##### 



U. S. Securities and Exchange Commission
 Washington, D.C. 20549
 Form 10-K
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the fiscal year ended December 31, 2005
 o
    
    Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the transition period from  to
 Commission
file number 000-33223
 Gateway Financial Holdings, Inc.
  North Carolina
    
    56-2040581(State of incorporation)
    
    (IRS Employer Identification No.)
 1145 North Road Street, Elizabeth City, North Carolina
    
    27909(Address of principal executive offices)
    
    (Zip code)
 (252) 334-1511
   o þ
 o þ
 þ o
 o
  large accelerated filer o
    
    accelerated filer þ
    
    non-accelerated filer o
 o þ
     Document
    
    Where Incorporated1.
    
    
    Proxy Statement for the Annual Meeting of Shareholders
to be held May 15, 2006 to be mailed to shareholders
within 120 days of December 31, 2005.
    
    Part III




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Form 10-K Table of Contents
 Index
    
    
    
    PAGEPART IItem 1.
    
    Description of Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    12Item 1B.
    
    Unresolved Staff Comments
    
    
    17Item 2.
    
    Properties
    
    
    17Item 3.
    
    Legal
    
    
    18Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    18PART IIItem 5.
    
    Market for Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    19Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    20Item 8.
    
    Financial Statements
    
    
    44Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    78Item 9A.
    
    Controls and Procedures
    
    
    78Item 9B.
    
    Other Information
    
    
    81PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    81Item 11.
    
    Executive Compensation
    
    
    81Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    81Item 13.
    
    Certain Relationships and Related Transactions
    
    
    82Item 14.
    
    Principal Accounting Fees and Services
    
    
    82PART IVItem 15.
    
    Exhibits, Financial Statement Schedules
    
    
    82
 Page 2




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PART I
 ITEM
1.  DESCRIPTION OF BUSINESS
 General
     Market Area and Growth Strategy
  Page 3




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.
  
    
    Small-and medium-sized businesses;
    
    Professionals and middle managers of locally based companies;
    
    Residential real estate developers; and
    
    Individual consumers.
    
    
    Emphasize relationship banking.We have been successful in building client
relationships because our regional model enables us to deliver products and services that
are comparable to that of our largest competitors and high customer service levels that are
most commonly associated with a community bank. Each of the banks four regions has its
own President whose knowledge of the region, presence in the community and ability to make
prompt credit decisions, strengthens our ability to develop local relationships. We
typically render commercial loan decisions within 48 hours and retail loans within an hour.
Localized decision making and personalized customer service form the core of our
relationship banking strategy, and we plan to maintain this approach as we continue to grow
in both our existing markets and additional markets
    
    Grow organically in our existing markets.Our markets have been subject to
significant bank consolidation. We believe there is a large customer base in our markets
that prefers doing business with a local institution and may be dissatisfied with the
service received from larger regional and super-regional banks. By providing our
customers with personalized service and a big bank product suite, we expect to continue
our strong growth. We believe the success of our strategy is evidenced by the growth of
our deposits from approximately $115.7 million at December 31, 2001 to approximately
$646.3 million at December 31, 2005, and net loans, which increased from approximately
$105.8 million at December 31, 2001 to approximately $660.4 million at December 31,
2005.
    
    Expand franchise in high growth markets.We will actively consider both acquisitions
and de novo financial center opportunities in existing and new market areas. Since
December 31, 2001, we have
 Page 4




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successfully integrated four acquired financial centers and have opened ten de novo
financial centers. We are focused on markets in eastern Virginia and eastern North Carolina
that possess favorable growth characteristics and in which we have identified experienced
bankers to help execute our strategy. For example, we have currently targeted the MSAs of
Raleigh and Wilmington, North Carolina. According to ESRI, the MSA of Raleigh has a
projected population growth of 15.8% for 2005 to 2010. The MSA of Wilmington has a
projected population growth of 12.3% from 2005 to 2010. On January 4, 2006 we opened our
first financial center in Raleigh and expect to open a newly constructed financial center in
Southern Shores, North Carolina. Additionally, we currently intend to open five additional
new financial centers in 2006.
    
