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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2011

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

For the transition period from to

Commission file number 0-15956

Bank of Granite Corporation

(Exact name of registrant as specified in its charter)

Delaware

56-1550545

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


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

(828) 496-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock, $1.00 par value

15,454,641 shares outstanding as of July 31, 2011

Index


	Begins on Page
Part I - Financial Information

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets June 30, 2011 and December 31, 2010		3

Condensed Consolidated Statements of Income (Loss) Three Months Ended June 30, 2011 and 2010 And Six Months Ended June 30, 2011 and 2010		4

Condensed Consolidated Statements of Comprehensive Loss Three Months Ended June 30, 2011 and 2010 And Six Months Ended June 30, 2011 and 2010		5

Condensed Consolidated Statements of Changes in Stockholders’ Equity Six Months Ended June 30, 2011 and 2010		6

Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010		7

Notes to Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3. Quantitative and Qualitative Disclosures About Market Risk		32

Item 4. Controls and Procedures		33

Part II - Other Information

Item 1A. Risk Factors		33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		33

Item 6. Exhibits		34

Signatures		35

Exhibit Index		36

Item 1. Financial Statements

Bank of Granite Corporation

Condensed Consolidated Balance Sheets

(In thousands except per share data)


	June 30, 2011 (Unaudited)			December 31, 2010 (Note 1)

Assets:
Cash and cash equivalents:
Cash and due from banks	$	57,245		$	45,982
Interest-bearing deposits		2,526			1,242

Total cash and cash equivalents		59,771			47,224


Investment securities:
Available for sale, at fair value		249,498			255,104


Loans		476,788			562,124
Allowance for loan losses		(21,115	)		(28,273	)

Net loans		455,673			533,851


Premises and equipment, net		12,446			13,666
Accrued interest receivable		3,054			3,338
Other real estate owned		17,187			11,605
Other assets		9,431			11,052

Total assets	$	807,060		$	875,840


Liabilities and Stockholders’ Equity:
Deposits:
Interest-bearing	$	671,746		$	729,962
Noninterest-bearing		87,920			92,345

Total deposits		759,666			822,307
Short-term borrowings		24,000			18,000
Long-term borrowings		0			6,000
Accrued interest payable		788			1,046
Other liabilities		3,303			4,097

Total liabilities		787,757			851,450


Stockholders’ equity:
Common stock, $1.00 par value per share
Authorized - 25,000 shares
Issued - 18,981 shares in 2011 and 2010
Outstanding - 15,454 shares in 2011 and 2010		18,981			18,981
Additional paid-in capital		30,195			30,195
Retained earnings		23,433			28,644
Accumulated other comprehensive loss, net of deferred income taxes		(1,454	)		(1,578	)
Less: Cost of common stock in treasury;
3,527 shares in 2011 and 2010		(51,852	)		(51,852	)

Total stockholders’ equity		19,303			24,390

Total liabilities and stockholders’ equity	$	807,060		$	875,840

See notes to condensed consolidated financial statements.

Bank of Granite Corporation

Condensed Consolidated Statements of Income (Loss)

(Unaudited - in thousands except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Interest income:
Interest and fees from loans	$	7,034		$	9,285		$	14,551		$	19,488
Interest-bearing deposits		25			23			47			62
Investments:
U.S. Government agencies		2,183			2,105			4,350			4,131
Other		0			22			0			45

Total interest income		9,242			11,435			18,948			23,726


Interest expense:
Time deposits of $100 or more		682			1,322			1,499			2,718
Other time and savings deposits		1,158			1,906			2,489			4,188
Short-term borrowings		93			148			197			275
Long-term borrowings		0			80			27			201

Total interest expense		1,933			3,456			4,212			7,382


Net interest income		7,309			7,979			14,736			16,344
Provision for loan losses		4,001			8,503			6,006			20,603

Net interest income (loss) after provision for loan losses		3,308			(524	)		8,730			(4,259	)


Other income:
Service charges on deposit accounts		967			1,289			1,939			2,545
Other service fees and commissions		49			88			104			172
Securities gains		680			229			49			235
Other		304			319			592			627

Total other income		2,000			1,925			2,684			3,579


Other expenses:
Salaries and wages		1,972			2,185			4,150			4,400
Employee benefits		357			407			753			798
Equipment and occupancy expense, net		750			883			1,557			1,850
FDIC assessments		685			1,617			1,660			2,362
Other real estate owned		2,388			2,543			3,224			3,671
Other		2,575			2,074			5,281			3,890

Total other expenses		8,727			9,709			16,625			16,971


Loss before income tax benefit		(3,419	)		(8,308	)		(5,211	)		(17,651	)
Income tax benefit		0			(790	)		0			(790	)

Net loss	$	(3,419	)	$	(7,518	)	$	(5,211	)	$	(16,861	)


Per share amounts:
Net loss - basic and diluted	$	(0.22	)	$	(0.49	)	$	(0.34	)	$	(1.09	)

See notes to condensed consolidated financial statements.

Bank of Granite Corporation

Condensed Consolidated Statements of Comprehensive Loss

(Unaudited - in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010

Net loss	$	(3,419	)	$	(7,518	)	$	(5,211	)	$	(16,861	)


Items of other comprehensive loss:
Items of other comprehensive income, before tax:
Change in unrealized gains on securities available for sale		87			3,565			156			7,012
Reclassification adjustment for available for sale securities gains included in net income		680			229			49			235


Other comprehensive income, before tax		767			3,794			205			7,247
Change in deferred income taxes related to change in unrealized gains or losses on securities available for sale		(307	)		(1,535	)		(81	)		(2,982	)


Items of other comprehensive income, net of tax		460			2,259			124			4,265


Comprehensive loss	$	(2,959	)	$	(5,259	)	$	(5,087	)	$	(12,596	)

See notes to condensed consolidated financial statements.

Bank of Granite Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited - in thousands except per share data)


	Six Months Ended June 30,
	2011			2010

Common stock, $1.00 par value per share
At beginning of period	$	18,981		$	18,981

At end of period		18,981			18,981


Additional paid-in capital
At beginning of period		30,195			30,195

At end of period		30,195			30,195


Retained earnings
At beginning of period		28,644			52,308
Net loss		(5,211	)		(16,861	)

At end of period		23,433			35,447


Accumulated other comprehensive income (loss), net of deferred income taxes
At beginning of period		(1,578	)		(2,546	)
Net change in unrealized gains or losses on securities available for sale, net of deferred income taxes		124			4,265

At end of period		(1,454	)		1,719


Cost of common stock in treasury
At beginning of period		(51,852	)		(51,852	)

At end of period		(51,852	)		(51,852	)


Total stockholders’ equity	$	19,303		$	34,490

See notes to condensed consolidated financial statements.

