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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 29549

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 [x] No [_]

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common stock, $1 par value
13,496,981 shares outstanding as of July 31, 2002

Exhibit Index begins on page 25

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Index

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Item 1. Financial Statements

Bank of Granite Corporation
Consolidated Balance Sheets

See notes to consolidated financial statements.

3

Bank of Granite Corporation
Consolidated Statements of Income
(unaudited)

See noes to consolidated financial statements.

4

Bank of Granite Corporation
Consolidated Statements of
Comprehensive Income
(unaudited)

See notes to consolidated financial statements.

5

Bank of Granite Corporation
Consolidated Statements of Changes in
Shareholders’ Equity (unaudited)

See notes to consolidated financial statements.

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Bank of Granite Corporation
Consolidated Statements of Cash Flows
(unaudited)

See notes to consolidated financial statements.

(continued on next page)

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

See notes to consolidated financial statements.

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Bank of Granite Corporation
Notes to Consolidated Financial Statements
June 30, 2002

1.     In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position of Bank of Granite Corporation (the “Company”) as of June 30, 2002 and December 31, 2001, and the results of its operations for the three and six month periods ended June 30, 2002 and 2001, and its cash flows for the six month periods ended June 30, 2002 and 2001.

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

Per share amounts and average shares have been adjusted to reflect the 5-for-4 stock split paid May 31, 2002.

The accounting policies followed are set forth in Note 1 to the Company’s 2001 Annual Report to Shareholders on file with the Securities and Exchange Commission.

2.     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:

3.     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 to result from these transactions. The unfunded portion of loan commitments and standby letters of credit as of June 30, 2002 and December 31, 2001 were as follows:

4.     New Accounting Standards — In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. The Company currently does not have goodwill recorded within its financial statements. The initial adoption of SFAS No. 141 and SFAS No. 142 did not have an impact on its financial statements.

(continued on next page)

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Bank of Granite Corporation
Notes to Consolidated Financial Statements (concluded)
June 30, 2002

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.” SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have an impact on the Company’s financial position and results of operations for the quarter ended March 31, 2002.

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

Critical Accounting Policies

     The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The more critical accounting and reporting policies include the Company’s accounting for securities, loans, the allowance for loan losses and income taxes. In particular, the Company’s accounting policies relating to the allowance for loan losses and income taxes involve the use of estimates and require significant judgments to be made by management. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position or consolidated results of operations. See “Provisions for Loan Losses, Allowance for Loan Losses and Discussions of Asset Quality” herein for a complete discussion. Please also refer to Note 1 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report for the year ended December 31, 2001 on Form 10-K on file with the Securities and Exchange Commission for details regarding all of the Company’s critical and significant accounting policies.

Changes in Financial Condition
June 30, 2002 Compared With December 31, 2001

     Late in the fourth quarter of 2001, the Bank acquired and implemented new loan and deposit pricing software models that estimate returns on allocated capital based on various pricing terms. The new models are intended to assist the Bank’s personnel in making product pricing decisions that are based on the returns on allocated capital. The commercial loan pricing model incorporates not only the effects of loan terms net of estimated expenses, but also considers other loan and deposit relationships of commercial customers. The consumer loan and deposit pricing models work similarly, but do not consider additional relationships. As a part of implementation, the Bank made a financial decision not to aggressively price its time deposit products when less expensive borrowing opportunities were available. As a result, the Bank experienced a growth in loans and a decline in time deposit funding during the first six months of 2002. The decline in time deposit funding was replaced with overnight borrowings from the Federal Home Loan Bank at more favorable interest rates.

     Total assets decreased $14,094,695, or 1.97%, from December 31, 2001 to June 30, 2002. Earning assets decreased $19,675,662, or 2.93%, over the same six month period. Investment securities decreased $26,329,884, or 16.54%, primarily because proceeds from calls and maturities of debt securities were used to fund the Bank’s loan growth and a decline in the Bank’s rate sensitive time deposits. Loans, the largest earning asset, increased $7,439,825, or 1.46%, over the same period, primarily because of a $17,572,931, or 3.63%, increase as of June 30, 2002 in loans of the Bank, partially offset by a $10,133,106, or 38.83%, decrease as of June 30, 2002 in the level of mortgage loans of GLL. Cash and cash equivalents increased $5,199,531, or 19.22%, which was attributable to a $5,985,134, or 22.78%, increase in cash and due from banks. Also during this period, other assets increased $922,085, or 27.46%.

