Reserved
    
    
    14PART IIItem 5   Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6   Selected Financial Data
    
    
    15Item 7   Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 7A     Quantitative and Qualitative Disclosures
about Market Risk
    
    
    29Item 8   Financial Statements
    
    
    30Item 9   Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
    
    
    61Item 9A     Controls and Procedures
    
    
    62Item 9B     Other Information
    
    
    63PART IIIItem 10   Directors, Executive Officers and Corporate Governance
    
    
    63Item 11   Executive Compensation
    
    
    63Item 12   Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    15 and 63Item 13   Certain Relationships and Related Transactions and Director
Independence
    
    
    64Item 14   Principal Accountant Fees and Services
    
    
    64PART IVItem 15   Exhibits and Financial Statement Schedules
    
    
    65Signatures
    
    
    67EX-10.3EX-10.6EX-10.10EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  2




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The discussions included in this annual report 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 the Company and its 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 the Companys 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.
 
  
        3




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4




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The Bank Holding Company Act
  State Law
 - -
 Deposit Insurance
   -
 5




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Capital Requirements
        6




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
    
    Assure the on-going participation of the Banks Board of Directors in the affairs
of the Bank;
    
    Have and retain qualified management of the Bank, and assess management and
staffing needs, qualifications and performance;
    
    Present a written capital plan to the FDIC and the Commissioner within 30 days of
the Order by which the Bank would achieve a Tier 1 Leverage Capital Ratio of not less
than 8 percent and Total Risk-Based Capital Ratio of not less than 12 percent during the
life of the Order;
    
    Formulate and implement a plan to reduce the Banks risk exposure in assets
classified Substandard or Doubtful in the FDICs most recent report of examination by
20 percent in 180 days; 40 percent in 360 days; 65 percent in 540 days and by 75 percent
in 720 days;
    
    Analyze and reduce credit concentrations in the Banks loan portfolio;
    
    Within 60 days, ensure full implementation of effective lending and collection
policies;
    
    Cease to extend additional credit to any borrower who has a loan or extension of
credit with the Bank that is classified as Loss or Doubtful;
    
    Within 45 days, adopt and implement a plan regarding the Banks liquidity,
contingent funding and asset liability management, and review and revise the plan on a
quarterly basis;
    
    Not pay cash dividends without the prior written consent of the FDIC and the
Commissioner;
    
    Neither renew, roll-over nor increase the amount of brokered deposits above
the amount outstanding at the date of the Order without obtaining a waiver from the
FDIC.
   Federal Deposit Insurance Corporation Improvement Act of 1991
  
    
    Publicly available annual financial condition and management reports
for certain financial institutions, including audits by independent
accountants,
    
    The establishment of uniform accounting standards by federal banking agencies,
    
    The establishment of a prompt corrective action system of regulatory
supervision and intervention, based on capitalization levels, with greater
scrutiny and restrictions placed on depository institutions with lower levels
of capital,
    
    Additional grounds for the appointment of a conservator or receiver, and
    
    Restrictions or prohibitions on accepting brokered deposits, except for
institutions which significantly exceed minimum capital requirements.
 7




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Miscellaneous
      8




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There is substantial doubt about our ability to continue as a going concern.
  9




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Failure to comply with regulatory orders is likely to result in adverse actions and restrictions.
  Continued losses will further erode our capital levels.
  Our business has been and may be adversely affected by conditions in the financial markets and
economic conditions generally.
    Economic difficulties could impair the ability of our customers, both individuals and
businesses, to repay their loans.
 10




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Changes in interest rates could cause our earnings to decline.
  Strong competition within our market areas may limit our growth and profitability. Larger banks
and numerous other financial institutions with greater resources may be able to compete more
effectively than we can.
  If significant increases are required to our allowance for loan losses, our earnings would
decrease.
   We may be required to raise additional capital in the future, but that capital may not be
available or may not be available on terms acceptable to us when it is needed.
  11




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We operate in a highly regulated environment and may be adversely affected by changes in laws
and regulations.
  The FDIC Deposit Insurance assessments that we are required to pay will increase, possibly
materially, in the future, which would have an adverse effect on our earnings.
  If investment securities we own suffer a decline in value that we determine to be other than
temporary, we may be required to record a significant charge to earnings.
  Changes in accounting may affect our reported earnings and operating income.
  A concentration of real estate development and commercial real estate loans in our portfolio could result in additional
increases in our allowance for loan losses, and corresponding decreases in our earnings, if the
general economy or real estate markets continue to experience a downward trend.
  Losing key personnel could negatively affect us.
  12




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Further decline in market value of Company stock could trigger delisting on the stock exchange.
  
   
    ApproximateFacility Size
    
    Lot Size
    
    OwnedLocation
    
    Principal Use
    
    (square feet)
    
    (acres)
    
    or LeasedGranite Falls, North Carolina23 North Main Street
    
    Home office
    
    
    8,735
    
    
    
    1.2
    
    
    ownedStorage building
    
    
    735
    
    
    
    0.5
    
    
    owned56 North Main Street
    
    Operations center
    
    
    11,769
    
    
    
    1.1
    
    
    owned2630 Connelly 
Springs Road
(Baton)
    

Banking office in
Ingles 
     Supermarket
    
    
    430
    
    
    
    none
    
    
    leasedBoone, North Carolina230 Wilson Drive
    
    Banking office
    
    
    5,705
    
    
    
    none
    

    
    leasedCharlotte, North Carolina301 South McDowell Street
    
    Banking office
    
    
    6,096
    
    
    
    none
    

    
    leased3920 Sharon Road 
(SouthPark)
    
    Banking office
    
    
    1,955
    
    
    
    none
    

    
    leasedConover, North Carolina1109 Conover Blvd, East
    
    Banking office
    
    
    4,421
    
    
    
    1.4
    
    
    ownedCornelius, North Carolina18825 West Catawba Avenue
    
    Banking office
    
    
    3,409
    
    
    none
    
    leased
 13




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ApproximateFacility Size
    
    Lot Size
    
    OwnedLocation
    
    Principal Use
    
    (square feet)
    
    (acres)
    
    or LeasedHickory, North Carolina25 3rd Street NW
    
    Banking office
    
    
    9,515
    
    
    
    0.5
    
    
    owned315 1st Avenue NW

(Bank of Granite Plaza)
    
    Support
offices
    
    
    15,092
    
    
    
    0.5
    
    
    owned2220 12th Avenue NE

(Springs Road)
    
    Banking office
    
    
    3,612
    
    
    
    1.6
    
    
    owned281 14th Avenue NE

(Viewmont)
    
    Banking office
    
    
    4,200
    
    
    
    2.0
    
    
    owned2900 Highway 127 South

(Mountain View)
    
    Banking office
    
    
    2,480
    
    
    
    1.8
    
    
    ownedHudson, North Carolina537 Main Street
    
    Banking office
    
    
    4,235
    
    
    
    4.1
    
    
    owned707 College Avenue SW
    
    Banking office
    
    
    7,400
    
    
    
    1.2
    
    
    owned1351 Norwood 

Street SW (Whitnel)
    
    Banking office
    
    
    2,530
    
    
    
    1.0
    
    
    owned701 Wilkesboro 

Boulevard NE (Hibriten)
    
    Banking
office closed in
2009
    
    
    2,480
    
    
    
    2.1
    
    
    ownedMatthews, North Carolina2432 McKee Road
    
    Banking office
    
    
    4,941
    
    
    
    1.5
    
    
    ownedMorganton, North Carolina201 East Meeting Street
    
    Banking office
    
    
    5,400
    
    
    
    0.8
    
    
    ownedNewton, North Carolina311 North Main Avenue
    
    Banking office
    
    
    3,612
    
    
    
    0.9
    
    
    ownedStatesville, North Carolina207 South Center Street
    
    Banking office
    
    
    5,000
    
    
    
    none
    
    
    leasedWilkesboro, North Carolina1305A S. Collegiate Drive
    
    Banking office
    
    
    1,600
    
    
    
    none
    
    
    ownedWinston-Salem, North Carolina791 Jonestown Road, Ste 100
    
    Banking office
    
    
    5,000
    
    
    
    none
    
    
    owned
 
   
  14




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® The Wall
Street Journal®
   Quarterly Common Stock Market Price Ranges and Dividends
 2009
    
    Quarter 1
    
    
    Quarter 2
    
    
    Quarter 3
    
    
    Quarter 4Price RangeHigh
    
    $
    3.61
    
    
    $
    3.50
    
    
    $
    3.12
    
    
    $
    1.04Low
    
    
    1.10
    
    
    
    1.50
    
    
    
    1.02
    
    
    
    0.40Close
    
    
    1.71
    
    
    
    3.01
    
    
    
    1.03
    
    
    
    0.51Dividends*
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
    
    
    
    n/a
 2008
    
    Quarter 1
    
    
    Quarter 2
    
    
    Quarter 3
    
    
    Quarter 4Price RangeHigh
    
    $
    12.99
    
    
    $
    11.85
    
    
    $
    8.58
    
    
    $
    5.00Low
    
    
    9.75
    
    
    
    6.66
    
    
    
    2.29
    
    
    
    2.15Close
    
    
    10.98
    
    
    
    7.11
    
    
    
    2.38
    
    
    
    2.45Dividends*
    
    
    0.13
    
    
    
    0.13
    
    
    
    n/a
    
    
    
    n/a
 
 *
    
    The Company suspended its cash dividend in the third quarter of 2008.  
   15




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16




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Accounting by Creditors for Impairment
of a Loan
    Performance Summary for 2009 and 2008
    17




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2009
    
    2008
    
    $ Change
    
    % Change(Table dollars in thousands except per share amounts)Net loss
    
    $
    (25,620
    )
    
    $
    (36,251
    )
    
    $
    10,631
    
    
    
    -29.3
    %Net loss per share
    
    
    (1.66
    )
    
    
    (2.35
    )
    
    
    0.69
    
    
    
    -29.4
    %Interest income
    
    
    52,646
    
    
    
    66,923
    
    
    
    (14,277
    )
    
    
    -21.3
    %Interest expense
    
    
    21,224
    
    
    
    29,753
    
    
    
    (8,529
    )
    
    
    -28.7
    %Net interest income
    
    
    31,422
    
    
    
    37,170
    
    
    
    (5,748
    )
    
    
    -15.5
    %Interest and fees from loans
    
    
    46,948
    
    
    
    57,953
    
    
    
    (11,005
    )
    
    
    -19.0
    %Average gross loans
    
    
    877,432
    
    
    
    971,560
    
    
    
    (94,128
    )
    
    
    -9.7
    %Provision for loan losses
    
    
    28,733
    
    
    
    30,228
    
    
    
    (1,495
    )
    
    
    -4.9
    %Charge-offs, net of recoveries
    
    
    25,702
    
    
    
    23,095
    
    
    
    2,607
    
    
    
    11.3
    %Nonperforming loans
    
    
    53,140
    
    
    
    50,591
    
    
    
    2,549
    
    
    
    5.0
    %Interest on securities and overnight investments
    
    
    4,032
    
    
    
    4,634
    
    
    
    (602
    )
    
    
    -13.0
    %Total other income
    
    
    8,887
    
    
    
    10,378
    
    
    
    (1,491
    )
    
    
    -14.4
    %Total other expenses
    
    
    42,996
    
    
    
    48,974
    
    
    
    (5,978
    )
    
    
    -12.2
    %Personnel expenses
    
    
    16,010
    
    
    
    21,497
    
    
    
    (5,487
    )
    
    
    -25.5
    %Goodwill impairment
    
    
    
    
    
    
    10,763
    
    
    
    (10,763
    )
    
    
    -100.0
    %Other noninterest expenses
    
    
    26,986
    
    
    
    16,714
    
    
    
    10,272
    
    
    
    61.5
    %Income tax expense (benefit)
    
    
    (5,800
    )
    
    
    4,597
    
    
    
    (10,397
    )
    
    
    -226.2
    %Net interest margin
    
    
    3.11
    %
    
    
    3.48
    %Average prime rate
    
    
    3.25
    %
    
    
    5.09
    %Yield on loans
    
    
    5.54
    %
    
    
    6.41
    %Yield on securities and overnight investments
    
    
    3.03
    %
    
    
    4.51
    %Cost of interest-bearing deposits
    
    
    2.32
    %
    
    
    3.13
    %
    18




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2009
    
    
    2008
    
    
    2007Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestAverage
    
    
    Yield/
    
    
    Income/
    
    
    Average
    
    
    Yield/
    
    
    Income/
    
    
    Average
    
    
    Yield/
    
    
    Income/(Table dollars in thousands)
    