Bank of Granite Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited - in thousands)


	Six Months Ended June 30,
	2011			2010

Increase (decrease) in cash & cash equivalents:
Cash flows from operating activities:
Net loss	$	(5,211	)	$	(16,861	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		587			735
Provision for loan losses		6,006			20,603
Investment security premium amortization, net		394			896
Deferred income taxes		0			(89	)
Gains on sales or calls of securities available for sale		(49	)		(235	)
Losses on writedowns or sale of other real estate		2,925			3,114
Losses on disposal of miscellaneous assets		382			10
Decrease in other assets		1,540			3,378
Decrease in taxes payable		0			(7	)
Decrease in accrued interest receivable		284			150
Decrease in accrued interest payable		(258	)		(249	)
Decrease in other liabilities		(794	)		(368	)

Net cash provided by operating activities		5,806			11,077


Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of securities available for sale		14,493			38,253
Proceeds from sales of securities available for sale		133,434			70,822
Purchase of securities available for sale		(142,461	)		(155,448	)
Net decrease in loans		58,867			94,975
Capital expenditures, net of proceeds from sale of miscellaneous assets		251			0
Proceeds from sales of other real estate		4,798			1,891

Net cash provided by investing activities		69,382			50,493


Cash flows from financing activities:
Net decrease in demand, NOW, money market and savings deposits		(17,182	)		(35,397	)
Net decrease in time deposits		(45,459	)		(22,564	)
Net increase in short-term borrowings		6,000			7,000
Net decrease in long-term borrowings		(6,000	)		(8,000	)

Net cash used in financing activities		(62,641	)		(58,961	)


Net increase in cash equivalents		12,547			2,609
Cash and cash equivalents at beginning of period		47,224			73,374


Cash and cash equivalents at end of period	$	59,771		$	75,983

See notes to condensed consolidated financial statements.

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements

June 30, 2011

(Unaudited)

1. UNAUDITED FINANCIAL STATEMENTS

Bank of Granite Corporation’s (the “Company’s” or the “Holding Company’s”) condensed consolidated balance sheet as of June 30, 2011, and the condensed consolidated statements of income (loss) and comprehensive loss for the three and six-month periods ended June 30, 2011 and 2010, and the condensed consolidated statements of changes in stockholders’ equity and cash flows for the six-month periods ended June 30, 2011 and 2010 are unaudited and reflect all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the interim period financial statements. Amounts as of December 31, 2010 included in the condensed consolidated financial statements and related notes were derived from the audited consolidated financial statements.

Certain amounts for the periods ended June 30, 2010 have been reclassified to conform to the presentation for the periods ended June 30, 2011.

The unaudited interim condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These interim condensed consolidated financial statements should be read in conjunction with the Company’s December 31, 2010 audited consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K, as amended.

The consolidated financial statements include the Company’s two wholly owned subsidiaries, Bank of Granite (the “Bank”), a full service commercial bank, and Granite Mortgage, Inc. (“Granite Mortgage”), a mortgage banking company which ceased mortgage originations during 2009. Because we now operate, manage, and, likewise, direct our corporate governance activities as a single reporting banking segment, we no longer have any reportable segments.

The accounting policies followed are set forth in Note 1 to the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2010 on file with the Securities and Exchange Commission. There were no changes in significant accounting policies during the six months ended June 30, 2011 except as described in Note 10 below.

2. REGULATORY MATTERS AND GOING CONCERN CONSIDERATIONS

Regulatory Actions

The Bank entered into a Stipulation and Consent (“Consent”) to the issuance of an Order to Cease and Desist (“Order”) by the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks (“the Commissioner”). Based on our Consent, the FDIC and the Commissioner jointly issued the Order on August 27, 2009.

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

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

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

Among other things, the Order requires the Bank to:

•

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

•

Formulate a plan to improve the Bank’s earnings and evaluate the plan quarterly;

•

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

•

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

•

Develop a plan to improve the Bank’s liquidity; monitor contingent funding needs and improve asset liability management, and review and revise the plan on a quarterly basis;

•

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

•

Neither renew, roll-over nor increase the amount of brokered deposits above the amount outstanding at the date of the Order.

The Bank’s current compliance with various stipulations of the Order can be summarized as follows:

•

The proposed merger plan and recapitalization is described in detail in Note 3. The proposed merger and recapitalization would infuse capital into the Bank sufficient to meet the requirements set forth in the Order.

•

The management plan has continued with the balance sheet contraction and continued expense control. The continuing elevated levels of problem loans and related loss provisions and the costs of resolution of same are the significant constraints to improved operating performance. The liquidity monitoring has been enhanced by more frequent analysis (weekly regulatory reporting); a funds re-pricing strategy to monitor market rates closely and insure competitive rates, and building liquidity by loan contraction and deposit retention.

•

The asset quality management strategy has included suspending any new land development and construction lending since 2009. Additionally, the Bank’s capital levels have prevented making SBA loans or participating in government supported small business lending. The result is the payoff of existing loans and the resolution of the problem loans has led to the steady contraction of the overall portfolio, with a very low volume of new loans granted.

•

The Bank has continually added more and more experienced workout personnel; however, the long duration of the recessing economic environment and the significant volume of real estate loans have been factors that have prevented a significant reduction in nonperforming asset levels.

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

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

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

Going Concern Considerations

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

The Bank has not achieved the required capital levels mandated by the Order, and as set forth in Note 3, the proposed transaction would result in capital sufficient to comply with the Order. However, absent the completion of the merger and recapitalization there can be no assurance that any other capital raising initiatives will be successful to meet the capital levels required in the Order. Banking regulators classify a bank as “critically undercapitalized” if it fails to meet a 2% capital leverage ratio. Under “prompt corrective action,” a critically undercapitalized bank must be placed in conservatorship or receivership within 90 days of such determinations unless the FDIC and appropriate regulators determine that other action would protect the deposit insurance fund.

Non-compliance with the capital requirements of the Order and the continued erosion of capital in the current year may cause the Bank to be subject to further enforcement actions by the FDIC or the Commissioner, including potential regulatory receivership. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Capital Matters

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

The minimum capital requirements to be characterized as “well capitalized” and “adequately capitalized”, as defined by regulatory guidelines, and the Company’s actual capital ratios on a consolidated and Bank-only basis were as follows as of June 30, 2011:


							Minimum Regulatory Requirement
	Actual						Adequately Capitalized			Well Capitalized			Pursuant to Order
	Consolidated			Bank			Adequately Capitalized			Well Capitalized			Pursuant to Order

Leverage capital ratios		2.53	%		2.47	%		4.00	%		5.00	%		8.00	%
Risk-based capital ratios:
Tier 1 capital		3.91	%		3.82	%		4.00	%		6.00	%		8.00	%
Total capital		5.20	%		5.10	%		8.00	%		10.00	%		12.00	%

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

3. PROPOSED MERGER AND RECAPITALIZATION

The Company entered into an Agreement and Plan of Merger with FNB United Corp. (“FNB”) on April 26, 2011. The merger agreement provides that Bank of Granite Corporation shareholders will receive 3.375 shares of FNB’s common stock in exchange for each share of Bank of Granite Corporation common stock they own immediately prior to completion of the merger. The proposed merger is part of a transaction in which The Carlyle Group (“Carlyle”) and Oak Hill Capital Partners (“Oak Hill Capital”) have entered into binding agreements (“The Investment Agreements”) to purchase $158 million of common stock of FNB as part of a $310 million capital raise by FNB. The $310 million has been fully subscribed as of August 2, 2011.

