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

FORM 10-Q

Commission file number 0-15956

     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
13,438,590 shares outstanding as of October 31, 2002

Exhibit Index begins on page 29

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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.

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Bank of Granite Corporation
Consolidated Statements of Income (unaudited)

See notes to consolidated financial statements.

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

See notes to consolidated financial statements.

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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
September 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 September 30, 2002 and December 31, 2001, and the results of its operations for the three and nine month periods ended September 30, 2002 and 2001, and its cash flows for the nine month periods ended September 30, 2002 and 2001 in conformity with accounting principles generally accepted in the United States of America.

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 Annual Report on Form 10-K for the year ended December 31, 2001 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 September 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)
September 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 September 30, 2002.

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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
September 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 nine months of 2002.

     Total assets increased $16,701,692, or 2.33%, from December 31, 2001 to September 30, 2002. Earning assets increased $9,435,678, or 1.41%, over the same nine month period. Loans, the largest earning asset, increased $31,934,593, or 6.26%, over the same period, comprised primarily of a $29,466,282, or 6.08%, increase in loans of the Bank and a $2,468,311, or 9.46%, increase in mortgage loans of GLL. Investment securities decreased $21,713,312, or 13.64%, as from calls and maturities of debt securities were used to fund the Bank’s loan growth. Cash and cash equivalents increased $6,256,647, or 23.12%, which was primarily due to a $7,042,250, or 26.80%, increase in cash and due from banks. Also during this period, other assets increased $1,594,618, or 47.49%, primarily because of a $874,439 increase in foreclosed properties.

     Funding the asset growth was a combination of deposit growth and earnings retained, partially offset by a decline in overnight borrowings. Deposits increased $14,973,772, or 2.86%, from December 31, 2001 to September 30, 2002. Noninterest-bearing demand deposits increased $9,546,922, or 10.23%, over the same nine month period. NOW account deposits decreased $1,988,082, or 2.36%, from December 31, 2001 to September 30, 2002. Money market deposits increased $22,435,903, or 55.80%, during the same period, primarily due to the Bank’s new premium money market account that carried an attractive introductory rate. Savings deposits increased $2,714,189, or 11.25%, from December 31, 2001 to September 30, 2002. Demand, money market and savings deposits increased $32,708,932, or 13.52%, over the same period, while time deposits decreased $17,735,160, or 6.31%, as customers appeared to choose liquidity over the lower rates available on time deposits.

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     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 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 September 30, 2002, such overnight borrowings decreased $12,863,909, or 31.70%, reflecting a decrease of $13,360,639, or 48.97%, in overnight borrowings in the form of federal funds purchased, advances from the Federal Home Loan Bank and securities sold under agreements to repurchase, partially offset by an increase of $496,730, or 3.74%, in overnight borrowings in the form of commercial paper. The decline in the need for overnight borrowings resulted primarily from the growth in the Bank’s new premium money market account discussed above. Other borrowings increased $1,195,866, or 5.14%, reflecting an increase in temporary borrowings by GLL primarily due to higher mortgage origination activity. Other liabilities increased $11,308,173, or 526.96%, from December 31, 2001 to September 30, 2002, primarily because of security purchases of $10,000,000 that were in the process of settlement at the end of the quarter.

     Common stock outstanding increased 2,470,114 shares, or 22.48%, from December 31, 2001 to September 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 in a 5-for-4 stock split announced in April. Also from December 31, 2001 through September 30, 2002, the Company repurchased 275,749 shares of its common stock at an average price of $18.00. Earnings retained were $6,784,423 for the first nine months of 2002, after paying cash dividends of $4,114,507. Accumulated other comprehensive income, net of deferred income taxes, increased $889,080, or 159.72%, from December 31, 2001 to September 30, 2002, primarily because the value of securities available for sale rose when 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 September 30, 2002 such unfunded commitments to extend credit were $90,106,125, while commitments in the form of standby letters of credit totaled $7,535,242.

     In late September 2002, GLL changed the method in which it manages its mortgage loans in process. Prior to the change, as GLL committed to or locked in a mortgage rate with a customer, GLL would concurrently obtain a commitment from a institutional buyer to buy the mortgage upon its closing 30 to 45 days thereafter. Effective in late September, GLL began waiting until the mortgage loan closes to arrange for the sale of the mortgage loan. This method allows GLL to bundle mortgage loans and obtain better pricing compared with the sale of individual mortgage loans, however this method also introduces interest rate risk to GLL’s loans in process since rates may fluctuate subsequent to GLL’s rate commitment to the mortgage customer. In order to minimize the risk that interest rates may move against GLL subsequent to the rate commitment, GLL began entering into hedge contracts to “forward sell” mortgage-backed securities coincident to the rate commitment. When the mortgage loan is ultimately sold, GLL then buys the mortgage-backed security, thereby completing the hedge contract. As of September 30, 2002, GLL held approximately $12,615,000 in open mortgage loan commitments with

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an estimated market value of approximately $12,699,000, an unrealized gain of approximately $84,000. Also as of September 30, 2002, GLL held approximately $12,000,000 in open mortgage-backed security commitments with an estimated market value of approximately $11,951,000, an unrealized loss of approximately $49,000. Because this strategy was implemented late in September 2002, there were no realized gains or losses related to this strategy in the nine months ended September 30, 2002.