    Balance
    
    
    Cost
    
    
    Expense
    
    
    Balance
    
    
    Cost
    
    
    Expense
    
    
    Balance
    
    
    Cost
    
    
    ExpenseAssetsLoans (1)
    
    $
    877,432
    
    
    
    5.54
    %
    
    $
    48,614
    
    
    $
    971,560
    
    
    
    6.41
    %
    
    $
    62,289
    
    
    $
    949,574
    
    
    
    8.63
    %
    
    $
    81,906Taxable securities
    
    
    126,253
    
    
    
    2.90
    %
    
    
    3,660
    
    
    
    83,166
    
    
    
    3.89
    %
    
    
    3,236
    
    
    
    128,848
    
    
    
    4.44
    %
    
    
    5,726Nontaxable securities (2)
    
    
    8,270
    
    
    
    6.77
    %
    
    
    560
    
    
    
    30,839
    
    
    
    6.66
    %
    
    
    2,054
    
    
    
    36,861
    
    
    
    6.64
    %
    
    
    2,449Federal funds sold
    
    
    5,116
    
    
    
    0.16
    %
    
    
    8
    
    
    
    4,667
    
    
    
    1.35
    %
    
    
    63
    
    
    
    1,748
    
    
    
    5.21
    %
    
    
    91Total interest-earning assets
    
    
    1,017,071
    
    
    
    5.20
    %
    
    
    52,842
    
    
    
    1,090,232
    
    
    
    6.20
    %
    
    
    67,642
    
    
    
    1,117,031
    
    
    
    8.07
    %
    
    
    90,172Cash and due from banks
    
    
    39,091
    
    
    
    
    
    
    
    
    
    
    
    23,919
    
    
    
    
    
    
    
    
    
    
    
    25,779All other assets
    
    
    45,497
    
    
    
    
    
    
    
    
    
    
    
    75,549
    
    
    
    
    
    
    
    
    
    
    
    63,101Total assets
    
    $
    1,101,659
    
    
    
    
    
    
    
    
    
    
    $
    1,189,700
    
    
    
    
    
    
    
    
    
    
    $
    1,205,911Liabilities and
stockholders equityNOW deposits
    
    $
    140,022
    
    
    
    0.96
    %
    
    
    1,348
    
    
    $
    134,919
    
    
    
    1.14
    %
    
    
    1,533
    
    
    $
    122,345
    
    
    
    1.28
    %
    
    
    1,572Money market deposits
    
    
    197,416
    
    
    
    1.51
    %
    
    
    2,981
    
    
    
    233,782
    
    
    
    2.89
    %
    
    
    6,755
    
    
    
    244,361
    
    
    
    4.25
    %
    
    
    10,381Savings deposits
    
    
    20,303
    
    
    
    0.20
    %
    
    
    40
    
    
    
    21,567
    
    
    
    0.24
    %
    
    
    52
    
    
    
    22,677
    
    
    
    0.39
    %
    
    
    89Time deposits of $100 or more
    
    
    209,525
    
    
    
    3.16
    %
    
    
    6,630
    
    
    
    214,208
    
    
    
    4.07
    %
    
    
    8,724
    
    
    
    204,249
    
    
    
    4.91
    %
    
    
    10,036Other time deposits
    
    
    282,971
    
    
    
    3.07
    %
    
    
    8,699
    
    
    
    246,424
    
    
    
    3.89
    %
    
    
    9,580
    
    
    
    229,716
    
    
    
    4.67
    %
    
    
    10,734Interest-bearing deposits
    
    
    850,237
    
    
    
    2.32
    %
    
    
    19,698
    
    
    
    850,900
    
    
    
    3.13
    %
    
    
    26,644
    
    
    
    823,348
    
    
    
    3.99
    %
    
    
    32,812Overnight borrowings
    
    
    11,240
    
    
    
    1.09
    %
    
    
    123
    
    
    
    28,305
    
    
    
    2.48
    %
    
    
    703
    
    
    
    36,357
    
    
    
    3.87
    %
    
    
    1,407Other borrowings
    
    
    45,569
    
    
    
    3.08
    %
    
    
    1,403
    
    
    
    52,857
    
    
    
    4.55
    %
    
    
    2,406
    
    
    
    48,503
    
    
    
    5.42
    %
    
    
    2,629Total interest-bearing liabilities
    
    
    907,046
    
    
    
    2.34
    %
    
    
    21,224
    
    
    
    932,062
    
    
    
    3.19
    %
    
    
    29,753
    
    
    
    908,208
    
    
    
    4.06
    %
    
    
    36,848Noninterest-bearing deposits
    
    
    111,614
    
    
    
    
    
    
    
    
    
    
    
    131,563
    
    
    
    
    
    
    
    
    
    
    
    146,563Other liabilities
    
    
    15,134
    
    
    
    
    
    
    
    
    
    
    
    12,820
    
    
    
    
    
    
    
    
    
    
    
    11,376Stockholders equity
    
    
    67,865
    
    
    
    
    
    
    
    
    
    
    
    113,255
    
    
    
    
    
    
    
    
    
    
    
    139,764Total liabilities
and stockholders equity
    
    $
    1,101,659
    
    
    
    
    
    
    
    
    
    
    $
    1,189,700
    
    
    
    
    
    
    
    
    
    
    $
    1,205,911Net yield on earning assets andnet interest income (2)(3)
    
    
    
    
    
    
    3.11
    %
    
    $
    31,618
    
    
    
    
    
    
    
    3.48
    %
    
    $
    37,889
    
    
    
    
    
    
    
    4.77
    %
    
    $
    53,324Interest rate spread (4)
    
    
    
    
    
    
    2.86
    %
    
    
    
    
    
    
    
    
    
    
    3.01
    %
    
    
    
    
    
    
    
    
    
    
    4.01
    %
 
 (1)
    
    Nonaccrual loans have been included.(2)
    
    Yields and interest income on tax-exempt investments have been adjusted to tax equivalent basis using a 35% tax rate for 2009, 2008 and 2007. The taxable equivalent adjustments
were approximately $196 thousand, $719 thousand and $857 thousand for 2009, 2008 and 2007, respectively.(3)
    
    Net yield on earning assets is computed by dividing net interest earned by
average earning assets.(4)
    
    The interest rate spread is the interest-earning
assets rate less the interest-bearing liabilities rate.  
 2009 compared to 2008
    
    2008 compared to 2007Change
    
    
    
    
    
    ChangeAttributable to
    
    
    
    
    
    Attributable to(Table in thousands)
    
    Volume(1)
    
    Rate(1)
    
    Total
    
    Volume(1)
    
    Rate(1)
    
    TotalLoans
    
    $
    (5,625
    )
    
    $
    (8,050
    )
    
    $
    (13,675
    )
    
    $
    1,653
    
    
    $
    (21,270
    )
    
    $
    (19,617
    )Taxable securities
    
    
    1,463
    
    
    
    (1,039
    )
    
    
    424
    
    
    
    (1,904
    )
    
    
    (586
    )
    
    
    (2,490
    )Nontaxable securities
    
    
    (1,516
    )
    
    
    22
    
    
    
    (1,494
    )
    
    
    (401
    )
    
    
    6
    
    
    
    (395
    )Federal funds sold
    
    
    3
    
    
    
    (58
    )
    
    
    (55
    )
    
    
    96
    
    
    
    (124
    )
    
    
    (28
    )Interest-earning assets
    
    $
    (5,675
    )
    
    $
    (9,125
    )
    
    $
    (14,800
    )
    
    $
    (556
    )
    
    $
    (21,974
    )
    
    $
    (22,530
    )NOW deposits
    
    $
    54
    
    
    $
    (239
    )
    
    $
    (185
    )
    
    $
    152
    
    
    $
    (191
    )
    
    $
    (39
    )Money market deposits
    
    
    (800
    )
    
    
    (2,974
    )
    
    
    (3,774
    )
    
    
    (378
    )
    
    
    (3,248
    )
    
    
    (3,626
    )Savings deposits
    
    
    (3
    )
    
    
    (9
    )
    
    
    (12
    )
    
    
    (4
    )
    
    
    (33
    )
    
    
    (37
    )Time deposits of $100 or more
    
    
    (169
    )
    
    
    (1,925
    )
    
    
    (2,094
    )
    
    
    447
    
    
    
    (1,759
    )
    
    
    (1,312
    )Other time deposits
    
    
    1,272
    
    
    
    (2,153
    )
    
    
    (881
    )
    
    
    715
    
    
    
    (1,869
    )
    
    
    (1,154
    )Interest-bearing deposits
    
    
    354
    
    
    
    (7,300
    )
    
    
    (6,946
    )
    
    
    932
    
    
    
    (7,100
    )
    
    
    (6,168
    )Overnight borrowings
    
    
    (305
    )
    
    
    (275
    )
    
    
    (580
    )
    
    
    (256
    )
    
    
    (448
    )
    
    
    (704
    )Other borrowings
    
    
    (278
    )
    
    
    (725
    )
    
    
    (1,003
    )
    
    
    217
    
    
    
    (440
    )
    
    
    (223
    )Interest-bearing liabilities
    
    $
    (229
    )
    
    $
    (8,300
    )
    
    $
    (8,529
    )
    
    $
    893
    
    
    $
    (7,988
    )
    
    $
    (7,095
    )
 
 (1)
    
    The rate/volume variance for each category has been allocated equally on a consistent basis
between rate and volume variances. 19




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##### Table of Contents



20




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##### Table of Contents



Non-sensitiveInterest Sensitive Within
    
    Total
    
    or Sensitive1 to
    
    91 to
    
    181 to
    
    Within
    
    Beyond(Table dollars in thousands)
    
    90 Days
    
    180 Days
    
    365 Days
    
    1 Year
    
    1 Year
    
    TotalInterest-earning AssetsInterest-bearing due from banks
    
    $
    1,763
    
    
    $
    
    
    
    $
    
    
    
    $
    1,763
    
    
    $
    
    
    
    $
    1,763Securities (at amortized cost) (1):U.S. Government agencies
    
    
    
    
    
    
    
    
    
    
    1,539
    
    
    
    1,539
    
    
    
    42,172
    
    
    
    43,711Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,738
    
    
    
    150,738Other (including equity securities)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    853
    
    
    
    853Loans (gross):Real estate  Construction
    
    
    38,874
    
    
    
    1,092
    
    
    
    361
    
    
    
    40,327
    
    
    
    19,374
    
    
    
    59,701Real estate  Mortgage
    
    
    334,356
    
    
    
    5,338
    
    
    
    10,221
    
    
    
    349,915
    
    
    
    216,082
    
    
    
    565,997Commercial, financial and agricultural
    
    
    108,757
    
    
    
    1,155
    
    
    
    2,110
    
    
    
    112,022
    
    
    
    31,596
    
    
    
    143,618Consumer
    
    
    1,355
    
    
    
    229
    
    
    
    636
    
    
    
    2,220
    
    
    
    3,986
    
    
    
    6,206All other
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    147
    
    
    
    
    
    
    
    147Total interest-earning assets
    
    $
    485,252
    
    
    $
    7,814
    
    
    $
    14,867
    
    
    $
    507,933
    
    
    $
    464,801
    
    
    $
    972,734Interest-bearing LiabilitiesInterest-bearing deposits:Savings and NOW accounts
    
    $
    164,627
    
    
    $
    
    
    
    $
    
    
    
    $
    164,627
    
    
    $
    
    
    
    $
    164,627Money market accounts
    
    
    155,745
    
    
    
    
    
    
    
    
    
    
    
    155,745
    
    
    
    
    
    
    
    155,745Time deposits of $100 or more
    
    
    42,043
    
    
    
    29,359
    
    
    
    123,878
    
    
    
    195,280
    
    
    
    52,359
    
    
    
    247,639Other time deposits
    
    
    56,349
    
    
    
    40,738
    
    
    
    139,672
    
    
    
    236,759
    
    
    
    52,162
    
    
    
    288,921Overnight and short-term borrowings
    
    
    3,000
    
    
    
    2,000
    
    
    
    15,000
    
    
    
    20,000
    
    
    
    
    
    
    
    20,000Long-term borrowings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    20,000Total interest-bearing liabilities
    
    $
    421,764
    
    
    $
    72,097
    
    
    $
    278,550
    
    
    $
    772,411
    
    
    $
    124,521
    
    
    $
    896,932Interest sensitivity gap
    
    $
    63,488
    
    
    $
    (64,283
    )
    