     Accompanying the decline in assets were lower levels of deposits and other borrowings, partially offset by earnings retained. Deposits decreased slightly by $742,446, or 0.14%, from December 31, 2001 to June 30, 2002. Demand, money market and savings deposits increased $10,096,833, or 4.17%, while total time deposits decreased $10,839,279, or 3.86%, over the same period, for the reasons stated above related to less aggressive pricing of these products.

     The Company has sources of funding, in addition to deposits, in the form of overnight and other short-term borrowings as well as other longer-term borrowings. Overnight borrowings are primarily in

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the form of federal funds purchased and commercial deposit products that sweep balances overnight into securities sold under agreements to repurchase or commercial paper issued by the Company. From December 31, 2001 to June 30, 2002, such overnight borrowings decreased $2,862,161, or 7.05%. Other borrowings decreased $10,551,982, or 45.37%, reflecting a decrease in temporary borrowings by GLL primarily due to lower mortgage origination activity.

     Common stock outstanding increased 2,552,096 shares, or 23.23%, from December 31, 2001 to June 30, 2002, primarily due to shares issued in connection with the 5-for-4 stock split in May 2002, partially offset by shares repurchased under the Company’s stock repurchase plan. On May 31, 2002, the Company issued 2,883,471 shares of its common stock due to a 5-for-4 stock split announced in April. Also from December 31, 2001 through June 30, 2002, the Company repurchased 193,768 shares of its common stock at an average price of $17.84. Earnings retained were $4,589,004 for the first six months of 2002, after paying cash dividends of $2,627,342. Accumulated other comprehensive income, net of deferred income taxes, increased $204,080, or 36.66%, from December 31, 2001 to June 30, 2002, primarily because the value of securities available for sale rose as interest rates on longer term bonds fell during the period.

Liquidity, Interest Rate Sensitivity and Market Risks

     The objectives of the Company’s liquidity management policy include providing adequate funds to meet the cash needs of both depositors and borrowers, as well as providing funds to meet the basic needs for on-going operations of the Company and regulatory requirements. Depositor cash needs, particularly those of commercial depositors, can fluctuate significantly depending on both business and economic cycles, while both retail and commercial deposits can fluctuate significantly based on the yields and returns available from alternative investment opportunities. Borrower cash needs are also often dependent upon business and economic cycles. In addition, the Company’s liquidity is affected by off-balance sheet commitments to lend in the forms of unfunded commitments to extend credit and standby letters of credit. As of June 30, 2002 such unfunded commitments to extend credit were $89,283,210, while commitments in the form of standby letters of credit totaled $8,050,811.

     Neither the Company nor its subsidiaries have historically incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial instruments or structured finance or special purpose entities organized as corporations, partnerships or limited liability companies or trusts. The Bank and GLL both had contractual off-balance sheet obligations in the form of noncancelable operating leases with unrelated vendors, though such obligations and the related lease expenses were not material to the Company’s financial condition as of June 30, 2002 and December 31, 2001 or its results of operations for the periods then ended.

     Liquidity requirements of the Bank are primarily met through two categories of funding. The first is core deposits, which includes demand deposits, savings accounts and certificates of deposits. The Bank considers these to be a stable portion of the Bank’s liability mix and the result of on-going stable consumer and commercial banking relationships. At June 30, 2002, the Bank’s core deposits, defined as total deposits excluding time deposits of $100,000 or more, totaled $399,772,332, or 76.6%, of the Bank’s total deposits compared to $398,570,108, or 76.2%, of the Bank’s total deposits as of December 31, 2001.