     Except for the hedging strategy discussed above, 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 September 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 September 30, 2002, the Bank’s core deposits, defined as total deposits excluding time deposits of $100,000 or more, totaled $414,612,439, or 77.1%, 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 methods of funding used by the Bank are 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 on a short-term basis. As of September 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 September 30, 2002, the Bank had investment securities pledged to secure overnight funding lines in the approximate amounts of $11,175,000 with the Federal Reserve Bank and $30,149,000 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 September 30, 2002, the Bank had a credit line of $25,953,000 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 $24,453,000 of mortgage the loans originated by GLL and the Company serves as guarantor under the terms of this line. As of September 30, 2002 and December 31, 2001, this line of credit was $30,000,000 and $25,000,000, respectively.

     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

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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.

Results of Operations

For the Three Month Period Ended September 30, 2002 Compared With the Same
Period in 2001 and for the Nine Month Period Ended September 30, 2002 Compared
With the Same Period in 2001

     During the three month period ended September 30, 2002, the Company’s net income increased to $3,682,584, or 7.94%, from the $3,411,815 earned in the same period of 2001. The increase primarily resulted from higher net interest margins related to banking operations. For the first nine months of 2002, net income was $10,916,458, up $1,026,030, or 10.37%, from the $9,890,428 earned in the same year-to-date period of 2001. The year-to-date increase primarily resulted from higher net interest margins, lower provisions for loan losses and growth in income from mortgage banking operations.

Net Interest Income for the Quarterly Periods

     During the three month period ended September 30, 2002, the Company’s net interest income increased $699,030, or 8.81%, compared to the three months ended September 30, 2001, primarily due to higher loan demand and an improved net interest margin. The Company’s net interest margin averaged 5.44% during the three month period compared to 5.07% 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

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income and net interest margins, please see “Liquidity, Interest Rate Sensitivity and Market Risks” above.

     During the quarter ended September 30, 2002, interest income decreased $1,411,819, or 11.10%, from the same period last year, primarily because of lower rates on loans and investments, and lower volumes of investments, partially offset by higher volumes of loans. Interest and fees on loans decreased $798,891, or 7.65%, due to lower average rates during the quarter, partially offset by higher volumes of loans. Yields on loans averaged 7.22% for the quarter, down from 8.60% for the same quarter last year. The prime lending rate during the three month period averaged 4.75% compared to 6.67% during the same period in 2001. Gross loans averaged $529,895,252 compared to $482,004,617 last year, an increase of $47,890,635, or 9.94%. Average loans of the Bank were $509,100,750 compared to $459,307,945 last year, an increase of $49,792,805, or 10.84%, while average loans of GLL were $20,794,502 compared to $22,696,672 last year, a decrease of $1,902,170, or 8.38%. Interest on securities and overnight investments decreased $612,928, or 27.05%, due to lower average volumes invested during the quarter. Average securities and overnight investments were $130,733,212 compared to $175,155,442 last year, a decrease of $44,422,230, or 25.36%.

     Interest expense decreased $2,110,849, or 44.17%, primarily because of lower rates on interest-bearing deposits and other borrowings. Overall, rates on interest-bearing deposits averaged 2.24% for the quarter, down from 4.03% for the same quarter last year. Total interest-bearing deposits averaged $429,984,225 compared to $442,435,756 last year, a decrease of $12,451,531, or 2.81%. Savings, NOW and money market deposits averaged $162,282,688 compared to $139,066,787 last year, an increase of $23,215,901, or 16.69%, primarily due to the Bank’s new premium money market account that carried an attractive introductory rate. Time deposits averaged $267,701,537 compared to $303,368,969 last year, a decrease of $35,667,432, or 11.76%. 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. Time deposits generally pay a higher rate of interest than most other types of deposits. Overnight borrowings averaged $30,495,983 compared to $14,025,277 last year, an increase of $16,470,706, or 117.44%, 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 $17,111,225 compared to $20,064,667 last year, a decrease of $2,953,442, or 14.72%, 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. The Company has not historically relied upon “out-of-market” or “brokered” deposits as a significant source of funding.

Net Interest Income for the Year-to-Date Periods