    $
    (263,683
    )
    
    $
    (264,478
    )Cumulative interest sensitivity gap
    
    
    63,488
    
    
    
    (795
    )
    
    
    (264,478
    )
    
    
    (264,478
    )Interest earning-assets as a percentage
of interest-bearing liabilities
    
    
    115
    %
    
    
    11
    %
    
    
    5
    %
    
    
    66
    %
 
 (1)
    
    Interest sensitivity periods for debt securities are based on contractual maturities.  
 Within
    
    
    One to
    
    
    FiveOne
    
    
    Five
    
    
    Years or(Table in thousands)
    
    Year
    
    
    Years
    
    
    More
    
    
    TotalReal estate  Construction
    
    $
    34,625
    
    
    $
    17,790
    
    
    $
    7,286
    
    
    $
    59,701Real estate  Mortgage
    
    
    129,679
    
    
    
    302,771
    
    
    
    133,547
    
    
    
    565,997Commercial, financial and agricultural
    
    
    65,915
    
    
    
    62,801
    
    
    
    14,902
    
    
    
    143,618Consumer
    
    
    1,436
    
    
    
    4,687
    
    
    
    83
    
    
    
    6,206All other
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    147Total
    
    $
    231,802
    
    
    $
    388,049
    
    
    $
    155,818
    
    
    $
    775,669Predetermined rate, maturity
greater than one year
    
    $
    
    
    
    $
    182,433
    
    
    $
    53,690
    
    
    $
    236,123Variable rate or maturing within
one year
    
    
    231,802
    
    
    
    205,616
    
    
    
    102,128
    
    
    
    539,546Total
    
    $
    231,802
    
    
    $
    388,049
    
    
    $
    155,818
    
    
    $
    775,669
  
 (Table in thousands)
    
    2009
    
    
    2008
    
    
    2007Non-interest-bearing demand deposits
    
    $
    111,614
    
    
    $
    131,563
    
    
    $
    146,563Interest-bearing demand deposits
    
    
    337,438
    
    
    
    368,701
    
    
    
    366,706Savings deposits
    
    
    20,303
    
    
    
    21,567
    
    
    
    22,677Time deposits
    
    
    492,496
    
    
    
    460,632
    
    
    
    433,965Total
    
    $
    961,851
    
    
    $
    982,463
    
    
    $
    969,911
 21




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##### Table of Contents



Within
    
    Three to
    
    Six to
    
    Within
    
    One toThree
    
    Six
    
    Twelve
    
    One
    
    Five(In thousands)
    
    Months
    
    Months
    
    Months
    
    Year
    
    Years
    
    TotalTime deposits of $100 thousand or more
    
    $
    42,043
    
    
    $
    29,359
    
    
    $
    123,878
    
    
    $
    195,280
    
    
    $
    52,359
    
    
    $
    247,639
     
 (Table dollars in thousands)
 2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansLoansReal estate -Construction
    
    $
    59,701
    
    
    
    7.7
    %
    
    $
    146,167
    
    
    
    15.4
    %
    
    $
    182,457
    
    
    
    19.2
    %
    
    $
    161,072
    
    
    
    17.6
    %
    
    $
    125,555
    
    
    
    15.1
    %Mortgage
    
    
    565,997
    
    
    
    73.0
    %
    
    
    593,233
    
    
    
    62.5
    %
    
    
    513,140
    
    
    
    54.1
    %
    
    
    488,347
    
    
    
    53.4
    %
    
    
    455,322
    
    
    
    54.6
    %Commercial,
financial and
agricultural
    
    
    143,618
    
    
    
    18.5
    %
    
    
    199,370
    
    
    
    21.0
    %
    
    
    238,469
    
    
    
    25.2
    %
    
    
    248,691
    
    
    
    27.2
    %
    
    
    231,229
    
    
    
    27.7
    %Consumer
    
    
    6,206
    
    
    
    0.8
    %
    
    
    10,713
    
    
    
    1.1
    %
    
    
    13,481
    
    
    
    1.4
    %
    
    
    15,317
    
    
    
    1.7
    %
    
    
    20,911
    
    
    
    2.5
    %All other
    
    
    147
    
    
    
    0.0
    %
    
    
    258
    
    
    
    0.0
    %
    
    
    567
    
    
    
    0.1
    %
    
    
    742
    
    
    
    0.1
    %
    
    
    915
    
    
    
    0.1
    %Total loans
    
    
    775,669
    
    
    
    100.0
    %
    
    
    949,741
    
    
    
    100.0
    %
    
    
    948,114
    
    
    
    100.0
    %
    
    
    914,169
    
    
    
    100.0
    %
    
    
    833,932
    
    
    
    100.0
    %Deferred origination
fees, net
    
    
    (650
    )
    
    
    
    
    
    
    (1,592
    )
    
    
    
    
    
    
    (1,788
    )
    
    
    
    
    
    
    (1,677
    )
    
    
    
    
    
    
    (1,485
    )Total loans, net of
deferred fees
    
    $
    775,019
    
    
    
    
    
    
    $
    948,149
    
    
    
    
    
    
    $
    946,326
    
    
    
    
    
    
    $
    912,492
    
    
    
    
    
    
    $
    832,447
  22




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##### Table of Contents



(Table dollars in thousands)
    
    2009
    
    2008
    
    2007
    
    2006
    
    2005Nonperforming assetsNonaccrual loans
    
    $
    40,736
    
    
    $
    50,591
    
    
    $
    36,450
    
    
    $
    9,289
    
    
    $
    6,424Restructured loans  nonaccrual
    
    
    12,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    53,140
    
    
    
    50,591
    
    
    
    36,450
    
    
    
    9,289
    
    
    
    6,424Foreclosed properties
    
    
    13,235
    
    
    
    6,805
    
    
    
    2,491
    
    
    
    1,162
    
    
    
    926Total nonperforming assets
    
    $
    66,375
    
    
    $
    57,396
    
    
    $
    38,941
    
    
    $
    10,451
    
    
    $
    7,350Restructured loans  accruing
    
    $
    13,284
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Loans past due 90 days or more and still accruing interest
    
    
    1,195
    
    
    
    114
    
    
    
    162
    
    
    
    5,074
    
    
    
    4,208Nonperforming loans to total loans
    
    
    6.86
    %
    
    
    5.34
    %
    
    
    3.85
    %
    
    
    1.02
    %
    
    
    0.77
    %Allowance for loan losses to nonperforming loans
    
    
    52.38
    %
    
    
    49.03
    %
    
    
    48.49
    %
    
    
    169.95
    %
    
    
    216.75
    %Nonperforming loans to total assets
    
    
    5.01
    %
    
    
    4.41
    %
    
    
    2.99
    %
    
    
    0.77
    %
    
    
    0.58
    %Nonperforming assets to total assets
    
    
    6.26
    %
    
    
    5.00
    %
    
    
    3.19
    %
    
    
    0.87
    %
    
    
    0.66
    %
     
 (Table in thousands)
    
    2009
    
    2008
    
    2007
    
    2006
    
    2005Total investment in impaired loans
    
    $
    38,912
    
    
    $
    42,615
    
    
    $
    27,017
    
    
    $
    15,516
    
    
    $
    11,046Loan loss allowance related to impaired loans
    
    $
    7,715
    
    
    $
    5,400
    
    
    $
    3,029
    
    
    $
    3,926
    
    
    $
    3,249
   23




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##### Table of Contents



Accounting By Creditors for Impairment
of a Loan
       24




---



##### Table of Contents



(Table dollars in thousands)
    
    2009
    
    2008
    
    2007
    
    2006
    
    2005Balance at beginning of year
    
    $
    24,806
    
    
    $
    17,673
    
    
    $
    15,787
    
    
    $
    13,924
    
    
    $
    13,665Loans charged off:Real estate
    
    
    23,435
    
    
    
    15,550
    
    
    
    14,850
    
    
    
    1,708
    
    
    
    919Commercial, financial and agricultural
    
    
    5,003
    
    
    
    10,557
    
    
    
    30,955
    
    
    
    2,808
    
    
    
    3,484Credit cards and related plans
    
    
    54
    
    
    
    16
    
    
    
    15
    
    
    
    26
    
    
    
    45Installment loans to individuals
    
    
    78
    
    
    
    396
    
    
    
    177
    
    
    
    410
    
    
    
    540Demand deposit overdraft program
    
    
    159
    
    
    
    195
    
    
    
    233
    
    
    
    251
    
    
    
    262Asset-based lending
    
    
    
    
    
    
    
    
    
    
    7,433
    
    
    
    
    
    
    
    Total charge-offs
    
    
    28,729
    
    
    
    26,714
    
    
    
    53,663
    
    
    
    5,203
    
    
    
    5,250Recoveries of loans previously charged off:Real estate
    
    
    738
    
    
    
    1,340
    
    
    
    233
    
    
    
    84
    
    
    
    63Commercial, financial and agricultural
    
    
    2,176
    
    
    
    2,041
    
    
    
    19
    
    
    
    282
    
    
    
    29Credit cards and related plans
    
    
    7
    
    
    
    1
    
    
    
    4
    
    
    
    10
    
    
    
    3Installment loans to individuals
    
    
    36
    
    
    
    145
    
    
    
    47
    
    
    
    138
    
    
    
    42Demand deposit overdraft program
    
    
    70
    
    
    
    92
    
    
    
    115
    
    
    
    138
    
    
    
    178Total recoveries
    
    
    3,027
    
    
    
    3,619
    
    
    
    418
    
    
    
    652
    
    
    
    315Net charge-offs
    
    
    25,702
    
    
    
    23,095
    
    
    
    53,245
    
    
    
    4,551
    
    
    
    4,935Provision for loan losses
    
    
    28,733
    
    
    
    30,228
    
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194Balance at end of year
    
    $
    27,837
    
    
    $
    24,806
    
    
    $
    17,673
    
    
    $
    15,787
    
    
    $
    13,924Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    2.95
    %
    
    
    2.42
    %
    
    
    5.70
    %
    
    
    0.52
    %
    
    
    0.61
    %Allowance coverage of net charge-offs
    
    
    108.31
    %
    
    
    107.41
    %
    
    
    33.19
    %
    
    
    346.95
    %
    
    
    282.14
    %Allowance as a percentage of gross loans
    
    
    3.59
    %
    
    
    2.62
    %
    
    
    1.87
    %
    
    
    1.73
    %
    
    
    1.67
    %
  
 (Table dollars in thousands)
 2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    TotalAmount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansReal estate
    
    $
    24,065
    
    
    
    80.7
    %
    
    $
    20,164
    
    
    
    77.9
    %
    
    $
    12,421
    
    
    
    73.3
    %
    
    $
    5,091
    
    
    
    71.0
    %
    
    $
    4,448
    
    
    
    69.7
    %Commercial,
financial,
and agricultural
    
    
    3,217
    
    
    
    18.5
    %
    
    
    3,965
    
    
    
    21.0
    %
    
    
    3,899
    
    
    
    25.2
    %
    
    
    9,891
    
    
    
    27.2
    %
    
    
    8,401
    
    
    
    27.7
    %Consumer
    
    
    126
    
    
    
    0.8
    %
    
    
    211
    
    
    
    1.1
    %
    
    
    281
    
    
    
    1.4
    %
    
    
    443
    
    
    
    1.7
    %
    
    
    577
    
    
    
    2.5
    %All other loans
    
    
    39
    
    
    
    0.0
    %
    
    
    34
    
    
    
    0.0
    %
    
    
    310
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %Unallocated
    
    
    390
    
    
    
    n/a
    
    
    
    432
    
    
    
    n/a
    
    
    
    762
    
    
    
    n/a
    
    
    
    362
    
    
    
    n/a
    
    
    
    498
    
    
    
    n/aTotal loans
    
    $
    27,837
    
    
    
    100.0
    %
    
    $
    24,806
    
    
    
    100.0
    %
    
    $
    17,673
    
    
    
    100.0
    %
    
    $
    15,787
    
    
    
    100.0
    %
    
    $
    13,924
    
    
    
    100.0
    %
     25




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##### Table of Contents



After One Year but
    
    
    After Five Years butWithin One Year
    
    
    Within Five Years
    
    
    Within Ten Years
    
    
    After Ten Years(Table dollars in thousands)
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldAvailable for sale: (1)U.S. government agency
    
    $
    1,539
    
    
    
    1.05
    %
    
    $
    38,172
    
    
    