     The other principal method of funding used by the Bank is through large denomination certificates of deposit, federal funds purchased, repurchase agreements and other short and intermediate term borrowings. The Bank’s policy is to emphasize core deposit growth rather than growth through purchased or brokered time deposits because core deposits tend to be a more stable source of funding and purchased or brokered time deposits often have a higher cost of funds. During periods of weak demand for its deposit products, the Bank maintains several credit facilities under which it may borrow

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on a short-term basis. As of June 30, 2002, the Bank had three unsecured lines of overnight borrowing capacity with its correspondent banks, which totaled $21,000,000. In addition, the Bank uses its capacity to pledge assets to serve as collateral to borrow on a secured basis. As of June 30, 2002, the Bank had investment securities pledged to secure overnight funding lines in the approximate amounts of $13,200,000 with the Federal Reserve Bank and $30,679,000 with the Federal Home Loan Bank. The Bank also has significant capacity to pledge its loans secured by first liens on residential and commercial real estate as collateral for additional borrowings from the Federal Home Loan Bank during periods when loan demand exceeds deposit growth or when the interest rates on such borrowings compare favorably to interest rates on deposit products. As of June 30, 2002, the Bank had a credit line of $23,298,000 collateralized by loans secured by first liens on residential real estate.

     GLL temporarily funds its mortgages, from the time of origination until the time of sale, through the use of a warehouse line of credit from one of the Company’s correspondent financial institutions. GLL requests changes in the amount of the line of credit based on its estimated funding needs. The line is secured by the mortgage loans originated and the Company serves as guarantor under the terms of this line. As of June 30, 2002 and December 31, 2001, this line of credit was $25,000,000.

     The majority of the Company’s deposits are rate-sensitive instruments with rates which tend to fluctuate with market rates. These deposits, coupled with the Company’s short-term certificates of deposit, have increased the opportunities for deposit repricing. The Company places great significance on monitoring and managing the Company’s asset/liability position. The Company’s policy of managing its interest margin (or net yield on interest-earning assets) is to maximize net interest income while maintaining a stable deposit base. The Company’s deposit base is not generally subject to the level of volatility experienced in national financial markets in recent years; however, the Company does realize the importance of minimizing such volatility while at the same time maintaining and improving earnings. A common method used to manage interest rate sensitivity is to measure, over various time periods, the difference or gap between the volume of interest-earning assets and interest-bearing liabilities repricing over a specific time period. However, this method addresses only the magnitude of funding mismatches and does not address the magnitude or relative timing of rate changes. Therefore, management prepares on a regular basis earnings projections based on a range of interest rate scenarios of rising, flat and declining rates in order to more accurately measure interest rate risk.

     Interest-bearing liabilities and the loan portfolio are generally repriced to current market rates. The Company’s balance sheet is asset-sensitive, meaning that in a given period there will be more assets than liabilities subject to immediate repricing as the market rates change. Because most of the Company’s loans are at variable rates, they reprice more rapidly than rate sensitive interest-bearing deposits. During periods of rising rates, this results in increased net interest income. The opposite occurs during periods of declining rates.

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

     The Company has not experienced a change in the mix of its rate-sensitive assets and liabilities or in interest rates in the market that it believes would result in a material change in the Company’s analysis of its interest rate sensitivity as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

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Results of Operations
For the Three Month Period Ended June 30, 2002 Compared With
the Same Period in 2001 and for the Six Month Period Ended
June 30, 2002 Compared With the Same Period in 2001

     During the three month period ended June 30, 2002, the Company’s net income increased to $3,451,535, or 31.21%, from the $2,630,507 earned in the same period of 2001. The increase primarily resulted from lower provisions for loan losses and higher net interest margins related to banking operations. For essentially the same reasons, year-to-date net income was also higher. For the first six months of 2002, net income was $7,233,874, up $755,261, or 11.66%, from the $6,478,613 earned in the same year-to-date period of 2001.

Net Interest Income for the Quarterly Periods

     During the three month period ended June 30, 2002, the Company’s net interest income increased $483,972, or 6.00%, compared to the three months ended June 30, 2001, primarily due to higher loan demand and an improved net interest margin. The Company’s net interest margin averaged 5.48% during the three month period compared to 5.12% during the same period in 2001. For a discussion of the Company’s asset-sensitivity and the related effects on the Company’s net interest income and net interest margins, please see “Liquidity, Interest Rate Sensitivity and Market Risks” above.