Completion of the merger and The Carlyle Group and Oak Hill Capital Partners investments are dependent on each other and the satisfactory completion of a number of other conditions, including the exchange of FNB preferred stock held by the U.S. Treasury for FNB common stock on the terms specified in the merger and investment agreements, receipt of regulatory approvals, the approval of the shareholders of both FNB and Bank of Granite, FNB United raising $310 million inclusive of The Carlyle Group and Oak Hill Capital Partners investments, receipt of advice that the private placement investments will not impair FNB United’s existing net operating loss deferred tax asset, FNB United and the Company meeting specified financial condition requirements and not having experienced material adverse effects and events, and other customary closing conditions.

4. INVESTMENT SECURITIES

The amortized cost, gross unrealized gains and losses and fair values of investment securities at June 30, 2011 and December 31, 2010 were as follows:

(In thousands)

Amortized

Gross Unrealized

Fair

Type and Contractual Maturity

Cost

Gains

Losses

Value

AVAILABLE FOR SALE

At June 30, 2011:

U.S. Government agencies due:

After 5 years but within 10 years

34,463

447

34,016

After 10 years

22,137

360

21,777

Total U.S. Government agencies

56,600

807

55,793

Government agency and other mortgage-backed securities due:

After 10 years

191,821

399

1,968

190,252

Corporate bonds due:

After 5 years but within 10 years

3,500

3,453

Total available for sale

251,921

399

2,822

249,498

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(unaudited)

For the three months ended June 30, 2011, sales of securities available for sale resulted in proceeds of $95.3 million, $725 thousand in realized gains and $45 thousand in realized losses. Sales of securities available for sale for the six months ended June 30, 2011 resulted in proceeds of $133.4 million, $748 thousand in realized gains and $699 thousand in realized losses.

As of June 30, 2011, accumulated other comprehensive losses, net of deferred income taxes, included unrealized net losses of $2.4 million, net of deferred income tax benefit of $969 thousand, related to securities available for sale.

For the three months ended June 30, 2010, sales and calls of securities available for sale resulted in proceeds of $68.1 million, $313 thousand in realized gains and $84 thousand in realized losses. Sales and calls of securities available for sale for the six months ended June 30, 2010 resulted in proceeds of $94.8 million, $340 thousand in realized gains and $105 thousand in realized losses.


(In thousands)
	Amortized		Gross Unrealized				Fair
Type and Contractual Maturity	Cost		Gains		Losses		Value

AVAILABLE FOR SALE
At December 31, 2010:

U. S. Government agencies due:
After 5 years but within 10 years	$	41,985	$	0	$	1,310	$	40,675
After 10 years		19,076		123		378		18,821

Total U.S. Government agencies		61,061		123		1,688		59,496


State and local due:
After 5 years but within 10 years		1,265		0		48		1,217
After 10 years		4,165		0		124		4,041

Total state and local		5,430		0		172		5,258


Government agency and other mortgage-backed securities due:
After 10 years		187,741		692		1,622		186,811

Corporate bonds due:
After 5 years but within 10 years		3,500		39		0		3,539


Total available for sale	$	257,732	$	854	$	3,482	$	255,104

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

Securities with unrealized losses at June 30, 2011 and December 31, 2010 not recognized in income, substantially all of which have been in a loss position less than 12 months were as follows:


(In thousands)	June 30, 2011				December 31, 2010
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss

Less than 12 months:
U.S. Government agencies	$	55,793	$	807	$	54,697	$	1,688
State and local		0		0		5,257		172
Government agency and other mortgage-backed securities		126,796		1,832		116,940		1,622
Corporate bonds		3,453		47		0		0

12 months or more:
Government agency and other mortgage-backed securities		2,989		136		0		0


Total temporarily impaired	$	189,031	$	2,822	$	176,894	$	3,482

Unrealized losses on securities have not been recognized in income because management has the intent and ability to hold for the foreseeable future, and the decline in fair value is largely due to decreases in market interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market interest rates decline. Furthermore, it is not likely that the Company will have to sell any impaired securities before a recovery of the amortized cost.

5. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are made primarily to customers in the Company’s market areas. Loans at June 30, 2011 and December 31, 2010, classified by segment, are as follows:


(In thousands)	June 30, 2011			December 31, 2010

Real estate - construction	$	18,589		$	26,920
Real estate - mortgage, commercial		359,757			413,761
Commercial and industrial		49,964			69,334
Consumer		48,749			52,443

		477,059			562,458
Deferred origination fees, net		(271	)		(334	)

Total	$	476,788		$	562,124

The credit quality indicator presented for all segments (except Consumer) within the loan portfolio is a widely-used and standard system representing the degree of risk of nonpayment. The risk-grade categories presented in the following table are:

Pass - Loans categorized as Pass are higher quality loans that have adequate sources of repayment and little risk of collection.

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

Special Mention - A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard - A Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of Substandard loans, does not have to exist in individual assets classified Substandard.

Impaired - A loan is graded Impaired when it is probable that the loan will not be collected in accordance with its terms. All Impaired loans are placed on nonaccrual and evaluated quarterly for the appropriate level of impairment.

Loans categorized as Special Mention are considered Criticized. Loans categorized as Substandard or Impaired are considered Classified.

The following tables present loan balances by credit quality indicator as of June 30, 2011 and December 31, 2010 :


(In thousands)	Pass (Ratings 1-4)		Special Mention (Rating 5)		Substandard (Rating 6-8)		Impaired		Total

June 30, 2011

Real estate - construction	$	4,745	$	2,535	$	1,253	$	10,056	$	18,589
Real estate - mortgage, commercial		197,029		73,223		62,006		27,499		359,757
Commercial and industrial		32,957		6,194		8,643		2,170		49,964
Consumer		42,753		4,009		1,913		74		48,749

Total	$	277,484	$	85,961	$	73,815	$	39,799	$	477,059


December 31, 2010

Real estate - construction	$	4,948	$	3,085	$	2,213	$	16,674	$	26,920
Real estate - mortgage, commercial		234,742		75,264		66,034		37,721		413,761
Commercial and industrial		46,728		8,229		10,772		3,605		69,334
Consumer		48,486		2,114		1,843		0		52,443

Total	$	334,904	$	88,692	$	80,862	$	58,000	$	562,458

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

The following tables present ALLL activity by portfolio segment for the three months and six months ended June 30, 2011 and 2010:


(In thousands)	Real Estate Construction			Real Estate Mortgage, Commercial			Commercial and Industrial			Consumer			Unallocated			Total

Allowance for loan losses:

Three Months Ended June 30, 2011

Beginning Balance	$	2,772		$	17,223		$	2,574		$	471		$	2,135		$	25,175
Charge-offs		(2,267	)		(4,853	)		(1,076	)		(209	)		0			(8,405	)
Recoveries		14			137			166			27			0			344
Provision		651			2,344			428			154			424			4,001

Ending Balance	$	1,170		$	14,851		$	2,092		$	443		$	2,559		$	21,115


Six Months Ended June 30, 2011

Beginning Balance	$	3,662		$	19,528		$	3,214		$	499		$	1,370		$	28,273
Charge-offs		(3,517	)		(8,112	)		(2,069	)		(477	)		0			(14,175	)
Recoveries		26			431			490			64			0			1,011
Provision		999			3,004			457			357			1,189			6,006

Ending Balance	$	1,170		$	14,851		$	2,092		$	443		$	2,559		$	21,115


Three Months Ended June 30, 2010

Beginning Balance	$	3,729		$	21,835		$	3,370		$	572		$	840		$	30,346
Charge-offs		(1,175	)		(5,130	)		(3,717	)		(236	)		0			(10,258	)
Recoveries		92			438			476			23			0			1,029
Provision		2,213			2,774			3,676			180			(340	)		8,503

Ending Balance	$	4,859		$	19,917		$	3,805		$	539		$	500		$	29,620


Six Months Ended June 30, 2010

Beginning Balance	$	5,391		$	18,150		$	3,304		$	602		$	390		$	27,837
Charge-offs		(4,456	)		(10,196	)		(5,420	)		(296	)		0			(20,368	)
Recoveries		92			675			728			53			0			1,548
Provision		3,832			11,288			5,193			180			110			20,603

Ending Balance	$	4,859		$	19,917		$	3,805		$	539		$	500		$	29,620

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

The following table presents loans on nonaccrual status by loan segment:


(In thousands)	June 30, 2011		December 31, 2010

Real estate - construction	$	10,813	$	17,785
Real estate - mortgage, commercial		35,698		40,504
Commercial and industrial		2,861		3,797
Consumer		527		183

Total	$	49,899	$	62,269

The following tables present an aging analysis of loans as of June 30, 2011 and December 31, 2010 :


(In thousands)	Real Estate Construction		Real Estate Mortgage, Commercial		Commercial and Industrial		Consumer		Total

June 30, 2011

Past Due:
1-29 Days	$	156	$	25,054	$	2,357	$	3,594	$	31,161
30-89 Days		179		14,592		2,497		289		17,557
90 or More Days		0		1,178		0		0		1,178

Total Past Due		335		40,824		4,854		3,883		49,896


Current		7,441		283,235		42,249		44,339		377,264
Nonaccrual		10,813		35,698		2,861		527		49,899

Total Loans	$	18,589	$	359,757	$	49,964	$	48,749	$	477,059


December 31, 2010

Past Due:
1-29 Days	$	1,052	$	44,119	$	9,057	$	3,815	$	58,043
30-89 Days		0		20,529		1,240		548		22,317
90 or More Days		0		6,842		624		0		7,466

Total Past Due		1,052		71,490		10,921		4,363		87,826


Current		8,083		301,767		54,616		47,897		412,363
Nonaccrual		17,785		40,504		3,797		183		62,269

Total Loans	$	26,920	$	413,761	$	69,334	$	52,443	$	562,458

Interest income on impaired loans recognized for the three and six-month periods of 2011 and 2010 was immaterial. If interest from nonaccrual loans, including impaired loans, had been recognized in accordance with the original terms of the loans, the estimated gross interest income for the second quarters of 2011 and 2010 that would have been recorded was approximately $777 thousand and $899 thousand, respectively. For the comparable year-to-date periods, interest income of approximately $1.7 million in 2011 and in 2010 would have been recognized in accordance with the original terms of the nonaccrual loans.

The average recorded balance of impaired loans for the second quarters of 2011 and 2010 was $41.0 million and $47.0 million, respectively. The average recorded balance of impaired loans was $48.9 million for the first six months of 2011 and $44.1 million for the first six months of 2010.

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

The following tables present impaired loan information as of June 30, 2011 and December 31, 2010 :


(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment

June 30, 2011

*With no related allowance recorded:*
Real estate - construction	$	5,659	$	8,419	$	0	$	3,534
Real estate - mortgage, commercial		15,547		19,412		0		10,718
Commercial and industrial		1,143		1,341		0		882
Consumer		74		74		0		37

Total		22,423		29,246		0		15,171


*With an allowance recorded:*
Real estate - construction		4,397		4,992		884		9,831
Real estate - mortgage, commercial		11,952		12,092		3,289		21,892
Commercial and industrial		1,027		1,035		627		2,006
Consumer		0		0		0		0

Total		17,376		18,119		4,800		33,729


*Total:*
Real estate - construction		10,056		13,411		884		13,365
Real estate - mortgage, commercial		27,499		31,504		3,289		32,610
Commercial and industrial		2,170		2,376		627		2,888
Consumer		74		74		0		37

Total	$	39,799	$	47,365	$	4,800	$	48,900


December 31, 2010

With no related allowance recorded:
Real estate - construction	$	1,409	$	2,089	$	0	$	2,438
Real estate - mortgage, commercial		5,889		7,184		0		6,723
Commercial and industrial		621		768		0		681

Total		7,919		10,041		0		9,842


With an allowance recorded:
Real estate - construction		15,265		16,121		3,175		12,609
Real estate - mortgage, commercial		31,832		32,621		7,079		23,848
Commercial and industrial		2,984		3,221		1,309		2,157

Total		50,081		51,963		11,563		38,614


Total:
Real estate - construction		16,674		18,210		3,175		15,047
Real estate - mortgage, commercial		37,721		39,805		7,079		30,571
Commercial and industrial		3,605		3,989		1,309		2,838

Total	$	58,000	$	62,004	$	11,563	$	48,456

6. EARNINGS PER SHARE

Earnings per share have been computed using 15,454,000 shares of common stock outstanding as there have been no changes during the periods reported. The levels of outstanding stock options are insignificant and are not included for any period because their inclusion would be anti-dilutive.

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

7. FAIR VALUE MEASUREMENTS AND DISCLOSURES

Investment Securities Available for Sale

A significant portion of the Company’s available for sale investment portfolio is government guaranteed, and the fair value measurements for the second quarter of 2011 were estimated using independent pricing sources that were determined to be Level 2 measurements, Significant Other Observable Inputs. Unrealized gains and losses on securities available for sale are reflected in accumulated other comprehensive income and recognized gains and losses are reported as securities gains and losses in other income.