    4.15
    %
    
    $
    4,000
    
    
    
    3.13
    %
    
    $
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,738
    
    
    
    3.79
    %Total
    
    $
    1,539
    
    
    
    1.05
    %
    
    $
    38,172
    
    
    
    4.15
    %
    
    $
    4,000
    
    
    
    3.13
    %
    
    $
    150,738
    
    
    
    3.79
    %
 
 (1)
    
    Securities available for sale are stated at amortized cost.  
 (Table in thousands)
    
    2009
    
    
    2008
    
    
    2007Available for sale (at estimated fair value):U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    5,055U.S. government agency
    
    
    42,051
    
    
    
    46,063
    
    
    
    93,763State and political subdivisions
    
    
    
    
    
    
    5,416
    
    
    
    5,520Mortgage-backed securities
    
    
    147,831
    
    
    
    
    
    
    
    Other
    
    
    1,039
    
    
    
    7,097
    
    
    
    8,628Total
    
    $
    190,921
    
    
    $
    58,576
    
    
    $
    112,966Held to maturity (at amortized cost):State and political subdivisions
    
    $
    
    
    
    $
    23,627
    
    
    $
    29,656Total
    
    $
    
    
    
    $
    23,627
    
    
    $
    29,656
   26




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##### Table of Contents



Within
    
    
    One to
    
    
    Three to
    
    
    FiveOne
    
    
    Three
    
    
    Five
    
    
    Years or(Table in thousands)
    
    Year
    
    
    Years
    
    
    Years
    
    
    More
    
    
    TotalContractual Cash ObligationsShort-term borrowings
    
    $
    20,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    20,000Long-term borrowings
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    20,000Capitalized lease obligations
    
    
    444
    
    
    
    886
    
    
    
    671
    
    
    
    1,455
    
    
    
    3,456Operating lease obligations
    
    
    95
    
    
    
    149
    
    
    
    
    
    
    
    
    
    
    
    244Total
    
    $
    20,539
    
    
    $
    21,035
    
    
    $
    671
    
    
    $
    1,455
    
    
    $
    43,700Other CommitmentsCommitments to extend credit
    
    $
    46,044
    
    
    $
    7,680
    
    
    $
    4,370
    
    
    $
    48,028
    
    
    $
    106,122Standby letters of credit
    
    
    2,917
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    2,967Total
    
    $
    48,961
    
    
    $
    7,730
    
    
    $
    4,370
    
    
    $
    48,028
    
    
    $
    109,089
  For the Years Ended December 31,2009
    
    2008
    
    2007
    
    2006
    
    2005Return on average assets
    
    
    -2.33
    %
    
    
    -3.05
    %
    
    
    -1.27
    %
    
    
    1.56
    %
    
    
    1.41
    %Return on average equity
    
    
    -37.75
    %
    
    
    -32.01
    %
    
    
    -10.95
    %
    
    
    12.57
    %
    
    
    10.70
    %Average equity to average assets
    
    
    6.16
    %
    
    
    9.52
    %
    
    
    11.59
    %
    
    
    12.42
    %
    
    
    13.14
    %Dividend payout
    
    
    0.00
    %
    
    
    -11.08
    %
    
    
    -53.38
    %
    
    
    43.04
    %
    
    
    46.50
    %Efficiency ratio
    
    
    106.15
    %
    
    
    101.46
    %
    
    
    55.64
    %
    
    
    48.26
    %
    
    
    52.11
    %
      Disclosures about Segments of an Enterprise and
Related Information
 27




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##### Table of Contents



Community Banking
  2009
    
    2008
    
    $ Change
    
    % Change(Table dollars in thousands)Net interest income
    
    $
    30,071
    
    
    $
    34,345
    
    
    $
    (4,274
    )
    
    
    -12.4
    %Provision for loan losses
    
    
    28,644
    
    
    
    30,143
    
    
    
    (1,499
    )
    
    
    -5.0
    %Securities gains (losses)
    
    
    383
    
    
    
    (754
    )
    
    
    1,137
    
    
    
    -150.8
    %Total other income
    
    
    8,452
    
    
    
    7,988
    
    
    
    464
    
    
    
    5.8
    %Salaries and wages
    
    
    11,422
    
    
    
    13,480
    
    
    
    (2,058
    )
    
    
    -15.3
    %Employee benefits
    
    
    1,964
    
    
    
    3,401
    
    
    
    (1,437
    )
    
    
    -42.3
    %Goodwill impairment
    
    
    
    
    
    
    10,763
    
    
    
    (10,763
    )
    
    
    -100.0
    %Other
    
    
    21,363
    
    
    
    9,984
    
    
    
    11,379
    
    
    
    114.0
    %Total other expenses
    
    
    38,627
    
    
    
    41,773
    
    
    
    (3,146
    )
    
    
    -7.5
    %Income tax expense (benefit)
    
    
    (5,800
    )
    
    
    4,842
    
    
    
    (10,642
    )
    
    
    -219.8
    %Net loss
    
    
    (22,948
    )
    
    
    (34,425
    )
    
    
    11,477
    
    
    
    -33.3
    %Identifiable segment assets
    
    
    1,058,522
    
    
    
    1,112,029
    
    
    
    (53,507
    )
    
    
    -4.8
    %
     Mortgage Banking
  2009
    
    2008
    
    $ Change
    
    % Change(Table dollars in thousands)Net interest income
    
    $
    1,389
    
    
    $
    3,158
    
    
    $
    (1,769
    )
    
    
    -56.0
    %Mortgage banking income
    
    
    748
    
    
    
    3,573
    
    
    
    (2,825
    )
    
    
    -79.1
    %Salaries and wages
    
    
    2,474
    
    
    
    4,221
    
    
    
    (1,747
    )
    
    
    -41.4
    %Employee benefits
    
    
    145
    
    
    
    380
    
    
    
    (235
    )
    
    
    -61.8
    %Total other expenses
    
    
    4,167
    
    
    
    6,870
    
    
    
    (2,703
    )
    
    
    -39.3
    %Net income (loss)
    
    
    (2,120
    )
    
    
    8
    
    
    
    (2,128
    )
    
    
    n/mIdentifiable segment assets
    
    
    1,562
    
    
    
    31,885
    
    
    
    (30,323
    )
    
    
    -95.1
    %
  Other
  28




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##### Table of Contents



29




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##### Table of Contents



Begins onPageReport of Independent Registered Public Accounting Firm
    
    
    31Financial Statements:Consolidated Balance Sheets
December 31, 2009 and 2008
    
    
    32Consolidated Statements of Income
Years Ended December 31, 2009 and 2008
    
    
    33Consolidated Statements of Comprehensive Income
Years Ended December 31, 2009 and 2008
    
    
    34Consolidated Statements of Changes in Stockholders Equity
Years Ended December 31, 2009 and 2008
    
    
    35Consolidated Statements of Cash Flows
Years Ended December 31, 2009 and 2008
    
    
    36Notes to Consolidated Financial Statements
Years Ended December 31, 2009 and 2008
    
    
    38
 30




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ Dixon Hughes PLLCDIXON HUGHES PLLCCharlotte, North CarolinaMarch 31, 2010
 31




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2009 AND 2008
 (In thousands except per share data)
    
    2009
    
    2008ASSETS:Cash and cash equivalentsCash and due from banks
    
    $
    71,611
    
    
    $
    26,164Interest-bearing deposits
    
    
    1,763
    
    
    
    6,819Federal funds sold
    
    
    
    
    
    
    16,000Total cash and cash equivalents
    
    
    73,374
    
    
    
    48,983Investment securitiesAvailable for sale, at fair value (amortized cost of $195,302 and
$57,840 at December 31, 2009 and 2008, respectively)
    
    
    190,921
    
    
    
    58,576Held to maturity, at amortized cost (fair value of $0 and
$24,292 at December 31, 2009 and 2008, respectively)
    
    
    
    
    
    
    23,627Loans
    
    
    775,019
    
    
    
    948,149Allowance for loan losses
    
    
    (27,837
    )
    
    
    (24,806
    )Net loans
    
    
    747,182
    
    
    
    923,343Mortgage loans held for sale
    
    
    
    
    
    
    16,770Premises and equipment, net
    
    
    15,556
    
    
    
    19,079Accrued interest receivable
    
    
    3,917
    
    
    
    3,979Investment in bank owned life insurance
    
    
    4,106
    
    
    
    31,278Intangible assets
    
    
    
    
    
    
    143Other assets
    
    
    25,028
    
    
    
    21,177Total assets
    
    $
    1,060,084
    
    
    $
    1,146,955LIABILITIES AND STOCKHOLDERS EQUITY:DepositsDemand
    
    $
    109,673
    
    
    $
    117,168NOW accounts
    
    
    145,833
    
    
    
    153,444Money market accounts
    
    
    155,745
    
    
    
    204,108Savings
    
    
    18,794
    
    
    
    19,674Time deposits of $100 or more
    
    
    247,639
    
    
    
    208,002Other time deposits
    
    
    288,921
    
    
    
    289,426Total deposits
    
    
    966,605
    
    
    
    991,822Overnight and short-term borrowings
    
    
    20,000
    
    
    
    48,947Long-term borrowings
    
    
    20,000
    
    
    
    14,075Accrued interest payable
    
    
    1,701
    
    
    
    2,750Other liabilities
    
    
    4,692
    
    
    
    15,191Total liabilities
    
    
    1,012,998
    
    
    
    1,072,785STOCKHOLDERS EQUITY:Common stock, $1.00 par value, Authorized - 25,000 shares;Issued - 18,981 shares in 2009 and 2008;Outstanding - 15,454 shares in 2009 and 2008
    
    
    18,981
    
    
    
    18,981Additional paid-in capital
    
    
    30,195
    
    
    
    30,190Retained earnings
    
    
    52,308
    
    
    
    77,928Accumulated other comprehensive loss, net of
deferred income taxes of $1,837 and $714 at
December 31, 2009 and 2008, respectively
    
    
    (2,546
    )
    
    
    (1,077
    )Less: Cost of common stock in treasury;3,527 shares in 2009 and 2008
    
    
    (51,852
    )
    
    
    (51,852
    )Total stockholders equity
    
    
    47,086
    
    
    
    74,170Total liabilities and stockholders equity
    
    $
    1,060,084
    
    
    $
    1,146,955
  32




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2009 AND 2008
 (In thousands except per share data)
    
    2009
    
    2008INTEREST INCOME:Interest and fees from loans
    
    $
    46,948
    
    
    $
    57,953Interest and fees from mortgage banking
    
    
    1,666
    
    
    
    4,336Federal funds sold
    
    
    8
    
    
    
    63Interest-bearing deposits
    
    
    67
    
    
    
    339Investments:U.S. Treasury
    
    
    18
    
    
    
    150U.S. Government agencies
    
    
    3,233
    
    
    
    2,129States and political subdivisions
    
    
    364
    
    
    
    1,335Other
    
    
    342
    
    
    
    618Total interest income
    
    
    52,646
    
    
    
    66,923INTEREST EXPENSE:Time deposits of $100 or more
    
    
    6,630
    
    
    
    8,724Other time and savings deposits
    
    
    13,068
    
    
    
    17,920Overnight and short-term borrowings
    
    
    631
    
    
    
    2,431Long-term borrowings
    
    
    895
    
    
    
    678Total interest expense
    
    
    21,224
    
    
    
    29,753NET INTEREST INCOME
    
    
    31,422
    
    
    
    37,170PROVISION FOR LOAN LOSSES
    
    
    28,733
    
    
    
    30,228NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    2,689
    
    
    
    6,942OTHER INCOME:Service charges on deposit accounts
    
    
    5,423
    
    
    
    5,664Other service charges, fees and commissions
    
    
    429
    
    
    
    703Mortgage banking income
    
    
    748
    
    
    
    3,573Securities gains (losses)
    
    
    1,074
    
    
    
    (1
    )Other-than-temporary impairment losses
    
    
    (996
    )
    
    
    (1,937
    )Other
    
    
    2,209
    
    
    
    2,376Total other income
    
    
    8,887
    
    
    
    10,378OTHER EXPENSES:Salaries and wages
    
    
    13,896
    
    
    
    17,701Employee benefits
    
    
    2,114
    
    
    
    3,796Occupancy expense, net
    
    
    2,032
    
    
    
    2,443Equipment rentals, depreciation and
maintenance
    
    
    2,317
    
    
    
    2,568FDIC assessments
    
    
    3,704
    
    
    
    1,176Other real estate owned
    
    
    10,254
    
    
    