     During the quarter ended June 30, 2002, interest income decreased $2,245,820, or 16.64%, from the same period last year, primarily because of lower rates on loan and investment assets, partially offset by higher volumes of loans. Interest and fees on loans decreased $1,628,087, or 14.75%, due to lower loan yields during the quarter. Yields on loans averaged 7.34% for the quarter, down from 9.21% for the same quarter last year. The prime lending rate during the three month period averaged 4.75% compared to 7.59% during the same period in 2001. Gross loans averaged $514,202,647 compared to $480,700,426 last year, an increase of $33,502,221, or 6.97%. Average loans of the Bank were $497,576,490 compared to $456,590,659 last year, an increase of $40,985,831, or 8.98%, while average loans of GLL were $16,626,157 compared to $24,109,767 last year, a decrease of $7,483,610, or 31.04%. Interest on securities and overnight investments decreased $617,733, or 25.06%, primarily due to lower average volumes invested during the quarter and to a lesser extent to lower average rates. Average securities and overnight investments were $143,562,962 compared to $185,221,898 last year, a decrease of $41,658,936, or 22.49%.

     Interest expense decreased $2,729,792, or 50.24%, primarily because of lower rates on time deposits. Time deposits generally pay a higher rate of interest than most other types of deposits. Overall, rates on interest-bearing deposits averaged 2.31% for the quarter, down from 4.58% for the same quarter last year. Total interest-bearing deposits averaged $427,414,788 compared to $448,373,316 last year, a decrease of $20,958,528, or 4.67%. Savings, NOW and money market deposits averaged $156,539,671 compared to $136,436,877 last year, an increase of $20,102,794, or 14.73%. Time deposits averaged $270,875,117 compared to $311,936,439 last year, a decrease of $41,061,322, or 13.16%. The Company attributes the decrease in time deposits to its decision not to price its time deposits as aggressively due to more favorable borrowing rates from alternative sources of funding. Overnight borrowings averaged $34,877,270 compared to $11,310,511 last year, an increase of $23,566,759, or 208.36%, primarily reflecting the Bank’s additional overnight borrowings due to interest rates falling to levels that were more favorable than the rates on time deposits in the Bank’s markets. Other borrowings averaged $13,418,962 compared to $21,531,732 last year, a decrease of $8,112,770, or 37.68%, due to a decrease of $8,112,770, or 37.68%, in temporary borrowings of GLL primarily due to lower mortgage origination activity. Other borrowings were the principal source of funding for the mortgage origination activities of GLL. The Company has not historically relied upon “out-of-market” or “brokered” deposits as a significant source of funding.

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Net Interest Income for the Year-to-Date Periods

     As was the case for the second quarter, the Company’s net interest income increased for the year-to-date period. Higher loan volumes and a shift in funding to lower cost wholesale funds from higher cost time deposit funds caused the Company’s net interest income to increase $479,905, or 2.89%, during the six month period ended June 30, 2002 compared to the same period in 2001. The Company’s net interest margin averaged 5.48% for the year-to-date period, up from 5.41% for the same period last year. For a discussion of the Company’s asset-sensitivity and the related effects on the Company’s net interest income and net interest margins, please see “Liquidity, Interest Rate Sensitivity and Market Risks” above.

     As was the case for the second quarter, interest income and expense were lower for the six month period ended June 30, 2002. During the first six months of 2002, interest income decreased $4,896,525, or 17.74%, from the same period last year due to lower rates on loans and other interest-earning assets outpacing increases in interest income due to higher volumes of loans. Interest and fees on loans decreased $3,781,155, or 16.74%, due to lower average rates during the year-to-date period. Yields on loans averaged 7.40% for the year-to-date period, down from 9.66% for the same period last year. The prime rate during the six month period averaged 4.76% compared to 8.20% during the same period in 2001. Gross loans averaged $512,757,845 compared to $471,679,628 last year, an increase of $41,078,217, or 8.71%. Average loans of the Bank were $493,577,208 compared to $451,309,816 last year, an increase of $42,267,392, or 9.37%, while average loans of GLL were $19,180,637 compared to $20,369,812 last year, a decrease of $1,189,175, or 5.84%. Interest on securities and overnight investments decreased $1,115,370, or 22.30%, due to both lower rates and lower average volumes invested during the period. Average securities and overnight investments were $149,241,229 compared to $180,146,215 last year, a decrease of $30,904,986, or 17.16%.