The following tables reflect investment securities available for sale measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010:


			Fair Value Measurements at Reporting Date Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2011
U.S. Government agencies	$	55,793	$	0	$	55,793	$	0
Government agency and other mortgage-backed securities		190,252		0		190,252		0
Corporate bonds		3,453		0		3,453		0

Total investment securities available for sale	$	249,498	$	0	$	249,498	$	0


December 31, 2010
U.S. Government agencies	$	59,496	$	0	$	59,496	$	0
State and local		5,258		0		5,258		0
Government agency and other mortgage-backed securities		186,811		0		186,811		0
Corporate bonds		3,539		0		3,539		0

Total investment securities available for sale	$	255,104	$	0	$	255,104	$	0

The Company utilizes a third party pricing service to provide valuations on its securities portfolio. Despite most of these securities being U.S. Government agency debt obligations, corporate bonds, and agency mortgage-backed securities, third party valuations are determined based on the characteristics of a security (such as maturity, duration, rating, etc.) and in reference to similar or comparable securities. Due to the nature and methodology of these valuations, the Company considers these fair value measurements as Level 2. No securities were transferred between Level 1 and Level 2 during the first six months of 2011.

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

Impaired Loans

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

Thus, the fair value reflects the loan balance less the specifically allocated reserve. Impaired loans for which no reserve has been specifically allocated are not included in the table below. At June 30, 2011, all impaired loan values were determined to be based on Level 3 measurements.

Other Real Estate Owned

Other real estate owned is initially accounted for at fair value, less estimated costs to dispose of the property. Any excess of the recorded investment over fair value, less costs to dispose, is charged to the allowance for loan losses at the time of transfer. Updated appraisals or evaluations are obtained periodically for all other real estate owned properties. These appraisals or evaluations are used to update fair value estimates. Writedowns are charged to earnings for subsequent losses on other real estate owned when these updates indicate such losses have occurred. The ability of the Company to recover the carrying value of other real estate owned is based upon future sales of the real estate. The ability to effect such sales is subject to market conditions and other factors beyond our control, and future declines in the value of the real estate could result in writedowns and charges to earnings. At June 30, 2011, the fair value measurements for other real estate were determined to be Level 3 measurements.

The following tables reflect certain loans and other real estate measured at fair value on a nonrecurring basis at June 30, 2011 and December 31, 2010:


			Fair Value Measurements at Reporting Date Using
(In thousands)	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

June 30, 2011
Impaired loans (1)	$	31,329	$	0	$	0	$	31,329
Other real estate owned		17,187		0		0		17,187


Total assets	$	48,516	$	0	$	0	$	48,516


December 31, 2010
Impaired loans (1)	$	45,705	$	0	$	0	$	45,705
Other real estate owned		11,605		0		0		11,605


Total assets	$	57,310	$	0	$	0	$	57,310

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

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

8. COMMITMENTS AND CONTINGENCIES

In the normal course of business there are various commitments and contingent liabilities such as commitments to extend credit, which are not reflected on the financial statements. The unfunded portion of loan commitments and standby letters of credit as of June 30, 2011 and December 31, 2010 were as follows:


(In thousands)	June 30, 2011		December 31, 2010

Financial instruments whose contract amounts represent credit risk
Unfunded commitments to extend credit	$	68,559	$	77,268
Standby letters of credit		730		1,262

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

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

Legal Proceedings

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

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

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


(In thousands)	June 30, 2011					December 31, 2010
	Carrying Amount		Estimated Fair Value			Carrying Amount		Estimated Fair Value

Assets:
Cash and cash equivalents	$	59,771	$	59,771		$	47,224	$	47,224
Investment securities		249,498		249,498			255,104		255,104
Bank owned life insurance		4,387		4,387			4,320		4,320

Loans (1)		455,673		457,000			533,851		536,000
Market risk/liquidity adjustment		0		(20,000	)		0		(30,000	)
Net loans		455,673		437,000			533,851		506,000

Liabilities:
Demand deposits		364,245		364,245			381,427		381,427
Time deposits		395,421		396,000			440,880		441,000
Short-term borrowings		24,000		24,000			18,000		18,000
Long-term borrowings		0		0			6,000		6,000

(1)

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

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

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

The Company estimated fair value based on estimated future cash flows discounted at current origination rates for loans with similar terms and credit quality. The estimated values in 2011 are a function of higher credit spreads, partially offset by lower risk-free interest rates. However, the values derived from origination rates at June 30, 2011 likely do not represent exit prices due to the distressed market conditions; therefore, incremental market risks and liquidity discounts ranging from 3% to 25%, depending on the nature of the loans, were subtracted to reflect the illiquid and distressed market conditions as of June 30, 2011. The discounted value is a function of a market participant’s required yield in the current environment and is not a reflection of the expected cumulative losses on the loans.

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

Demand deposits are shown at their face value.

10. NEW ACCOUNTING STANDARDS

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

In July 2010, the FASB issued an update to the accounting standards governing the disclosures associated with credit quality and the allowance for loan losses. This new guidance requires additional disclosures related to the allowance for loan losses with the objective of providing financial statement users with greater transparency about an entity’s loan loss reserves and overall credit quality. Additional disclosures include showing on a disaggregated basis the aging of receivables, credit quality indicators, and troubled debt restructures with their effect on the allowance for loan losses. The provisions of this standard are effective for interim and annual reporting periods ending on or after December 15, 2010. The Company adopted these additional disclosures during the first quarter of 2011 and the adoption did not have a material impact on the Company’s financial position and results of operations; however, it has increased the amount of disclosures in the notes to the consolidated financial statements.

Bank of Granite Corporation

Notes to Condensed Consolidated Financial Statements (continued)

June 30, 2011

(Unaudited)

In April 2011, the FASB issued additional clarifying guidance for A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (1) the restructuring constitutes a concession and (2) the debtor is experiencing financial difficulties. For public entities, the amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Early adoption is permitted for public and nonpublic entities. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

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

Disclosures About Forward Looking Statements

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

Introduction

Management’s Discussion and Analysis is provided to assist in understanding and evaluating our results of operations and financial condition. The following discussion is intended to provide a general overview of our performance for the three and six-month periods ended June 30, 2011. Readers seeking more in-depth information should read the more detailed discussions below as well as the condensed consolidated financial statements and related notes included under Item 1 of this quarterly report. The “Regulatory Matters and Going Concern Considerations” in Note 2 of the Notes to Condensed Consolidated Financial Statements addresses the significant risks and uncertainties for the Company.

All information presented is consolidated data unless otherwise specified. Uncertainty and future events could cause changes in accounting estimates that have material effects on the financial position and results of operations in future periods.

Executive Overview

The loss for the six months ended June 30, 2011 is $5.2 million, compared to the $16.9 million loss for the same period of 2010. The comparative loan loss provisions are $6.0 million for 2011 versus $20.6 million for 2010. The results for the 2011 period continue to reflect a reduced inflow of problem loans and the six-month period of 2010 appears to have been the end or the inflection point of the extreme problem credit inflow and underlying collateral depreciation.

However, the three-month period ending June 30, 2011 loss of $3.4 million was $1.6 million more than the first quarter of 2011 and is reflective of the continuing level of problem loans. The resolution process, which in many instances relates to the legal process of foreclosure or bankruptcy, continues to be very extended and costly. Secondly, a significant part of the second quarter loss increase is related to the increased loan loss provision and increased losses on other real estate.