    Grow insurance agency through acquisitions.Our independent insurance agency was
created through the acquisition and integration of three independent insurance agencies.
Since December 31, 2001, we have successfully integrated the further acquisitions of an
insurance agency, the Outer Banks business of another insurance agency, and an insurance
premium finance agency. We will actively consider acquisitions in both our existing market
areas and in other growing markets in eastern Virginia and eastern North Carolina that have
favorable market demographics for our insurance agency subsidiary.
    
    Improve our core profitability.We believe as we grow our franchise that we will be
able to take advantage of the economies of scale typically enjoyed by larger organizations.
As our financial center network matures and the pace of our expansion slows, our
profitability should improve. We believe the investments we have made in our financial
center network and technology infrastructure are sufficient to support a much larger
organization, and therefore believe increases in our expense base going forward should be
lower than our proportional increase in assets and revenues.
    
    Continue our disciplined execution.We believe our success as a banking organization
depends on a disciplined approach to originating loans and monitoring the performance of
our loan portfolio. Despite our growth, we have consistently maintained strong asset
quality. We believe our strong asset quality is the result of conservative underwriting
standards, experienced loan officers and the strength of the local economies in which we
operate. At December 31, 2005, our non-performing assets as a percentage of total assets
were 0.02% and our ratio of net charge-offs to average loans was 0.02%. Our year-end
non-performing assets as a percentage of total assets have not exceeded 0.67% in any of the
past five years.
 Competition
    Page 5




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Other Products and Services
 Other Banking Products and Services.
  Other Financial Services.
  Employees
  SUPERVISION AND REGULATION
  Gateway Financial Holdings, Inc.
    Page 6




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Enforcement Authority
 Interstate Acquisitions
 Capital Adequacy
   Page 7




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Source of Strength for Subsidiary.
 Dividends.
 Change of Control.
 Gateway Bank & Trust Co.
  Transactions with Affiliates
 Page 8




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Loans to Insiders
 Regulation of Lending Activities
 Financial Centers
   Reserve Requirements.
 Community Reinvestment.
 Governmental Monetary Policies
 Page 9




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Dividends
   Capital Adequacy
 Changes in Management
 Enforcement Authority
 Prompt Corrective Action
 Page 10




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Deposit Insurance.
 Future legislation and regulations.
  Page 11




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ITEM 1A RISK FACTORS
 An investment in our common stock involves risks. Shareholders should carefully consider the risks
described below in conjunction with the other information in this Form 10K and information
incorporated by reference in this Form 10K, including our consolidated financial statements and
related notes. If any of the following risks or other risks which have not been identified or which
we may believe are immaterial or unlikely, actually occur, our business, financial condition and
results of operations could be harmed. This could cause the price of our stock to decline, and
shareholders could lose part or all of their investment. This Form 10K contains forward-looking
statements that involve risks and uncertainties, including statements about our future plans,
objectives, intentions and expectations. Many factors, including those described below, could cause
actual results to differ materially from those discussed in our forward-looking statements.
 Our business strategy includes the continuation of significant growth plans, and our
financial condition and results of operations could be negatively affected if we fail to grow or
fail to manage our growth effectively.
  Our business is subject to the success of the local economies where we operate.
   We may face risks with respect to future expansion.
  
    
    the time and costs associated with identifying and evaluating potential
acquisitions and merger partners;
    
    the estimates and judgments used to evaluate credit, operations, management and
market risks with respect to the target entity may not be accurate;
    
    the time and costs of evaluating new markets, hiring experienced local management
and opening new offices, and the time lags between these activities and the
generation of sufficient assets and deposits to support the costs of the expansion;
    
    our ability to finance an acquisition and possible ownership and economic dilution
to our current shareholders and to investors purchasing common stock in this
offering;
 Page 12