    876Goodwill impairment
    
    
    
    
    
    
    10,763Other
    
    
    8,679
    
    
    
    9,651Total other expenses
    
    
    42,996
    
    
    
    48,974LOSS BEFORE INCOME
TAX EXPENSE (BENEFIT)
    
    
    (31,420
    )
    
    
    (31,654
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    (5,800
    )
    
    
    4,597NET LOSS
    
    $
    (25,620
    )
    
    $
    (36,251
    )Net (loss)  Basic
    
    $
    (1.66
    )
    
    $
    (2.35
    )
  33




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 YEARS ENDED DECEMBER 31, 2009 AND 2008
 (In thousands)
    
    2009
    
    2008NET LOSS
    
    $
    (25,620
    )
    
    $
    (36,251
    )ITEMS OF OTHER COMPREHENSIVE
LOSS:Unrealized gains (losses) on securities
available for sale
    
    
    (4,713
    )
    
    
    2,839Reclassification adjustment for
available for sale securities
losses included in net income
    
    
    (404
    )
    
    
    (1,943
    )Prior service cost and net actuarial
income (loss)  SERP
    
    
    2,526
    
    
    
    (2,526
    )Other comprehensive loss, before tax
    
    
    (2,591
    )
    
    
    (1,630
    )Change in deferred income taxes
related to change in unrealized gains
or losses on securities available for sale
    
    
    2,129
    
    
    
    (357
    )Change in deferred income taxes related to prior
service cost and net actuarial income (loss)  SERP
    
    
    (1,007
    )
    
    
    1,007COMPREHENSIVE LOSS
    
    $
    (27,089
    )
    
    $
    (37,231
    )
  34




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2009 AND 2008
 (In thousands except per share data)
    
    2009
    
    2008COMMON STOCK, $1.00 par valueAt beginning of year
    
    $
    18,981
    
    
    $
    18,965Par value of shares issued under stock option plan
    
    
    
    
    
    
    16At end of year
    
    
    18,981
    
    
    
    18,981ADDITIONAL PAID-IN CAPITALAt beginning of year
    
    
    30,190
    
    
    
    30,053Surplus of shares issued under stock option plan
    
    
    
    
    
    
    112Tax benefit from nonqualifying dispositions
of stock options
    
    
    
    
    
    
    10Stock-based compensation expense
    
    
    5
    
    
    
    15At end of year
    
    
    30,195
    
    
    
    30,190RETAINED EARNINGSAt beginning of year
    
    
    77,928
    
    
    
    118,196Net loss
    
    
    (25,620
    )
    
    
    (36,251
    )Dividends
    
    
    
    
    
    
    (4,017
    )At end of year
    
    
    52,308
    
    
    
    77,928ACCUMULATED OTHER
COMPREHENSIVE LOSS,
NET OF DEFERRED INCOME TAXESAt beginning of year
    
    
    (1,077
    )
    
    
    (97
    )Net change in unrealized gains or losses on securities
available for sale, net of deferred income taxes
    
    
    (2,988
    )
    
    
    539Net change in prior service cost and net actuarial
loss  SERP, net of deferred income taxes
    
    
    1,519
    
    
    
    (1,519
    )At end of year
    
    
    (2,546
    )
    
    
    (1,077
    )COST OF COMMON STOCK
IN TREASURYAt beginning of year
    
    
    (51,852
    )
    
    
    (51,852
    )Cost of common stock repurchased
    
    
    
    
    
    
    At end of year
    
    
    (51,852
    )
    
    
    (51,852
    )Total stockholders equity
    
    $
    47,086
    
    
    $
    74,170Shares issuedAt beginning of year
    
    
    18,981
    
    
    
    18,965Shares issued under incentive stock option plans
    
    
    
    
    
    
    16At end of year
    
    
    18,981
    
    
    
    18,981Common shares in treasuryAt beginning of year
    
    
    (3,527
    )
    
    
    (3,527
    )Common shares repurchased
    
    
    
    
    
    
    At end of year
    
    
    (3,527
    )
    
    
    (3,527
    )Total shares outstanding
    
    
    15,454
    
    
    
    15,454
  35




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2009 AND 2008
 (In thousands)
    
    2009
    
    2008INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (25,620
    )
    
    $
    (36,251
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation
    
    
    1,753
    
    
    
    1,946Provision for loan losses
    
    
    28,733
    
    
    
    30,228Goodwill impairment
    
    
    
    
    
    
    10,763Investment security premium amortization, net
    
    
    1,160
    
    
    
    192Acquisition premium amortization, net
    
    
    143
    
    
    
    46Deferred income taxes
    
    
    
    
    
    
    9,507Losses (gains) on sales or calls of securities
available for sale
    
    
    (592
    )
    
    
    6Gains on calls of securities
held to maturity
    
    
    (482
    )
    
    
    (5
    )Impairment losses on securities
    
    
    996
    
    
    
    1,937Originations of loans held for sale
    
    
    (82,177
    )
    
    
    (254,684
    )Proceeds from loans held for sale
    
    
    99,924
    
    
    
    256,538Gains on loans held for sale
    
    
    (977
    )
    
    
    (3,305
    )Loss on disposal or sale of premises
    
    
    1,267
    
    
    
    39Losses (gains) on disposal or sale of equipment
    
    
    129
    
    
    
    (10
    )Loss on sale of other real estate
    
    
    7,816
    
    
    
    681Decrease in accrued interest receivable
    
    
    62
    
    
    
    2,970Decrease in accrued interest payable
    
    
    (1,049
    )
    
    
    (462
    )Increase in cash surrender value of bank
owned life insurance
    
    
    (977
    )
    
    
    (1,188
    )Decrease in other assets
    
    
    743
    
    
    
    4,017Increase (decrease) in other liabilities
    
    
    (5,866
    )
    
    
    3,802Net cash provided by
operating activities
    
    
    24,986
    
    
    
    26,767CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    54,370
    
    
    
    68,152Proceeds from sales, maturities, calls and paydowns
of securities held to maturity
    
    
    24,103
    
    
    
    6,010Proceeds from sales of securities available for sale
    
    
    173,748
    
    
    
    275Purchases of securities available for sale
    
    
    (366,274
    )
    
    
    (15,251
    )Net decrease (increase) in loans
    
    
    125,443
    
    
    
    (24,933
    )Proceeds from sale of bank owned life insurance
    
    
    28,149
    
    
    
    Capital expenditures
    
    
    
    
    
    
    (5,602
    )Proceeds from sales of fixed assets
    
    
    374
    
    
    
    10Proceeds from sales of other real estate
    
    
    7,731
    
    
    
    1,027Net cash provided by investing activities
    
    
    47,644
    
    
    
    29,688
   36




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
    
    (concluded from previous page)YEARS ENDED DECEMBER 31, 2009 AND 2008
 (In thousands)
    
    2009
    
    2008CASH FLOWS FROM FINANCING ACTIVITIES:Net decrease in demand deposits, NOW
and savings deposits
    
    $
    (64,349
    )
    
    $
    (43,946
    )Net increase in time deposits
    
    
    39,132
    
    
    
    63,779Net decrease in overnight and
short-term borrowings
    
    
    (28,947
    )
    
    
    (51,243
    )Net increase (decrease) in long-term borrowings
    
    
    5,925
    
    
    
    (3,500
    )Proceeds from shares issued under stock option plan
    
    
    
    
    
    
    128Tax benefit on shares issued under stock option plan
    
    
    
    
    
    
    10Dividends paid
    
    
    
    
    
    
    (6,024
    )Net cash used by financing activities
    
    
    (48,239
    )
    
    
    (40,796
    )NET INCREASE IN
CASH EQUIVALENTS
    
    
    24,391
    
    
    
    15,659CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
    
    
    48,983
    
    
    
    33,324CASH AND CASH EQUIVALENTS
AT END OF YEAR
    
    $
    73,374
    
    
    $
    48,983SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid (refunded) during the year for:Interest
    
    $
    22,273
    
    
    $
    30,215Income tax refunded
    
    
    (7,841
    )
    
    
    (13,662
    )Noncash investing and financing activities:Transfer from loans to other real
estate owned
    
    
    21,977
    
    
    
    6,022
  37




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2009 AND 2008
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        38




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##### Table of Contents



Intangibles-Goodwill and Other
  39




---



##### Table of Contents



Income Taxes
 Income Taxes
  Stock Compensation
 Financial Instruments Financial Instruments
 Investment in Debt and
Equity Securities Investment in Debt and Equity Securities
 Fair Value
Measurements and Disclosures Fair Value Measurements and Disclosures
 Generally Accepted Accounting Principles TM
 40




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##### Table of Contents



2. REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS
 Regulatory Actions
     
    
    Assure the on-going participation of the Banks Board of Directors in the affairs of the
Bank;
    
    Have and retain qualified management of the Bank, and assess management and staffing
needs, qualifications and performance;
    
    Present a written capital plan to the FDIC and the Commissioner within 30 days of the
Order by which the Bank would achieve a Tier 1 Leverage Capital Ratio of not less than
8 percent and Total Risk-Based Capital Ratio of not less than 12 percent during the life of
the Order;
    
    Formulate and implement a plan to reduce the Banks risk exposure in assets classified
Substandard or Doubtful in the FDICs most recent report of examination by 20 percent
in 180 days; 40 percent in 360 days; 65 percent in 540 days and by 75 percent in 720 days;
    
    Analyze and reduce credit concentrations in the Banks loan portfolio;
    
    Within 60 days, ensure full implementation of effective lending and collection policies;
    
    Cease to extend additional credit to any borrower who has a loan or extension of credit with
the Bank that is classified as Loss or Doubtful;
    
    Within 45 days, adopt and implement a plan regarding the Banks liquidity, contingent
funding and asset liability management, and review and revise the plan on a quarterly
basis;
    
    Not pay cash dividends without the prior written consent of the FDIC and the Commissioner;
    
    Neither renew, roll-over nor increase the amount of brokered deposits above the amount
outstanding at the date of the Order without obtaining a waiver from the FDIC.
   41




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##### Table of Contents



Going Concern Considerations
    Capital Matters
   Actual
    
    Minimum Regulatory RequirementAdequately
    
    Well
    
    Pursuant toConsolidated
    
    Bank
    
    Capitalized
    
    Capitalized
    
    OrderLeverage capital
    
    
    4.85
    %
    
    
    4.66
    %
    
    
    4.00
    %
    
    
    5.00
    %
    
    
    8.00
    %Risk-based capital:Tier 1 capital
    
    
    6.44
    %
    
    
    6.19
    %
    
    
    4.00
    %
    
    
    6.00
    %
    
    
    8.00
    %Total capital
    
    
    7.73
    %
    
    
    7.47
    %
    
    
    8.00
    %
    
    
    10.00
    %
    
    
    12.00
    %
 42




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##### Table of Contents



3. INVESTMENT SECURITIES
  (Table in thousands)Amortized
    
    Gross Unrealized
    
    FairType and Contractual Maturity
    
    Cost
    
    Gains
    
    Losses
    
    ValueAVAILABLE FOR SALEAt December 31, 2009:U. S. Government agencies due:Within 1 year
    
    $
    1,539
    
    
    $
    9
    
    
    $
    
    
    
    $
    1,548After 1 year but within 5 years
    
    
    38,172
    
    
    
    
    
    
    
    1,434
    
    
    
    36,738After 5 years but within 10 years
    
    
    4,000
    
    
    
    
    
    
    
    235
    
    
    
    3,765Total U.S. Government agencies
    
    
    43,711
    
    
    
    9
    
    
    
    1,669
    
    
    
    42,051GNMA Mortgage-backed
securities due:After 10 years
    
    
    150,738
    
    
    
    192
    
    
    
    3,099
    
    
    
    147,831Total mortgage-backed securities
    
    
    150,738
    
    
    
    192
    
    
    
    3,099
    
    
    
    147,831Others*:Common stocks and
mutual funds
    
    
    853
    
    
    
    186
    
    
    
    
    
    
    
    1,039Total others
    
    
    853
    
    
    
    186
    
    
    
    
    
    
    
    1,039Total available for sale
    
    $
    195,302
    
    
    $
    387
    
    
    $
    4,768
    
    
    $
    190,921
 
 *
    
    Others include investments in common stocks, preferred stocks and mutual funds.   43




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##### Table of Contents



(Table in thousands)Amortized
    
    Gross Unrealized
    
    FairType and Contractual Maturity
    
    Cost
    
    Gains
    
    Losses
    
    ValueAVAILABLE FOR SALEAt December 31, 2008:U. S. Government agencies due:Within 1 year
    