     Interest expense decreased $5,376,430, or 48.98%, primarily because of lower rates on interest-bearing deposits and other borrowings. Rates on interest-bearing deposits averaged 2.39% for the year-to-date period, down from 4.77% for the same period last year. Interest-bearing deposits averaged $424,696,428 compared to $440,941,213 last year, a decrease of $16,244,785, or 3.68%. Time deposits averaged $272,313,638 compared to $307,231,007 last year, a decrease of $34,917,369, or 11.37%. As discussed in the previous sections, the Bank decided to pursue lower cost wholesale overnight funding rather than funding loan growth with higher cost time deposits. Overnight borrowings averaged $41,281,280 compared to $10,261,198 last year, an increase of $31,020,082, or 302.30%, reflecting an increase of $27,310,961 in average overnight borrowings in the form of federal funds purchased and securities sold under agreements to repurchase of the Bank and an increase of $3,709,121 in average overnight borrowings in the form of commercial paper related to the commercial deposit sweep arrangements of the Bank. Other borrowings averaged $15,980,447 compared to $17,978,965 last year, a decrease of $1,998,518, or 11.12%, reflecting a decrease in temporary borrowings of GLL primarily due to lower mortgage origination activity. Other borrowings were the principal source of funding for the mortgage origination activities of GLL.

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

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

     Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectibility becomes doubtful. Upon loan origination, the Bank’s originating loan officer evaluates the quality of the loan and assigns one of seven risk grades, each grade indicating a different level of loss reserves. The loan officer monitors the loan’s performance and credit quality and makes changes to the credit grade as conditions warrant. When originated or renewed, all loans over a certain dollar amounts receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Any issues regarding the risk assessments are addressed by the Bank’s senior credit administrators and factored into management’s decision to originate or renew the loan as well as the level of reserves deemed appropriate for the loan. Furthermore, large loans and commitments made each month, as well as all commercial loans past due 30 days or more, are reviewed monthly by the Bank’s Board of Directors. The Bank’s Board of Directors also review monthly an analysis of the Bank’s reserves relative to the range of reserves estimated by the Bank’s Credit Administration.

     As an additional measure, the Bank engages an independent third party risk assessment group to review the underwriting, documentation, risk grading analyses and the methodology of determining the adequacy of the allowance for losses. This independent third party determines its own selection criteria to select loan relationships for review and evaluation. The third party’s evaluation and report is shared with management, the Bank’s Audit Committee and ultimately, the Bank’s Board of Directors.

     As part of the continual grading process, individual commercial loans are assigned a credit risk grade based on their credit quality, which is subject to change as conditions warrant. Before making any changes in these risk grades, management considers assessments as determined by the third party risk assessment group, regulatory examiners and the Bank’s Credit Administration. Management considers certain commercial loans with weaker credit risk grades to be individually impaired and measures such impairment based upon available cash flows and the value of the collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk. In estimating reserve levels, the Bank also aggregates non-graded loans into pools of similar credits and reviews the historical loss experience associated with these pools as additional criteria to allocate the allowance to each category.

     Management uses the information developed from the procedures described above in evaluating and grading the loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to assist management in determining the appropriate levels of the allowance for loan losses.

     Management considers the allowance for loan losses adequate to cover the estimated losses inherent in the Company’s loan portfolio as of the date of the financial statements. Management believes it has established the allowance in accordance with accounting principles generally accepted in the United States of America and in consideration of the current economic environment. While management uses the best information available to make evaluations, future additions to the allowance may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral

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part of their examination process, periodically review the Bank’s allowances for loan losses. Such agencies may require the recognition of adjustments to the allowances based on their judgments of information available to them at the time of their examinations.

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

     General economic trends greatly affect loan losses, and no assurances can be made that further charges to the loan loss allowance may not be significant in relation to the amount provided during a particular period or that further evaluation of the loan portfolio based on conditions then prevailing may not require sizable additions to the allowance, thus necessitating similarly sizable charges to operations. During the three and six month periods ended June 30, 2002, management determined a charge to operations of $1,007,249 and $1,798,284, respectively, would bring the loan loss reserve to a balance considered to be adequate to reflect the growth in loans and to absorb estimated potential losses in the portfolio. At June 30, 2002, the loan loss reserve was 1.51% of net loans outstanding compared to 1.28% as of December 31, 2001. The following table presents an analysis of changes in the allowance for loan losses for the quarter-to-date and year-to-date periods.