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
    
    the diversion of our managements attention to the negotiation of a transaction,
and the integration of the operations and personnel of the combining businesses;
    
    entry into new markets where we lack experience;
    
    the introduction of new products and services into our business;
    
    the incurrence and possible impairment of goodwill associated with an acquisition
and possible adverse short-term effects on our results of operations; and
    
    the risk of loss of key employees and customers.
  If the value of real estate in our core market areas were to decline materially, a significant
portion of our loan portfolio could become under-collateralized, which could have a material
adverse effect on us.
   An inadequate allowance for loan losses would reduce our earnings and capital.
   A significant part of our loan portfolio is unseasoned.
  Our reliance on time deposits, including out-of-market certificates of deposit, as a source of
funds for loans and our other liquidity needs could have an adverse effect on our operating
results.
 Page 13




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The building of market share through our de novo financial center strategy could cause our
expenses to increase faster than our revenues.
  Our recent results may not be indicative of our future results.
  We may be adversely affected by interest rate changes.
  Our operations and customers might be affected by the occurrence of a natural disaster or other
catastrophic event in our market area.
  Page 14




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Competition from financial institutions and other financial service providers may adversely
affect our profitability.
   We are subject to extensive regulation that could limit or restrict our activities.
   Our directors and executive officers own a significant portion of our common stock
  Our continued success is dependent upon the services of our management team.
  Our continued pace of growth may require us to raise additional capital in the future, but that
capital may not be available when it is needed.
 Page 15




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Our future capital needs could result in dilution of your investment.
  The trading volume in our common stock is low and the sale of substantial amounts of our common
stock in the public market could depress the price of our common stock.
   Our ability to pay dividends is limited and we may be unable to pay future dividends.
  Holders of our junior subordinated debentures have rights that are senior to those of our common
shareholders.
  Certain provisions under our Articles of Incorporation and applicable law may make it difficult
for others to obtain control of our corporation even if such a change in control may be favored
by some shareholders.
 Page 16




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Our securities are not FDIC insured.
  ITEM 1B  UNRESOLVED STAFF COMMENTS
  ITEM 2  PROPERTIES
  Approximate Square
    
    Year Established/Office Location
    
    Footage
    
    AcquiredEdenton 344 Virginia Road (4)
    
    
    2,400
    
    
    
    2002Elizabeth
City 1145 North Road Street (1)
    
    
    9,000
    
    
    
    1999Elizabeth City 1141 North Road Street (6)
    
    
    6,000
    
    
    
    2001Elizabeth
City 1404 West Ehringhaus Street (3)
    
    
    2,000
    
    
    
    2003Elizabeth
City 400 West Ehringhaus Street (4)
    
    
    5,000
    
    
    
    2004Elizabeth
City 802 West Ehringhaus Street (2)
    
    
    3,200
    
    
    
    2004Hertford 147 North Church Street (2)
    
    
    2,000
    
    
    
    2002Kitty
Hawk 3600 Croatan Highway (1)
    
    
    6,500
    
    
    
    2002Moyock 100 Moyock Commons Drive (4)
    
    
    4,000
    
    
    
    2004Nags Head 2808 S. Croatan Highway (5)
    
    
    4,800
    
    
    
    2004Plymouth 433 U.S. Highway 64 East (4)
    
    
    5,200
    
    
    
    2000Roper 102 W. Buncomb Street (3)
    
    
    550
    
    
    
    2000Chesapeake 111 Gainsbourgh Square (5)
    
    
    7,200
    
    
    
    2002Chesapeake 575 Cedar Road (3)
    
    
    2,400
    
    
    
    2003Emporia 5205 Main Street (3)
    
    
    6,500
    
    
    
    2004Suffolk 2825 Godwin Drive (3)
    
    
    3,200
    
    
    
    2004Virginia
Beach 4460 Corporation Lane, Suite 100 (3)
    
    
    4,000
    
    
    
    2000Virginia
Beach 3001 Shore Drive (3)
    