    $
    20,899
    
    
    $
    340
    
    
    $
    
    
    
    $
    21,239After 1 year but within 5 years
    
    
    24,611
    
    
    
    218
    
    
    
    5
    
    
    
    24,824Total U.S. Government agencies
    
    
    45,510
    
    
    
    558
    
    
    
    5
    
    
    
    46,063State and local due:After 1 year but within 5 years
    
    
    1,847
    
    
    
    37
    
    
    
    
    
    
    
    1,884After 5 years but within 10 years
    
    
    847
    
    
    
    4
    
    
    
    4
    
    
    
    847After 10 years
    
    
    2,788
    
    
    
    
    
    
    
    103
    
    
    
    2,685Total state and local
    
    
    5,482
    
    
    
    41
    
    
    
    107
    
    
    
    5,416Others* due:After 10 years
    
    
    2,693
    
    
    
    210
    
    
    
    
    
    
    
    2,903Equity securities
    
    
    4,155
    
    
    
    39
    
    
    
    
    
    
    
    4,194Total others
    
    
    6,848
    
    
    
    249
    
    
    
    
    
    
    
    7,097Total available for sale
    
    $
    57,840
    
    
    $
    848
    
    
    $
    112
    
    
    $
    58,576HELD TO MATURITYAt December 31, 2008:State and local due:Within 1 year
    
    $
    6,454
    
    
    $
    50
    
    
    $
    
    
    
    $
    6,504After 1 year but within 5 years
    
    
    12,654
    
    
    
    404
    
    
    
    
    
    
    
    13,058After 5 years but within 10 years
    
    
    2,938
    
    
    
    133
    
    
    
    
    
    
    
    3,071After 10 years
    
    
    1,581
    
    
    
    78
    
    
    
    
    
    
    
    1,659Total state and local
    
    
    23,627
    
    
    
    665
    
    
    
    
    
    
    
    24,292Total held to maturity
    
    $
    23,627
    
    
    $
    665
    
    
    $
    
    
    
    $
    24,292
 
 *
    
    Others include investments in common stocks, preferred stocks and mutual funds.    (Table in thousands)Amortized
    
    Gross Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2009Federal Home Loan Bank stock
    
    $
    3,914
    
    
    $
    
    
    
    $
    
    
    
    $
    3,914December 31, 2008Federal Home Loan Bank stock
    
    $
    3,342
    
    
    $
    
    
    
    $
    
    
    
    $
    3,342
 44




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##### Table of Contents



Less than 12 months
    
    12 months or more
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    Unrealized(Table in thousands)
    
    Value
    
    Loss
    
    Value
    
    Loss
    
    Value
    
    Loss2009U.S. Government agencies
    
    $
    40,503
    
    
    $
    (1,669
    )
    
    $
    
    
    
    $
    
    
    
    $
    40,503
    
    
    $
    (1,669
    )GNMA Mortgage-backed
securities
    
    
    124,311
    
    
    
    (3,099
    )
    
    
    
    
    
    
    
    
    
    
    124,311
    
    
    
    (3,099
    )Total temporarily impaired
    
    $
    164,814
    
    
    $
    (4,768
    )
    
    $
    
    
    
    $
    
    
    
    $
    164,814
    
    
    $
    (4,768
    )2008U.S. Government agencies
    
    $
    1,995
    
    
    $
    (5
    )
    
    $
    
    
    
    $
    
    
    
    $
    1,995
    
    
    $
    (5
    )State and local
    
    
    985
    
    
    
    (60
    )
    
    
    2,128
    
    
    
    (47
    )
    
    
    3,113
    
    
    
    (107
    )Total temporarily impaired
    
    $
    2,980
    
    
    $
    (65
    )
    
    $
    2,128
    
    
    $
    (47
    )
    
    $
    5,108
    
    
    $
    (112
    )
   4. LOANS
  (Table in thousands)
    
    2009
    
    2008Real estate:Construction
    
    $
    59,701
    
    
    $
    146,167Mortgage, primarily commercial
    
    
    565,997
    
    
    
    593,233Commercial, financial and agricultural
    
    
    143,618
    
    
    
    199,370Consumer
    
    
    6,206
    
    
    
    10,713All other loans
    
    
    147
    
    
    
    258775,669
    
    
    
    949,741Deferred origination fees, net
    
    
    (650
    )
    
    
    (1,592
    )Total
    
    $
    775,019
    
    
    $
    948,149
 45




---



##### Table of Contents



(Table in thousands)
    
    2009
    
    2008Nonaccrual loans
    
    $
    40,736
    
    
    $
    50,591Restructured loans  nonaccrual
    
    
    12,404
    
    
    
    Total nonperforming loans
    
    
    53,140
    
    
    
    50,591Foreclosed properties
    
    
    13,235
    
    
    
    6,805Total nonperforming assets
    
    $
    66,375
    
    
    $
    57,396Restructured loans  accruing
    
    $
    13,284
    
    
    $
    Loans 90 days or more and still accruing interest
    
    $
    1,195
    
    
    $
    114Impaired loans with related loan loss allowance
    
    $
    27,149
    
    
    $
    20,816Impaired loans without related loan loss allowance
    
    
    11,763
    
    
    
    21,799Total investment in impaired loans
    
    $
    38,912
    
    
    $
    42,615Loan loss allowance related to impaired loans
    
    $
    7,715
    
    
    $
    5,400Average recorded balance of impaired loans
    
    $
    34,025
    
    
    $
    29,000
    (Table in thousands)
    
    2009
    
    2008Balance at beginning of year
    
    $
    6,805
    
    
    $
    2,491Additions
    
    
    21,977
    
    
    
    6,022Proceeds from sale
    
    
    (7,731
    )
    
    
    (1,027
    )Write-downs and net loss on sale
    
    
    (7,816
    )
    
    
    (681
    )Balance at end of year
    
    $
    13,235
    
    
    $
    6,805
  46




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5. ALLOWANCE FOR LOAN LOSSES
  (Table in thousands)
    
    2009
    
    2008Balance at beginning of year
    
    $
    24,806
    
    
    $
    17,673Loans charged off:Real estate
    
    
    23,435
    
    
    
    15,550Commercial, financial and agricultural
    
    
    5,003
    
    
    
    10,557Consumer and other
    
    
    291
    
    
    
    607Total charge-offs
    
    
    28,729
    
    
    
    26,714Recoveries of loans previously charged off:Real estate
    
    
    738
    
    
    
    1,340Commercial, financial and agricultural
    
    
    2,176
    
    
    
    2,041Consumer and other
    
    
    113
    
    
    
    238Total recoveries
    
    
    3,027
    
    
    
    3,619Net charge-offs
    
    
    25,702
    
    
    
    23,095Provision for loan losses
    
    
    28,733
    
    
    
    30,228Balance at end of year
    
    $
    27,837
    
    
    $
    24,806
 6. PREMISES AND EQUIPMENT
  Premises andAccumulated
    
    Equipment,(Table in thousands)
    
    Cost
    
    Depreciation
    
    NetAt December 31, 2009:Land
    
    $
    3,706
    
    
    $
    
    
    
    $
    3,706Buildings
    
    
    12,514
    
    
    
    4,833
    
    
    
    7,681Leasehold improvements
    
    
    690
    
    
    
    366
    
    
    
    324Furniture and equipment
    
    
    15,924
    
    
    
    13,471
    
    
    
    2,453Capitalized leases
    
    
    1,959
    
    
    
    567
    
    
    
    1,392Total
    
    $
    34,793
    
    
    $
    19,237
    
    
    $
    15,556
 Included in buildings is an asset with a carrying value of $2.8 million that is currently
held for sale for which the Company has taken an impairment charge of $1.0 million.
 Premises andAccumulated
    
    Equipment,(Table in thousands)
    
    Cost
    
    Depreciation
    
    NetAt December 31, 2008:Land
    
    $
    3,937
    
    
    $
    
    
    
    $
    3,937Buildings
    
    
    13,935
    
    
    
    4,618
    
    
    
    9,317Leasehold improvements
    
    
    768
    
    
    
    389
    
    
    
    379Furniture, equipment and vehicles
    
    
    16,842
    
    
    
    13,078
    
    
    
    3,764Capitalized leases
    
    
    1,959
    
    
    
    349
    
    
    
    1,610Construction in progress
    
    
    72
    
    
    
    
    
    
    
    72Total
    
    $
    37,513
    
    
    $
    18,434
    
    
    $
    19,079
 47




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7. INCOME TAXES
     (Table in thousands)
    
    2009
    
    2008Income tax expense (benefit)Current
    
    $
    (5,800
    )
    
    $
    (4,910
    )Deferred
    
    
    
    
    
    
    9,507Total
    
    $
    (5,800
    )
    
    $
    4,597
   (Table dollars in thousands)
    
    2009
    
    2008Statutory federal income tax rate
    
    
    35
    %
    
    
    35
    %Tax expense (benefit) at statutory rate
    
    $
    (10,997
    )
    
    $
    (11,079
    )Increase (decrease) in income taxes
resulting from:Redemption of investment in BOLI
    
    
    1,711
    
    
    
    Deferred tax asset valuation allowance
    
    
    3,284
    
    
    
    13,000Goodwill impairment
    
    
    
    
    
    
    3,767Other, net
    
    
    202
    
    
    
    (1,091
    )Income tax expense (benefit)
    
    $
    (5,800
    )
    
    $
    4,597
  48




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##### Table of Contents



December 31, 2009(Table in thousands)
    
    Assets
    
    Liabilities
    
    TotalExcess book over tax bad debt expense
    
    $
    10,520
    
    
    $
    
    
    
    $
    10,520Deferred compensation
    
    
    792
    
    
    
    
    
    
    
    792Excess tax over book loan income
    
    
    969
    
    
    
    
    
    
    
    969Operating loss and capital carryforwards
    
    
    2,601
    
    
    
    
    
    
    
    2,601Other real estate writedowns
    
    
    2,237
    
    
    
    
    
    
    
    2,237Other, net
    
    
    260
    
    
    
    (1,095
    )
    
    
    (835
    )Deferred tax asset valuation allowance
    
    
    (16,284
    )
    
    
    
    
    
    
    (16,284
    )Unrealized losses on securities
available for sale
    
    
    1,836
    
    
    
    
    
    
    
    1,836Total
    
    $
    2,931
    
    
    $
    (1,095
    )
    
    $
    1,836
 December 31, 2008(Table in thousands)
    
    Assets
    
    Liabilities
    
    TotalExcess book over tax bad debt expense
    
    $
    9,877
    
    
    $
    
    
    
    $
    9,877Deferred compensation
    
    
    3,368
    
    
    
    
    
    
    
    3,368Operating loss carryforward
    
    
    1,511
    
    
    
    
    
    
    
    1,511Excess tax over book loan fee income
    
    
    1,641
    
    
    
    
    
    
    
    1,641Deferred tax asset valuation allowance
    
    
    (13,000
    )
    
    
    
    
    
    
    (13,000
    )OID loan fee deferrals
    
    
    
    
    
    
    
    
    
    
    Other, net
    
    
    72
    
    
    
    (1,898
    )
    
    
    (1,826
    )Total
    
    $
    3,469
    
    
    $
    (1,898
    )
    
    $
    1,571
 8. STOCK OPTIONS
   2009
    
    
    2008Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    90,612
    
    
    $
    11.00
    
    
    
    153,837
    
    
    $
    13.08Granted
    
    
    
    
    
    
    
    
    
    
    5,000
    
    
    
    7.30Exercised
    
    
    
    
    
    
    
    
    
    
    16,036
    
    
    
    7.99Expired, forfeited or canceled
    
    
    40,285
    
    
    
    11.68
    
    
    
    52,189
    
    
    
    17.69Outstanding at end of year
    
    
    50,327
    
    
    $
    10.46
    
    
    
    90,612
    
    
    $
    11.00Options exercisable at end of year
    
    
    44,902
    
    
    $
    10.60
    
    
    
    76,662
    
    
    $
    10.83
  49




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9. EMPLOYEE BENEFIT PLANS
 Bank
Profit-Sharing Plan
  Bank
Savings SERP
  Bank
Officers SERP
 Retirement Benefits
 Retirement Benefits
  Beginning projected benefit obligation
    
