UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(mark one)

Commission file number 0-15956

Bank of Granite Corporation

(828) 496-2000

     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 þ No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Common stock, $1 par value
13,200,282 shares outstanding as of April 30, 2005

Exhibit Index begins on page 36

1

Index

2

Item 1. Financial Statements

Bank of Granite Corporation

See notes to consolidated condensed financial statements.

3

Bank of Granite Corporation

See notes to consolidated condensed financial statements.

4

Bank of Granite Corporation

See notes to consolidated condensed financial statements.

5

Bank of Granite Corporation

See notes to consolidated condensed financial statements.

6

Bank of Granite Corporation

See notes to consolidated condensed financial statements.

(continued on next page)

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Bank of Granite Corporation
Consolidated Condensed Statements of Cash Flows
   (unaudited) - (concluded)

See notes to consolidated condensed financial statements.

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Bank of Granite Corporation

1. UNAUDITED FINANCIAL STATEMENTS

The consolidated condensed balance sheet as of March 31, 2005 and the consolidated condensed statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the three month periods ended March 31, 2005 and 2004 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.

The unaudited interim consolidated condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. 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 consolidated condensed financial statements should be read in conjunction with the Company’s December 31, 2004 audited consolidated financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-K.

The consolidated financial statements include the Company’s two wholly-owned subsidiaries, Bank of Granite (the “Bank”), a full service commercial bank, and Granite Mortgage, Inc. (“Granite Mortgage”), a mortgage banking company.

The accounting policies followed are set forth in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 on file with the Securities and Exchange Commission. There were no changes in significant accounting policies during the three months ended March 31, 2005.

2. EARNINGS PER SHARE

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

For the three months ended March 31, 2005 and 2004, 48,922 shares and 45,766 shares, respectively, attributable to outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the stock options were greater than or equal to the average price of the common shares, and therefore their inclusion would have been anti-dilutive.

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Bank of Granite Corporation
Notes to Consolidated Condensed Financial Statements (continued)
March 31, 2005
   (unaudited)

3. COMMITMENTS AND CONTINGENCIES

In the normal course of business there are various commitments and contingent liabilities such as commitments to extend credit, which are not reflected on the financial statements. Management does not anticipate any significant losses will result from these transactions. The unfunded portion of loan commitments and standby letters of credit as of March 31, 2005 and December 31, 2004 were as follows:

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

Managed risk includes the risk associated with changes in interest rates associated with mortgage loans held for sale. Granite Mortgage uses two types of financial instruments to manage risk. These financial instruments, commonly referred to as derivatives, consists of contracts to forward sell mortgage-backed securities and options to forward sell securities. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument. Granite Mortgage uses derivatives primarily to hedge against changes in the market values of the mortgage loans it generates and sells.

As required by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” Granite Mortgage classifies its derivative financial instruments as a hedge of an exposure to changes in cash flow from forecasted transactions (sales of loans to third parties) (“cash flow hedge”). For a qualifying cash flow hedge, changes in the value of the derivatives that have been highly effective as hedges are recognized in other comprehensive income. For cash flow hedges, net income may be affected to the extent that changes in the value of the derivative instruments do not perfectly offset changes in the cash flow of the hedged asset or liability.

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Bank of Granite Corporation
Notes to Consolidated Condensed Financial Statements (continued)
March 31, 2005
  (unaudited)

4. STOCK-BASED COMPENSATION

The Company accounts for compensation costs related to the Company’s employee stock option plan using the intrinsic value method. Therefore, no compensation cost has been recognized for stock option awards because the options are granted at exercise prices based on the market value of the Company’s stock on the date of grant. Had compensation cost for the Company’s employee stock option plan been determined using the fair value method, the Company’s pro forma net income and earnings per share would have been as follows:

The Company computes its estimate of option compensation expense associated with the fair value method using The Black Scholes Model. There were no options granted during the periods ended March 31, 2005 or 2004.

5. GOODWILL AND INTANGIBLE ASSETS

During 2003, the Company’s acquisition of First Commerce Corporation generated goodwill of $10,763,447 and core deposit intangible assets of $630,013. Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” uses a non-amortization approach to account for purchased goodwill and intangible assets with indefinite useful lives. Intangible assets with finite useful lives are amortized over their useful lives. As of March 31, 2005, the carrying value of the core deposit intangible asset totaled $438,145, net of accumulated amortization of $191,878. This intangible asset was determined by management to meet the criteria for recognition apart from goodwill and to have a finite life of 10 years. Amortization expense associated with the core deposit intangible asset was $25,773 for the three month period ended March 31, 2005. Annual expense is expected to range from approximately $97,000 in 2005 to $52,000 in 2009.

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Bank of Granite Corporation
Notes to Consolidated Condensed Financial Statements (continued)
March 31, 2005
  (unaudited)

SFAS No. 142 requires that goodwill be tested for impairment annually at the same time each year and on an interim basis when events or circumstances change. The Company elected to perform its annual goodwill impairment test as of May 31. Management completed the annual goodwill impairment test as of May 31, 2004 and does not believe that events and circumstances subsequent to that date indicate that goodwill has been impaired.

6. SEGMENT DISCLOSURES

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