    
    2,000
    
    
    
    2003Virginia Beach 713 Independence Boulevard (3)
    
    
    2,200
    
    
    
    2003Virginia Beach 1580 Laskin Road (5)
    
    
    7,500
    
    
    
    2005Virginia Beach 2098 Princess Anne Road (3)
    
    
    2,500
    
    
    
    2005
 
 (1)
    
    Includes banking, investment brokerage and insurance services.(2)
    
    Insurance services only.(3)
    
    Banking services only.(4)
    
    Only banking and insurance services.(5)
    
    Only banking and investment brokerage services.(6)
    
    Operations building.  Page 17




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ITEM 3  LEGAL PROCEEDINGS
  ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  PART II
 ITEM 5  MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES
OF EQUITY SECURITIES
  High
    
    Low2004
    
    
    First Quarter
    
    $
    13.76
    
    
    $
    10.19Second Quarter
    
    
    13.24
    
    
    
    10.57Third Quarter
    
    
    14.16
    
    
    
    11.17Fourth Quarter
    
    
    14.58
    
    
    
    12.942005
    
    
    First Quarter
    
    $
    17.15
    
    
    $
    14.38Second Quarter
    
    
    18.70
    
    
    
    15.72Third Quarter
    
    
    18.20
    
    
    
    17.24Fourth Quarter
    
    
    18.15
    
    
    
    16.21
  Page 18




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ITEM 6  SELECTED FINANCIAL DATA
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands, except per share data)Operating Data:Total interest income
    
    $
    39,679
    
    
    $
    19,632
    
    
    $
    13,486
    
    
    $
    10,311
    
    
    $
    9,125Total interest expense
    
    
    16,376
    
    
    
    6,691
    
    
    
    5,341
    
    
    
    4,819
    
    
    
    5,059Net interest income
    
    
    23,303
    
    
    
    12,941
    
    
    
    8,145
    
    
    
    5,492
    
    
    
    4,066Provision for loan losses
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200
    
    
    
    480
    
    
    
    440Net interest income after
provision for loan losses
    
    
    21,103
    
    
    
    11,516
    
    
    
    6,945
    
    
    
    5,012
    
    
    
    3,626Total non-interest income
    
    
    8,067
    
    
    
    5,857
    
    
    
    4,485
    
    
    
    2,826
    
    
    
    2,420Total non-interest expense
    
    
    23,266
    
    
    
    14,653
    
    
    
    10,230
    
    
    
    7,211
    
    
    
    5,499Income before income taxes
    
    
    5,904
    
    
    
    2,720
    
    
    
    1,200
    
    
    
    627
    
    
    
    547Provision for income taxes
    
    
    1,965
    
    
    
    710
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200
    
    
    $
    627
    
    
    $
    547Per Share Data: (1)Net income basic
    
    $
    0.53
    
    
    $
    0.41
    
    
    $
    0.33
    
    
    $
    0.17
    
    
    $
    0.19Net income diluted
    
    
    0.51
    
    
    
    0.37
    
    
    
    0.32
    
    
    
    0.17
    
    
    
    0.19Dividends
    
    
    0.09
    
    
    
    0.02
    
    
    
    
    
    
    
    
    
    
    
    Book value
    
    
    10.40
    
    
    
    8.78
    
    
    
    6.83
    
    
    
    6.57
    
    
    
    6.31Tangible book value
    
    
    9.32
    
    
    
    7.33
    
    
    
    5.85
    
    
    
    5.95
    
    
    
    5.67Balance Sheet Data:Total assets
    
    $
    882,422
    
    
    $
    535,728
    
    
    $
    314,826
    
    
    $
    231,053
    
    
    $
    160,832Loans receivable
    
    
    666,652
    
    
    
    381,956
    
    
    
    231,740
    
    
    
    161,488
    
    
    
    107,240Allowance for loan losses
    
    
    6,283
    
    
    
    4,163
    
    
    
    2,759
    
    
    
    1,721
    
    
    