The nonperforming loans of $49.9 million at June 30, 2011 are down from $62.3 million at December 31, 2010. While this is improvement, the current operations of the Bank cannot absorb the resolution costs of the nonperforming assets until the amounts are substantially reduced.

The balance sheet contraction continues as the Bank continues the tact of minimizing required capital levels. The liquidity levels have been maintained at substantially adequate levels through deposit retention and liquidity from loan resolution.

As will be discussed in more detail in the balance sheet and operations analysis, the Bank’s revenue is decreasing as loans are replaced with lower earning securities and other income sources are challenged by new regulation, while expenses remain stable at an elevated level. The high level of costs related to loan and other real estate resolution and expenses related to the proposed merger transaction offset the continuing decreases in personnel costs and reduced FDIC assessments. These facts and the loan loss provisioning are the basis for asserting a challenging outlook.

The decrease in the capital levels at June 30, 2011 from December 31, 2010 or March 31, 2011 is not dramatic. However, the Bank is significantly undercapitalized and is at risk to becoming critically undercapitalized unless the operating losses are contained or the proposed merger and recapitalization transaction is completed in the near term.

The Company and the Bank have been notified by the primary regulator that a revised capital enhancement plan is required, and that revision was filed March 17, 2011. The plan is based on the completion of the proposed merger transaction.

More importantly, on April 26, 2011 the Company entered into a merger agreement with FNB United to merge and simultaneously recapitalize the combined entities through the investment of $310 million in the newly merged company. See Note 2, “Regulatory Matters and Going Concern Consideration,” and Note 3, “Proposed Merger and Recapitalization,” in the “Notes to Condensed Consolidated Financial Statements” for a more detailed description of the proposed transaction. The following sections of this discussion provide more details regarding current and prior year matters.

Results of Operations

For the Three Months Ended June 30, 2011

Compared With the Same Period in 2010


Financial Highlights for the Quarterly Periods	Three Months Ended June 30,
(In thousands)	2011			2010			% change

Earnings
Net interest income	$	7,309		$	7,979			-8.4	%
Provision for loan losses		4,001			8,503			-52.9	%
Other income		2,000			1,925			3.9	%
Other expense		8,727			9,709			-10.1	%
Net loss		(3,419	)		(7,518	)		54.5	%

Financial Highlights for the Year-to-Date Periods	Six Months Ended June 30,
(In thousands except per share amounts)	2011			2010			% change

Earnings
Net interest income	$	14,736		$	16,344			-9.8	%
Provision for loan losses		6,006			20,603			-70.8	%
Other income		2,684			3,579			-25.0	%
Other expense		16,625			16,971			-2.0	%
Net loss		(5,211	)		(16,861	)		69.1	%
Per share
Net loss
- Basic	$	(0.34	)	$	(1.09	)		68.8	%
- Diluted		(0.34	)		(1.09	)		68.8	%

Average for period
Assets	$	842,164		$	1,031,664			-18.4	%
Loans		523,234			717,297			-27.1	%
Deposits		789,904			941,864			-16.1	%
Stockholders’ equity		23,166			43,503			-46.7	%

Performance Summary

Net interest income

Net interest income of $7.3 million for the second quarter of 2011 was down 8.4% from the same quarter of 2010 and is reflective of the contracting loan portfolio (down $176.1 million or 27.0% compared to June 30, 2010).

The second quarter 2011 net interest margin of 3.94% was slightly higher than the first quarter of 2011 and each of the four quarters of 2010. The net interest margin protection is primarily the result of a steadily declining cost of funds in the referenced period as time deposits from prior high cost periods have matured. We believe any declines in future periods will be insignificant and margin compression is likely.

The net interest income for the first six-month periods of $14.7 million for 2011 versus $16.3 million for 2010 reflects the reduced interest income from the loan portfolio contraction which is partially offset by the net interest margin improvement of 3.84% for 2011 versus 3.46% for 2010 as the Bank focused on risk based loan pricing while cost of funds rates were declining as cited in the preceding paragraph.

Provision for loan losses

The provision for loan losses of $4.0 million for the second quarter was down $4.5 million from the second quarter of 2010 as the continued resolution of problem assets and a low volume of new loans resulted in the

reduced size of the loan portfolio and required lower levels of provisions to maintain the allowance for losses at reasonable levels.

The provision for loan losses for the first six-month period of 2011 of $6.0 million versus $20.6 million for the same period of 2010 is also reflective of the reduced loan portfolio in 2011 compared to 2010.

See additional discussion in the Executive Overview and Provisions for Loan Losses, Allowance for Loan Losses and Discussions of Asset Quality, and Note 5, “Loans and Allowances for Loan Losses,” in the “Notes to Condensed Consolidated Financial Statements.”

Other noninterest income

Noninterest income in the second quarter of 2011 included $680 thousand securities gains versus $631 thousand securities losses in the first quarter. The second quarter noninterest income was slightly higher than the same period of 2010. The total noninterest income for the six-month period of 2011 was $2.7 million compared to $3.6 million for the same period of 2010. The decrease in deposit service charges and fees reflects the effect of new regulations on overdraft charges and the reduction in deposits for 2011 compared to 2010.

Noninterest expense

Noninterest expense was lower in the second quarter of 2011 by $982 thousand compared to 2010, primarily because of the decrease in FDIC assessments. All other expense categories remained controlled and consistent in comparative periods.

The six-month comparison in which 2011 noninterest expense was $346 thousand less than 2010 reflects the decrease in FDIC assessments and other real estate writedowns, which were partially offset by increases in legal fees and outside services.

Changes in Financial Condition

June 30, 2011 Compared With December 31, 2010

The following table reflects the changes in our assets and liabilities as of June 30, 2011 compared with December 31, 2010.


(In thousands)	June 30, 2011		December 31, 2010		$ Change			% Change

Total assets	$	807,060	$	875,840	$	(68,780	)		-7.9	%
Earning assets		728,812		818,470		(89,658	)		-11.0	%
Cash and cash equivalents		59,771		47,224		12,547			26.6	%
Investment securities		249,498		255,104		(5,606	)		-2.2	%
Gross loans		476,788		562,124		(85,336	)		-15.2	%
Investment in bank owned life insurance		4,387		4,320		67			1.6	%
Other assets		5,044		6,732		(1,688	)		-25.1	%

Total liabilities	$	787,757	$	851,450	$	(63,693	)		-7.5	%
Deposits		759,666		822,307		(62,641	)		-7.6	%
Non-interest-bearing demand deposits		87,920		92,345		(4,425	)		-4.8	%
Interest-bearing demand deposits		254,674		268,817		(14,143	)		-5.3	%
NOW accounts		111,544		113,213		(1,669	)		-1.5	%
Money market accounts		143,130		155,604		(12,474	)		-8.0	%
Savings deposits		21,651		20,265		1,386			6.8	%
Time deposits		395,421		440,880		(45,459	)		-10.3	%
Overnight and short-term borrowings		24,000		18,000		6,000			33.3	%
Long-term borrowings		0		6,000		(6,000	)		n/a
Other liabilities		3,303		4,097		(794	)		-19.4	%

The changes in the Company’s balance sheet for the six months ended June 30, 2011 reflect the continued deleveraging of the Bank and changing the risk based asset mix.