    $
    7,911Participant payments
    
    
    (3,691
    )2009 expense
    
    
    1Prior
service cost and net actuarial loss reversal
    
    
    (2,526
    )Ending projected benefit obligation
    
    $
    1,695
   10. LEASES
  50




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(Table in thousands)
 Year
    
    Payments2010
    
    $
    4442011
    
    
    4442012
    
    
    4422013
    
    
    3572014
    
    
    3142015 and thereafter
    
    
    1,455Total minimum lease payments
    
    
    3,456Less amount representing interest
    
    
    (1,809
    )Present value of net minimum lease payments
    
    $
    1,647
  (Table in thousands)
 Year
    
    Payments2010
    
    $
    952011
    
    
    892012
    
    
    60Total
    
    $
    244
   11. OVERNIGHT AND SHORT-TERM BORROWED FUNDS
  December 31,(Table in thousands)
    
    2009
    
    2008Overnight borrowingsBank of Granite Corporation:Commercial deposits swept into commercial paper
    
    $
    
    
    
    $
    12,669Total overnight borrowings
    
    
    
    
    
    
    12,669Short-term borrowingsBank of Granite Corporation:Unsecured line of credit
    
    
    
    
    
    
    2,500Bank of Granite:Short-term borrowings from the Federal Home Loan Bank
    
    
    20,000
    
    
    
    13,000Granite Mortgage:Warehouse line of credit
    
    
    
    
    
    
    20,778Total short-term borrowings
    
    
    20,000
    
    
    
    36,278Total overnight and short-term borrowings
    
    $
    20,000
    
    
    $
    48,947
 51




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##### Table of Contents



December 31,(Table dollars in thousands)
    
    2009
    
    2008Balance outstanding at end of year
    
    $
    
    
    
    $
    12,669Maximum outstanding at any month-end during the year
    
    
    16,278
    
    
    
    59,090Average daily balance outstanding during the year
    
    
    11,240
    
    
    
    28,306Average interest rate during the year
    
    
    1.09
    %
    
    
    2.49
    %Average interest rate at end of year
    
    
    N/A
    
    
    
    1.49
    %
  December 31,(Table dollars in thousands)
    
    2009
    
    2008Balance outstanding at end of year
    
    $
    20,000
    
    
    $
    36,278Maximum outstanding at any month-end during the year
    
    
    46,059
    
    
    
    49,870Average daily balance outstanding during the year
    
    
    21,628
    
    
    
    38,317Average interest rate during the year
    
    
    3.17
    %
    
    
    4.52
    %Average interest rate at end of year
    
    
    2.62
    %
    
    
    3.93
    %
  12. LONG-TERM BORROWINGS
  December 31,(Table in thousands)
    
    2009
    
    2008Bank of Granite:Federal Home Loan Bank convertible advance at
5.22% due March 9, 2011 callable on or after
March 9, 2006
    
    $
    3,000
    
    
    $
    3,075Federal Home Loan Bank fixed rate credit
at 4.67% due September 20, 2010
    
    
    
    
    
    
    5,000Federal Home Loan Bank fixed rate credit
at 3.31% due February 11, 2010
    
    
    
    
    
    
    3,000Federal Home Loan Bank fixed rate credit
at 3.44% due June 1, 2010
    
    
    
    
    
    
    1,000Federal Home Loan Bank fixed rate credit
at 1.88% due January 31, 2011
    
    
    5,000
    
    
    
    Federal Home Loan Bank fixed rate credit
at 3.79% due May 31, 2011
    
    
    1,000
    
    
    
    1,000Federal Home Loan Bank fixed rate credit
at 2.18% due July 29, 2011
    
    
    5,000
    
    
    
    Federal Home Loan Bank fixed rate credit
at 2.41% due January 30, 2012
    
    
    5,000
    
    
    
    Federal Home Loan Bank fixed rate credit
at 4.04% due May 30, 2012
    
    
    1,000
    
    
    
    1,000Total long-term borrowings
    
    $
    20,000
    
    
    $
    14,075
 52




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13. MATURITIES OF TIME DEPOSITS
  (Table in thousands)
 Year
    
    Maturities2010
    
    $
    432,0392011
    
    
    74,7082012
    
    
    16,5122013
    
    
    13,301Total
    
    $
    536,560
 14. BASIC EARNINGS PER SHARE
  (Table in thousands except per share data)
    
    2009
    
    2008BASIC LOSS PER SHARENet loss
    
    $
    (25,620
    )
    
    $
    (36,251
    )Divide by: Weighted average shares outstanding
    
    
    15,454
    
    
    
    15,448Basic loss per share
    
    $
    (1.66
    )
    
    $
    (2.35
    )
  15. REGULATION AND REGULATORY RESTRICTIONS
   Adequately
    
    WellConsolidated
    
    Actual
    
    Capitalized
    
    CapitalizedAs of December 31, 2009Tier I capital to average assets
    
    
    4.84
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier I capital to risk weighted assets
    
    
    6.44
    %
    
    
    4.00
    %
    
    
    6.00
    %Total capital to risk weighted assets
    
    
    7.73
    %
    
    
    8.00
    %
    
    
    10.00
    %As of December 31, 2008Tier I capital to average assets
    
    
    6.49
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier I capital to risk weighted assets
    
    
    7.46
    %
    
    
    4.00
    %
    
    
    6.00
    %Total capital to risk weighted assets
    
    
    8.73
    %
    
    
    8.00
    %
    
    
    10.00
    %
 53




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##### Table of Contents



Adequately
    
    WellBank Only
    
    Actual
    
    Capitalized
    
    CapitalizedAs of December 31, 2009Tier I capital to average assets
    
    
    4.66
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier I capital to risk weighted assets
    
    
    6.19
    %
    
    
    4.00
    %
    
    
    6.00
    %Total capital to risk weighted assets
    
    
    7.48
    %
    
    
    8.00
    %
    
    
    10.00
    %As of December 31, 2008Tier I capital to average assets
    
    
    6.00
    %
    
    
    4.00
    %
    
    
    5.00
    %Tier I capital to risk weighted assets
    
    
    6.88
    %
    
    
    4.00
    %
    
    
    6.00
    %Total capital to risk weighted assets
    
    
    8.14
    %
    
    
    8.00
    %
    
    
    10.00
    %
  16. FAIR VALUE MEASUREMENTS AND DISCLOSURES
 Investment
Securities Available for Sale
   Fair Value Measurements atReporting Date UsingQuoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    Inputs(Table in thousands)
    
    Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)December 31, 2009U.S. Government agencies
    
    $
    42,051
    
    
    $
    
    
    
    $
    42,051
    
    
    $
    GNMA Mortgage-backed securities
    
    
    147,831
    
    
    
    
    
    
    
    147,831
    
    
    
    Equities
    
    
    1,039
    
    
    
    1,039
    
    
    
    
    
    
    
    Total investment securities
available for sale
    
    $
    190,921
    
    
    $
    1,039
    
    
    $
    189,882
    
    
    $
    December 31, 2008U.S. Government agencies
    
    $
    46,063
    
    
    $
    
    
    
    $
    46,063
    
    
    $
    State and local
    
    
    5,416
    
    
    
    
    
    
    
    5,416
    
    
    
    Equities
    
    
    7,097
    
    
    $
    1,643
    
    
    
    5,454
    
    
    
    Total investment securities
available for sale
    
    $
    58,576
    
    
    $
    1,643
    
    
    $
    56,933
    
    
    $
    
 54




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##### Table of Contents



Impaired Loans
  Other Real Estate Owned
   Fair Value Measurements atReporting Date UsingQuoted Prices
    
    Significantin Active
    
    Other
    
    SignificantMarkets for
    
    Observable
    
    UnobservableIdentical Assets
    
    Inputs
    
    Inputs(Table in thousands)
    
    Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)December 31, 2009Impaired loans (1)
    
    $
    26,788
    
    
    $
    
    
    
    $
    
    
    
    $
    26,788Other real estate owned
    
    
    13,235
    
    
    
    
    
    
    
    
    
    
    
    13,235Total assets
    
    $
    40,023
    
    
    $
    
    
    
    $
    
    
    
    $
    40,023December 31, 2008Mortgage loans held for sale (2)
    
    $
    16,770
    
    
    $
    
    
    
    $
    16,770
    
    
    $
    Impaired loans (1)
    
    
    35,298
    
    
    
    
    
    
    
    
    
    
    
    35,298Other real estate owned
    
    
    6,805
    
    
    
    
    
    
    
    
    
    
    
    6,805Total assets
    
    $
    58,873
    
    
    $
    
    
    
    $
    16,770
    
    
    $
    42,103
 
 (1)
    
    Net of reserves and loans carried at cost.(2)
    
    Mortgage loans held for sale were carried at the lower of cost or market or fair value. The
fair value was determined to be Level 2 measurements, Significant Other Observable Inputs as the
portfolio turned rapidly and current prices could be observed. 55




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17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
  December 31,Condensed Balance Sheets
    
    2009
    
    2008(In thousands)Assets:Cash and cash equivalents
    
    $
    343
    
    
    $
    13,380Investment in subsidiary bank at equity
    
    
    45,151
    
    
    
    66,465Investment in subsidiary mortgage bank at equity
    
    
    1,592
    
    
    
    6,665Other
    
    
    
    
    
    
    2,832Total
    
    $
    47,086
    
    
    $
    89,342Liabilities and Stockholders Equity:Overnight and short-term borrowings
    
    $
    
    
    
    $
    15,169Other
    
    
    
    
    
    
    3Stockholders equity
    
    
    47,086
    
    
    
    74,170Total
    
    $
    47,086
    
    
    $
    89,342For the Years Ended December 31,Condensed Results of Operations
    
    2009
    
    2008(In thousands)Equity in loss of subsidiary bank:Dividends
    
    $
    
    
    
    $
    (2,257
    )Loss retained
    
    
    (22,948
    )
    
    
    (34,425
    )Equity in earnings (loss)of subsidiary mortgage bank:Dividends
    
    
    2,953
    
    
    
    Earnings (loss) retained
    
    
    (5,073
    )
    
    
    8Income (expenses), net
    
    
    (552
    )
    
    
    423Net loss
    
    $
    (25,620
    )
    
    $
    (36,251
    )
 56




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##### Table of Contents



For the Years Ended December 31,Condensed Cash Flow
    
    2009
    
    2008(In thousands)Cash flows from operating activities:Net loss
    
    $
    (25,620
    )
    
    $
    (36,251
    )Adjustments to reconcile net loss to net cash
provided (used) by operating activities:Equity in losses of subsidiaries
    
    
    25,068
    
    
    
    36,674Stock-based compensation expense
    
    
    5
    
    
    
    15Premium amortization and discount
accretion, net
    
    
    (1
    )
    
    
    (3
    )Losses (gains) on sales or calls of
securities available for sale
    
    
    (174
    )
    
    
    67Impairment losses on securities
    
    
    478
    
    
    
    1,104Decrease in accrued interest receivable
    
    
    32
    
    
    
    Decrease in accrued interest payable
    
    
    
    
    
    
    (1
    )Decrease in other assets
    
    
    
    
    
    
    1Decrease in other liabilities
    
    
    (4
    )
    
    
    (2
    )Net cash provided (used) by operating activities
    
    
    (216
    )
    
    
    1,604Cash flows from investing activities:Proceeds from maturities of securities
available for sale
    
    
    
    
    
    
    2Proceeds from sales of securities
available for sale
    
    
    2,348
    
    
    
    275Net cash provided by investing activities
    
    
    2,348
    
    
    
    277Cash flows from financing activities:Net decrease in overnight and
short-term borrowings
    
    
    (15,169
    )
    
    
    (7,460
    )Net decrease in long-term borrowings
    
    
    
    
    
    
    (2,500
    )Net proceeds from issuance of common stock
    
    
    
    
    
    
    138Net dividends paid
    
    
    
    
    
    
    (6,024
    )Net cash used by financing activities
    
    
    (15,169
    )
    
    
    (15,846
    )Net decrease in cash
    
    
    (13,037
    )
    
    
    (13,965
    )Cash at beginning of year
    
    
    13,380
    
    
    
    27,345Cash at end of year
    
    $
    343
    
    
    $
    13,380Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    139
    
    
    $
    643Noncash investing and financing activities:In-kind dividend from subsidiary mortgage bank
    
    
    2,953
    
    
    
    
 57




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##### Table of Contents



18. COMMITMENTS AND CONTINGENCIES
  December 31,(Table in thousands)
    
    2009
    
    2008Financial instruments whose contract amounts represent credit riskCommitments to extend credit
    
    $
    106,122
    
    
    $
    162,958Standby letters of credit
    
    
    2,967
    
    
    