    1,435Deposits
    
    
    646,262
    
    
    
    406,259
    
    
    
    238,452
    
    
    
    174,663
    
    
    
    115,717Borrowings
    
    
    134,665
    
    
    
    63,926
    
    
    
    50,000
    
    
    
    31,401
    
    
    
    21,300Shareholders equity
    
    
    98,744
    
    
    
    64,318
    
    
    
    24,971
    
    
    
    23,968
    
    
    
    22,998Selected Performance Ratios:Return on average assets
    
    
    0.58
    %
    
    
    0.49
    %
    
    
    0.43
    %
    
    
    0.32
    %
    
    
    0.41
    %Return on average equity
    
    
    5.77
    %
    
    
    5.12
    %
    
    
    4.93
    %
    
    
    2.58
    %
    
    
    2.96
    %Net interest margin (2)
    
    
    3.81
    %
    
    
    3.59
    %
    
    
    3.24
    %
    
    
    3.09
    %
    
    
    3.32
    %Net interest spread (3)
    
    
    3.44
    %
    
    
    3.33
    %
    
    
    2.98
    %
    
    
    2.68
    %
    
    
    2.66
    %Non-interest income as a percentage of
net interest income and non-interest
income
    
    
    25.72
    %
    
    
    31.16
    %
    
    
    35.51
    %
    
    
    33.97
    %
    
    
    37.31
    %Non-interest income as a percentage of
average assets
    
    
    1.19
    %
    
    
    1.44
    %
    
    
    1.61
    %
    
    
    1.46
    %
    
    
    1.80
    %Non-interest expense to average assets
    
    
    3.43
    %
    
    
    3.59
    %
    
    
    3.67
    %
    
    
    3.71
    %
    
    
    4.10
    %Efficiency ratio (4)
    
    
    74.17
    %
    
    
    77.95
    %
    
    
    81.00
    %
    
    
    86.69
    %
    
    
    84.78
    %
 Page 19




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For the Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in thousands, except per share data)Asset Quality Ratios:Nonperforming loans to period-end loans
    
    
    0.03
    %
    
    
    0.13
    %
    
    
    0.52
    %
    
    
    0.82
    %
    
    
    0.00
    %Allowance for loan losses to period-end
loans
    
    
    0.94
    %
    
    
    1.09
    %
    
    
    1.19
    %
    
    
    1.07
    %
    
    
    1.34
    %Allowance for loan losses to
nonperforming loans (5)
    
    
    3079.90
    %
    
    
    849.59
    %
    
    
    228.02
    %
    
    
    129.59
    %
    
    NMNonperforming assets to total assets (6)
    
    
    0.02
    %
    
    
    0.09
    %
    
    
    0.38
    %
    
    
    0.67
    %
    
    
    0.14
    %Net loan charge-offs to average
loans outstanding
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.11
    %
    
    
    0.15
    %
    
    
    0.04
    %Capital Ratios:(7)Total risk-based capital
    
    
    15.17
    %
    
    
    17.40
    %
    
    
    12.68
    %
    
    
    12.51
    %
    
    
    17.89
    %Tier 1 risk-based capital
    
    
    14.31
    %
    
    
    16.41
    %
    
    
    11.59
    %
    
    
    11.57
    %
    
    
    16.72
    %Leverage ratio
    
    
    13.73
    %
    
    
    13.89
    %
    
    
    9.33
    %
    
    
    9.71
    %
    
    
    13.74
    %Equity to assets ratio
    
    
    11.19
    %
    
    
    12.01
    %
    
    
    7.93
    %
    
    
    10.37
    %
    
    
    14.30
    %Other Data:Number of banking offices
    
    
    18
    
    
    
    16
    
    
    
    10
    
    
    
    7
    
    
    
    4Number of full time equivalent employees
    
    
    247
    
    
    
    191
    
    
    
    123
    
    
    
    96
    
    
    
    69
 
 (1)
    