The loan portfolio contracted $85.3 million during the first six months of 2011 due to continued aggressive problem loan resolution and very weak loan demand. The loan to deposit ratio at June 30, 2011 was 62.8% compared to 68.4% at December 31, 2010.

The Bank’s deposits decreased $62.6 million during the first six months of 2011. While the offered deposit rates are competitive in the market, the marketing and rate posture for 2011 has been neutral to the local market. The Bank has been notified that the state of North Carolina is a high cost deposit market, and that allows the Bank to price deposit products in relation to the local market offered rates as compared to more restrictive national market rate caps. The issue has no effect currently; however, it could allow the Bank more flexibility in pricing deposits in the future.

Liquidity and Asset/Liability Management

The Company’s historical liquidity management process included anticipating operating cash requirements, evaluating time deposit maturities, monitoring loan to deposit ratios, and correlating these activities to an overall periodic internal liquidity measure. In evaluating our asset mix, we have sought to maintain a securities portfolio sufficient to provide short-term liquidity in periods of unusual fluctuations.

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

The Bank’s primary internal sources of liquidity are customer deposits, cash and balances due from other banks, and unencumbered investment securities. These funds, together with loan repayments, are used to fund continuing operations. The Bank’s liquidity (cash + unencumbered securities / total deposits) was approximately $245.2 million, or 32.3% of total deposits at June 30, 2011 and has exceeded the 20% target throughout the first six months of 2011. The Bank is not eligible to originate loans under any of the government sponsored small business programs because of insufficient capital. New loan volume for the six months was $9.4 million.

As of June 30, 2011, our core deposits, defined as total deposits excluding time deposits of $100 thousand or more, totaled $580.0 million, or 76.3% of our total deposits, compared to $617.6 million, or 75.1%, of our total deposits as of December 31, 2010.

Certificates of deposit of $100 thousand or more represented 23.7% and 24.9%, respectively, of the Bank’s total deposits at June 30, 2011 and December 31, 2010. Management believes that a sizeable portion of the Bank’s time deposits are relationship-oriented. The Bank had no brokered certificates of deposit at June 30, 2011 or December 31, 2010. While the Bank appreciates the need to pay competitive rates to retain these deposits, other subjective factors also influence deposit retention. Based upon prior experience, the Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity, if the Bank elects to competitively price these deposits.

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

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

The management of interest rate risk and the overall asset/liability position is integrated with the liquidity management process. Currently less than 10% of the Bank’s loans are directly related to market interest rates. The remaining loans are fixed rate or relate to the Bank’s independent index, which relates more directly to the risk in the Bank’s operating footprint.

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

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

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

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

We use several measures to assess and monitor the credit risks in our loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectibility becomes doubtful. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Furthermore, loans and commitments made during the month, as well as commercial loans past due 30 days or more, are reviewed monthly by the Loan Committee of the Bank’s Board of Directors.

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

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

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

The unallocated component of the allowance is determined through our assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance. The increasing uncertainty related to the current economic and business conditions has caused management to acknowledge the high level of continuing risk to the overall portfolio by continuing to increase the unallocated allowance component. The unallocated allowance also reflects our acknowledgement of the imprecision and subjectivity that underlie the assessment of credit risk in general.

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

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

We believe that our allowance is a reasonable estimation of probable losses incurred in our loan portfolio at June 30, 2011. No assurance can be given, however, that adverse economic circumstances or other events, including additional and continued loan review, future regulatory examination findings or changes in borrowers’ financial conditions, will not result in increased losses in the loan portfolio or in the need for increases in the allowance for loan losses or further writedowns of other real estate owned.

The following table and subsequent discussion present an analysis of changes in the allowance for loan losses for the second quarters and year-to-date periods of 2011 and 2010, respectively.


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2011			2010			2011			2010

Allowance for loan losses, beginning of period	$	25,175		$	30,346		$	28,273		$	27,837

Net charge-offs:
Loans charged off:
Real estate - construction		2,267			1,175			3,517			4,456
Real estate - mortgage, commercial		4,853			5,130			8,112			10,196
Commercial and industrial		1,076			3,717			2,069			5,420
Consumer		209			236			477			296

Total charge-offs		8,405			10,258			14,175			20,368

Recoveries of loans previously charged off:
Real estate - construction		14			92			26			92
Real estate - mortgage, commercial		137			438			431			675
Commercial and industrial		166			476			490			728
Consumer		27			23			64			53

Total recoveries		344			1,029			1,011			1,548

Net charge-offs		8,061			9,229			13,164			18,820

Loss provisions charged to operations		4,001			8,503			6,006			20,603

Allowance for loan losses, end of period	$	21,115		$	29,620		$	21,115		$	29,620


Ratio of annualized net charge-offs during the period to average loans during the period		6.45	%		5.41	%		5.07	%		5.29	%
Allowance coverage of annualized net charge-offs		65.31	%		80.02	%		79.54	%		78.05	%
Allowance as a percentage of loans		4.43	%		4.54	%		4.43	%		4.54	%

See Note 5, “Loans and Allowances for Loan Losses,” in the “Notes to Condensed Consolidated Financial Statements” for the allocation of the allowance for loan losses by portfolio segment.

Nonperforming assets at June 30, 2011 and December 31, 2010 were as follows:


(In thousands)	June 30, 2011			December 31, 2010

Nonperforming assets:
Nonaccrual loans	$	33,489		$	40,577
Restructured loans - nonaccrual		16,410			21,692

Total nonperforming loans		49,899			62,269
Foreclosed properties		17,187			11,605

Total nonperforming assets	$	67,086		$	73,874


Loans past due 90 days or more and still accruing interest	$	1,178		$	7,466

Nonperforming loans to total loans		10.47	%		11.08	%
Allowance coverage of nonperforming loans		42.32	%		45.40	%
Nonperforming assets to total assets		8.31	%		8.43	%

If interest from nonaccrual loans, including impaired loans, had been recognized in accordance with the original terms of the loans, the estimated gross interest income for the second quarters of 2011 and 2010 that would have been recorded was approximately $777 thousand and $899 thousand, respectively. For the comparable year-to-date periods, interest income of approximately $1.7 million in 2011 and in 2010 would have been recognized in accordance with the original terms of the nonaccrual loans.

We classify loans as nonaccrual when the loan is 90 days past due, or we believe the loan may be impaired, and the accrual of interest on such loans is discontinued. The recorded accrued interest receivable deemed uncollectible is reversed to the extent it was accrued in the current year or charged-off to the extent it was accrued in previous years. A loan classified as nonaccrual is returned to accrual status when the obligation has been brought current, it has been performed in accordance with its contractual terms for a sufficient period of time, and the ultimate collection of principal and interest is no longer considered doubtful. Of the Bank’s $49.9 million in nonperforming loans at June 30, 2011, approximately $13.0 million are for unimproved land or residential lots in various stages of development. The remaining population consists of loans to a variety of small business operations that are in default.