    4,998Financial instruments whose notional or contract amounts are
intended to hedge against interest rate riskForward commitments and options to sell mortgage-backed securities
    
    
    
    
    
    
    14,702
      58




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##### Table of Contents



19. FAIR VALUE OF FINANCIAL INSTRUMENTS
 Fair Value
Measurements and Disclosures.
 December 31, 2009
    
    December 31, 2008Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    Fair(Table in thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueAssets:Cash and cash equivalents
    
    $
    73,374
    
    
    $
    73,374
    
    
    $
    48,983
    
    
    $
    48,983Investment securities
    
    
    190,921
    
    
    
    190,921
    
    
    
    82,203
    
    
    
    82,868Bank owned life insurance
    
    
    4,106
    
    
    
    4,106
    
    
    
    31,278
    
    
    
    31,278Mortgage loans held for sale
    
    
    
    
    
    
    
    
    
    
    16,770
    
    
    
    16,949Loans (1)
    
    
    747,182
    
    
    
    752,000
    
    
    
    923,343
    
    
    
    929,447Market risk/liquidity adjustment
    
    
    
    
    
    
    (40,000
    )
    
    
    
    
    
    
    (45,000
    )Net loans
    
    
    747,182
    
    
    
    712,000
    
    
    
    923,343
    
    
    
    884,447Liabilities:Demand deposits
    
    
    430,045
    
    
    
    430,045
    
    
    
    494,394
    
    
    
    494,394Time deposits
    
    
    536,560
    
    
    
    539,000
    
    
    
    497,428
    
    
    
    509,447Overnight and short-term borrowings
    
    
    20,000
    
    
    
    20,000
    
    
    
    48,947
    
    
    
    48,947Long-term borrowings
    
    
    20,000
    
    
    
    21,000
    
    
    
    14,075
    
    
    
    15,158
 
 (1)
    
    Loan fair values are based on a hypothetical exit price, which does not represent the
estimated intrinsic value of the loan if held for investment. The assumptions used are expected
to approximate those that a market participant purchasing the loans would use to value the loans,
including a market risk premium and liquidity discount.   59




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20. OPERATING SEGMENTS
    COMMUNITY BANKING
  MORTGAGE BANKING
   OTHER
  60




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##### Table of Contents



(Table in thousands)
    
    2009
    
    2008COMMUNITY BANKINGNet interest income
    
    $
    30,071
    
    
    $
    34,345Provision for loan losses
    
    
    28,644
    
    
    
    30,143Total other income
    
    
    8,452
    
    
    
    7,988Total other expenses
    
    
    38,627
    
    
    
    41,773Loss before income tax expense (benefit)
    
    
    (28,748
    )
    
    
    (29,583
    )Net loss
    
    
    (22,948
    )
    
    
    (34,425
    )Identifiable segment assets
    
    
    1,058,522
    
    
    
    1,112,029MORTGAGE BANKINGNet interest income
    
    
    1,389
    
    
    
    3,158Provision for loan losses
    
    
    89
    
    
    
    85Total other income
    
    
    747
    
    
    
    3,560Total other expenses
    
    
    4,167
    
    
    
    6,870Loss before income tax benefit
    
    
    (2,120
    )
    
    
    (237
    )Net income (loss)
    
    
    (2,120
    )
    
    
    8Identifiable segment assets
    
    
    1,562
    
    
    
    31,885ALL OTHERNet interest expense
    
    
    (38
    )
    
    
    (333
    )Total other income
    
    
    (312
    )
    
    
    (1,170
    )Total other expenses
    
    
    202
    
    
    
    331Loss before income tax benefit
    
    
    (552
    )
    
    
    (1,834
    )Net loss
    
    
    (552
    )
    
    
    (1,834
    )Identifiable segment assets
    
    
    
    
    
    
    3,041TOTAL SEGMENTSNet interest income
    
    
    31,422
    
    
    
    37,170Provision for loan losses
    
    
    28,733
    
    
    
    30,228Total other income
    
    
    8,887
    
    
    
    10,378Total other expenses
    
    
    42,996
    
    
    
    48,974Loss before income tax expense (benefit)
    
    
    (31,420
    )
    
    
    (31,654
    )Net loss
    
    
    (25,620
    )
    
    
    (36,251
    )Identifiable segment assets
    
    
    1,060,084
    
    
    
    1,146,955
 
   61




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Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 Internal ControlIntegrated Framework
 
    
    Management has implemented a process to monitor and assess both the
design and operating effectiveness of internal control over financial reporting.
    
    All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and presentation.
    
    The Companys management assessed the effectiveness of the Companys internal
control over financial reporting as of December 31, 2009. In making this assessment,
it used criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commissions (COSO) in Internal ControlIntegrated Framework. Based on that
assessment,
we believe that, as of December 31, 2009, the Companys internal control over financial
reporting is effective based on those criteria.
  62




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##### Table of Contents



(a) Number of
    
    
    (b) Weighted-
    
    
    (c) Number of SecuritiesSecurities To Be
    
    
    Average Exercise
    
    
    Remaining Available forIssued Upon Exercise
    
    
    Price Of
    
    
    Future Issuance UnderOf Outstanding
    
    
    Outstanding
    
    
    Equity Compensation PlansOptions, Warrants and
    
    
    Options, Warrants
    
    
    (excluding securitiesRights
    
    
    and Rights
    
    
    reflected in column (a))Equity compensation plans Approved by security holders
    
    
    50,327
    
    
    $
    10.46
    
    
    
    743,300Not approved by security holders
    
    
    -0-
    
    
    
    n/a
    
    
    
    n/aTotal
    
    
    50,327
    
    
    $
    10.46
    
    
    
    743,300
  63




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##### Table of Contents



64




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##### Table of Contents



(a)1.
    
    Financial StatementsThe information required by this item is set forth under Item 8.2.
    
    Financial Statement SchedulesThe information required by this item is set forth in the Notes to Consolidated Financial
Statements under Item 8.3.
    
    Exhibits3.1
    
    Certificate of Incorporation, as amendedBank 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
    
    Bylaws of the Registrant, as amendedBank of Granite Corporations Amended and Restated Bylaws, filed as Exhibit 3.1 to the
Registrants Current Report on Form 8-K dated April 28, 2008, is incorporated herein by
reference.4.
    
    Instruments defining the rights of holders4.1
    
    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)
on 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.
    
    Material Contracts10.1
    
    Bank of Granite Employees Profit Sharing Plan and Trust, as amended, filed as
Exhibit 4.1 to the Registrants Registration Statement on Form S-8 (Registration Statement
No. 333-102383) on January 7, 2003, is incorporated herein by reference.10.2
    
    Agreement between Bank of Granite and D. Mark Stephens, dated October 23, 2009.**10.3
    
    Written Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of
Regulation S-K, dated August 24, 2009.10.4
    
    Consulting Agreement, dated December 19, 2005, between the Bank and John A. Forlines,
Jr. filed as Exhibit 10.1 to our Current Report on Form 8-K dated December 19, 2005, is
incorporated herein by reference.
 65




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##### Table of Contents



10.5
    
    Bank of Granite Corporations 2007 Stock Incentive Plan, filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q dated August 9, 2007, is incorporated herein by reference.**10.6
    
    Summary of Agreement between Bank of Granite and Jerry A. Felts, Chief Operating
Officer and Chief Financial Officer, effective as of July 1, 2009.**10.7
    
    Form of Amended and Restated Bank of Granite Salary Continuation Plan, effective
January 1, 2008 filed as Exhibit 10.7 to our Annual Report on Form 10-K for the fiscal
year ended December 31, 2008 is incorporated herein by reference.**10.8
    
    Amended and Restated Change of Control Agreement, dated December 19, 2008, between
the Company and R. Scott Anderson, filed as Exhibit 10.8 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 is incorporated herein by
reference.**10.9
    
    Amended and Restated Change of Control Agreement, dated December 19, 2008, between
the Company and Samuel M. Black, filed as Exhibit 10.11 to our Annual Report on
Form 10-K for the fiscal year ended December 31, 2008 is incorporated herein by
reference.**10.10
    
    Amended and Restated Change of Control Agreement, dated December 19, 2008,
between the Company and D. Mark Stephens.**10.11
    
    Stipulation and Consent between Bank of Granite and the Federal Deposit Insurance
Corporation and the North Carolina Commissioner of Banks and related Order to Cease
and Desist, filed as Exhibit 10.1 to our Current Report on Form 8-K, dated August 27,
2009, is incorporated herein by reference.10.12
    
    Amendment to Bank of Granite Salary Continuation Plan, effective November 1, 2009,
filed as Exhibit 10.1 to our Current Report on Form 8-K, dated October 30, 2009, is
incorporated herein by reference.**14.
    
    Ethics Policy, dated March 8, 2004, filed as Exhibit 14 to our Annual Report on Form
10-K for the fiscal year ended December 31, 2004 is incorporated herein by reference.21.
    
    Subsidiaries of the RegistrantThe information required by this item is also set forth under Item 8, Note 1, Summary
of Significant Accounting Policies.23.1
    
    Consent of Dixon Hughes PLLC31.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200231.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200232.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    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
 
 **
    
    Management Compensatory plan or arrangement 66




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##### Table of Contents



BANK OF GRANITE CORPORATIONBy:
    
    /s/ R. Scott AndersonR. Scott AndersonChief Executive OfficerMarch 31, 2010
  Signature
    
    Title
    
    Date/s/ R. Scott Anderson

R. Scott Anderson
    
    Chief Executive Officer and President
    
    March 31, 2010/s/ Jerry A. Felts

Jerry A. Felts
    
    Chief Operating Officer and 
Chief
Financial Officer
    
    March 31, 2010/s/ John N. Bray

John N. Bray
    
    Chairman and Director
    
    March 31, 2010/s/ R. Scott Anderson

R. Scott Anderson
    
    Director
    
    March 31, 2010/s/ Joseph D. Crocker

Joseph D. Crocker
    
    Director
    
    March 31, 2010/s/ Leila N. Erwin

Leila N. Erwin
    
    Director
    
    March 31, 2010/s/ Paul M. Fleetwood, III

Paul M. Fleetwood, III
    
    Director
    
    March 31, 2010/s/ Hugh R. Gaither

Hugh R. Gaither
    
    Director
    
    March 31, 2010/s/ James Y. Preston

James Y. Preston
    
    Director
    
    March 31, 2010/s/ Boyd C. Wilson, Jr.

Boyd C. Wilson, Jr.
    
    Director
    
    March 31, 2010
 67




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##### Table of Contents



BeginsExhibit
    
    
    
    on Page3.1
    
    Bank of Granite Corporations Certificate of Incorporation
    
    *3.2
    
    Bank of Granite Corporations Bylaws
    
    *4.1
    
    Form of stock certificate
    
    *4.2
    
    Articles 5, 6, 7, 10 and 13 of the Restated Certificate of
Incorporation
    
    *10.1
    
    Bank of Granite Employees Profit Sharing Plan and Trust
    
    *10.2
    
    Agreement between Bank of Granite and D. Mark Stephens**
    
    Filed herewith10.3
    
    Written Description of Director Compensation
    
    Filed herewith10.4
    
    Consulting Agreement between the Company and
John A. Forlines, Jr.
    
    *10.5
    
    Bank of Granite Corporations 2007 Stock Incentive Plan**
    
    *10.6
    
    Summary of Agreement between Bank of Granite and
Jerry A. Felts**
    
    Filed herewith10.7
    
    Form of Amended and Restated Bank of Granite Salary
Continuation Plan**
    
    *10.8
    
    Amended and Restated Change of Control Agreement
between the Company and R. Scott Anderson**
    
    *10.9
    
    Amended and Restated Change of Control Agreement
between the Company and Samuel M. Black**
    
    *10.10
    
    Amended and Restated Change of Control Agreement
between the Company and D. Mark Stephens**
    
    Filed herewith10.11
    
    Stipulation and Consent between Bank of Granite and
the Federal Deposit Insurance Corporation and
the North Carolina Commissioner of Banks and
related Order to Cease and Desist
    
    *10.12
    
    Amendment to Bank of Granite Salary Continuation Plan**
    
    *14
    
    Ethics Policy
    
    *21
    
    Subsidiaries of the Registrant
    
    Filed herewith23.1
    
    Consent of Independent Auditors
    
    Filed herewith31.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith31.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith32.1
    
    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 herewith32.2
    
    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* *
    
    Management compensatory plan or arrangement 68