    Restated for 11 for- 10 stock split in 2005, 21-for-20 stock split in 2004, 21-for-20
stock split occurring during 2003 and 11-for-10 stock split occurring during 2002.(2)
    
    Net interest margin is net interest income divided by average interest-earning assets.(3)
    
    Net interest spread is the difference between the average yield on interest-earning assets
and the average cost of interest-bearing liabilities.(4)
    
    Efficiency ratio is non-interest expense divided by the sum of net interest income and
non-interest income.(5)
    
    Considering that the Company had no nonperforming loans in 2001, certain allowance
for loan losses to nonperforming loans ratios are not considered meaningful NM.(6)
    
    Nonperforming assets consists of nonaccrual loans, restructured loans, and real estate owned,
where applicable.(7)
    
    Capital ratios are for the Company. ITEM 7  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  AND
 ITEM 7A  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  FORWARD LOOKING STATEMENTS
  Page 20




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Managements discussion and analysis is intended to assist readers in the understanding and
evaluation of the financial condition and results of operations of Gateway Financial Holdings, Inc.
It should be read in conjunction with the audited consolidated financial statements and
accompanying notes included in this annual report and the supplemental financial data appearing
throughout this discussion and analysis. On May 16, 2005 the Companys Board of Directors declared
an 11 for-10 stock split effected in the form of a 10% stock dividend, which was distributed June
20, 2005 to shareholders of record on May 30, 2005. On February 17, 2004, the Companys Board of
Directors declared a 21-for-20 stock split, to be effected in the form of a 5% stock dividend,
distributed April 8, 2004 to shareholders of record on March 15, 2004. On May 19, 2003, the
Companys Board of Directors declared a 21-for-20 stock split, effected in the form of a 5% stock
dividend, which was distributed June 12, 2003 to shareholders of record on May 21, 2003. All
references in this discussion and analysis to per share results and weighted average shares
outstanding have been adjusted to reflect the effects of these stock splits.
 OVERVIEW
     Page21




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FINANCIAL CONDITION
December 31, 2005 and 2004
    Page22




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NET INTEREST INCOME
 
 Page23




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Average Balances and Average Rates Earned and Paid.
 For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Loans
    
    $
    523,492
    
    
    $
    36,358
    
    
    
    6.95
    %
    
    $
    301,466
    
    
    $
    17,509
    
    
    
    5.81
    %
    
    $
    197,801
    
    
    $
    11,511
    
    
    
    5.82
    %Interest-earning deposits
    
    
    3,668
    
    
    
    138
    
    
    
    3.76
    %
    
    
    6,515
    
    
    
    102
    
    
    
    1.57
    %
    
    
    1,867
    
    
    
    21
    
    
    
    1.12
    %Investment securities available for sale taxable
    
    
    72,579
    
    
    
    2,731
    
    
    
    3.76
    %
    
    
    47,630
    
    
    
    1,835
    
    
    
    3.85
    %
    
    
    49,652
    
    
    
    1,851
    
    
    
    3.73
    %Investment securities available for sale tax exempt
    
    
    6,327
    
    
    
    204
    
    
    
    3.22
    %
    
    
    1,908
    
    
    
    64
    
    
    
    3.35
    %
    
    
    
    
    
    
    
    
    
    
    FHLB/FRB stock
    
    
    5,038
    
    
    
    248
    
    
    
    4.92
    %
    
    
    2,936
    
    
    
    122
    
    
    
    4.16
    %
    
    
    2,409
    
    
    
    103
    
    
    
    4.28
    %Total interest-earning assets
    
    
    611,104
    
    
    
    39,679
    
    
    
    6.49
    %
    
    
    360,455
    
    
    
    19,632
    
    
    
    5.45
    %
    
    
    251,729
    
    
    
    13,486
    
    
    
    5.36
    %Other assets
    
    
    67,916
    
    
    
    
    
    
    
    
    
    
    
    47,244
    

    
    
    

    
    
    
    
    
    