All of our investment in impaired loans, $39.8 million at June 30, 2011, is included in nonaccruing loans in the table above, and the related loan loss allowance was $4.8 million. At December 31, 2010, our investment in impaired loans was $58.0 million, and the related loan loss allowance was $11.6 million. The average recorded balance of impaired loans was $48.9 million for the first six months of 2011 and $44.1 million for the first six months of 2010.

In addition to the nonaccrual loans, the Bank has potential problem loans of approximately $73.8 million at June 30, 2011. Potential problem loans are loans as to which management had serious doubts as to the ability of the borrowers to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, nonperforming assets. Management defines potential problem loans as those loans graded substandard in the Bank’s grading system. These loans were considered in determining the reasonableness of the allowance for loan losses and are closely and regularly monitored to protect the Bank’s interests.

Impaired loans at June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
(In thousands)	Balance		Associated Impairment		Balance		Associated Impairment

Impaired loans individually reviewed
With no impairment	$	22,423	$	0	$	7,919	$	0
With impairment		17,376		4,800		50,081		11,563

Total impaired loans	$	39,799	$	4,800	$	58,000	$	11,563

Impaired loans (across all segments) at June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
(In thousands)	Balance		Associated Impairment		Balance		Associated Impairment

Real estate - construction	$	10,056	$	884	$	16,674	$	3,175
Real estate - mortgage, commercial		27,499		3,289		37,721		7,079
Commercial and industrial		2,170		627		3,605		1,309
Consumer		74		0		0		0

Total impaired loans	$	39,799	$	4,800	$	58,000	$	11,563

Troubled Debt Restructures at June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
(In thousands)	Balance		Associated Impairment		Balance		Associated Impairment

Troubled debt restructures, with no impairment	$	12,880	$	0	$	7,114	$	0
Troubled debt restructures, with impairment		3,530		783		14,578		2,150

Total troubled debt restructures	$	16,410	$	783	$	21,692	$	2,150

Troubled debt restructures (“TDRs”) are a subset of impaired loans. TDRs are predominantly real estate loans or real estate loans of operating companies. The predominant modification or concessions to the listed troubled borrowers has been principal and interest forgiveness to structure payments that existing operations can support. The common characteristic of the real estate restructures has been to restructure payments that guarantors could make as part of the transition to the ultimate disposition of the collateral by the guarantors.

The policy for returning TDRs to accrual status has been to not return to accrual until the year after the effective date of the TDR at the earliest. Secondly, we do not return to accrual until all payments of interest and principal are current and we believe there is reasonable basis to believe the borrower can continue such payments. Currently, all Bank TDRs are on nonaccrual status. TDRs are periodically evaluated for return to accrual status, which would occur if the borrower’s ability to meet the revised payment schedule is reasonably assured.

Changes in foreclosed properties for the six months ended June 30, 2011 and 2010 were as follows:


	Six Months Ended June 30,
(In thousands)	2011			2010

Balance at beginning of period	$	11,605		$	13,235
Additions		13,305			8,329
Proceeds from sale		(4,798	)		(1,891	)
Write-downs and net gain (loss) on sale		(2,925	)		(3,114	)

Balance at end of period	$	17,187		$	16,559

Off-Balance Sheet Arrangements

We have off-balance sheet commitments to lend in the forms of unfunded commitments to extend credit and standby letters of credit. Further discussions of off-balance sheet arrangements are included in Note 8, “Commitments and Contingencies,” in the “Notes to Condensed Consolidated Financial Statements.”

Contractual Obligations

As of June 30, 2011, there were no material changes to contractual obligations in the form of long-term borrowings and operating lease obligations as compared to those disclosed in our Annual Report on Form 10-K, as amended, for the year ended December 31, 2010. See also Note 8, “Commitments and Contingencies,” in the “Notes to Condensed Consolidated Financial Statements” for changes in other commitments in the form of commitments to extend credit and standby letters of credit.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

As of June 30, 2011, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. During the period covered by this Quarterly Report, no change in our internal control over financial reporting has occurred that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1A - Risk Factors

For additional factors that could affect the matters discussed above, see the “Risk Factors” section of the Company’s most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

There were no unregistered sales of our securities or share repurchase transactions for the three months ended June 30, 2011.

Item 6 - Exhibits

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


3.1		Bank of Granite Corporation’s Restated Certificate of Incorporation, filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q dated May 9, 2006, is incorporated herein by reference.

3.2		Bank of Granite Corporation’s Amended and Restated Bylaws, filed as Exhibit 3.1 to our Current Report on Form 8-K dated April 28, 2008, is incorporated herein by reference.

4.1		Form of stock certificate for Bank of Granite Corporation’s common stock, filed as Exhibit 4.1 to our Registration Statement on Form S-4 (Registration Statement No. 333-104233) dated April 1, 2003, is incorporated herein by reference.

4.2		Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation of Bank of Granite Corporation (included in Exhibit 3.1 hereto).

10.1		Agreement and Plan of Merger by and among FNB United Corp., Gamma Merger Corporation and Bank of Granite Corporation, filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated April 26, 2011, is incorporated herein by reference.

10.2		Amendment No. 1 to Agreement and Plan of Merger by and among FNB United Corp., Gamma Merger Corporation and Bank of Granite Corporation, filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K dated June 16, 2011, is incorporated herein by reference.

11		Schedule of Computation of Net Income Per Share.

		The information required by this item is set forth under Item 1 of Part I, Note 6.

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following financial statements from the Quarterly Report on Form 10-Q of Bank of Granite Corporation for the quarter ended June 30, 2011, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income (Loss), (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. (1)

(1)	As provided in Rule 406T of Regulation S-T, this information shall not be deemed “filed” for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 or otherwise subject to liability under those sections.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Bank of Granite Corporation
		(Registrant)

Date: August 10, 2011	By:	/s/ Jerry A. Felts
		Jerry A. Felts
		Chief Financial Officer and Principal Accounting Officer

Exhibit Index


		Begins on Page

3.1	Certificate of Incorporation, as amended	*

3.2	Amended and Restated Bylaws of the Registrant	*

4.1	Form of stock certificate for Bank of Granite Corporation’s common stock	*

4.2	Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation of Bank of Granite Corporation	*

10.1	Agreement and Plan of Merger between FNB United Corp., Gamma Merger Corporation and Bank of Granite Corporation	*

10.2	Amendment No. 1 to Agreement and Plan of Merger between FNB United Corp., Gamma Merger Corporation and Bank of Granite Corporation	*

11	Schedule of Computation of Net Income Per Share	**

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.	Filed herewith

101	Financial Statements submitted in XBRL format.	Filed herewith

*	Incorporated herein by reference.

**	The information required by this item is set forth under Item 1 of Part I, Note 6.

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BANK OF GRANITE CORP 10-Q