    
    26,727Total assets
    
    $
    679,020
    
    
    
    
    
    
    
    
    
    
    $
    407,699
    
    
    
    
    
    
    
    
    
    
    $
    278,456Interest-bearing liabilities:Deposits:Savings, NOW, and money market
    
    $
    178,577
    
    
    
    3,579
    
    
    
    2.00
    %
    
    $
    118,242
    
    
    
    1,553
    
    
    
    1.31
    %
    
    $
    55,852
    
    
    
    557
    
    
    
    1.00
    %Time deposits
    
    
    267,494
    
    
    
    9,115
    
    
    
    3.41
    %
    
    
    137,440
    
    
    
    3,430
    
    
    
    2.50
    %
    
    
    125,100
    
    
    
    3,555
    
    
    
    2.84
    %Borrowings
    
    
    91,005
    
    
    
    3,682
    
    
    
    4.05
    %
    
    
    59,758
    
    
    
    1,708
    
    
    
    2.86
    %
    
    
    43,244
    
    
    
    1,229
    
    
    
    2.84
    %Total interest-bearing liabilities
    
    
    537,076
    
    
    
    16,376
    
    
    
    3.05
    %
    
    
    315,440
    
    
    
    6,691
    
    
    
    2.12
    %
    
    
    224,196
    
    
    
    5,341
    
    
    
    2.38
    %Demand deposits
    
    
    72,369
    
    
    
    
    
    
    
    
    
    
    
    52,218
    
    
    
    
    
    
    
    
    
    
    
    27,943Other liabilities
    
    
    1,317
    
    
    
    
    
    
    
    
    
    
    
    815
    
    
    
    
    
    
    
    
    
    
    
    1,972Stockholders equity
    
    
    68,258
    
    
    
    
    
    
    
    
    
    
    
    39,226
    
    
    
    
    
    
    
    
    
    
    
    24,345Total liabilities and stockholders equity
    
    $
    679,020
    
    
    
    
    
    
    
    
    
    
    $
    407,699
    
    
    
    
    
    
    
    
    
    
    $
    278,456Net interest income and interest rate spread
    
    
    
    
    
    $
    23,303
    
    
    
    3.44
    %
    
    
    
    
    
    $
    12,941
    
    
    
    3.33
    %
    
    
    
    
    

    $
    8,145
    
    
    
    2.98
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.81
    %
    
    
    
    
    
    
    
    
    
    
    3.59
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    113.78
    %
    
    
    
    
    
    
    
    
    
    
    114.27
    %
    
    
    
    
    
    
    
    
    
    
    112.28
    %
 Page24




---



##### 



RATE/VOLUME ANALYSIS
  Year Ended
    
    
    
    
    
    
    
    
    
    
    Year EndedDecember 31, 2005 vs. 2004
    
    
    December 31, 2004 vs. 2003Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest income:Loans
    
    $
    14,158
    
    
    $
    4,691
    
    
    $
    18,849
    
    
    $
    6,027
    
    
    $
    (29
    )
    
    $
    5,998Interest-earning deposits
    
    
    (76
    )
    
    
    112
    
    
    
    36
    
    
    
    63
    
    
    
    18
    
    
    
    81Investment securities available
for saleTaxable
    
    
    950
    
    
    
    (54
    )
    
    
    896
    
    
    
    (77
    )
    
    
    61
    
    
    
    (16
    )Tax-exempt
    
    
    145
    
    
    
    (5
    )
    
    
    140
    
    
    
    32
    
    
    
    32
    
    
    
    64FHLB/FRB stock
    
    
    95
    
    
    
    31
    
    
    
    126
    
    
    
    22
    
    
    
    (3
    )
    
    
    19Total interest income
    
    
    15,272
    
    
    
    4,775
    
    
    
    20,047
    
    
    
    6,067
    
    
    
    79
    
    
    
    6,146Interest expense:DepositsSavings, NOW, and
money market
    
    
    1,001
    
    
    
    1,025
    
    
    
    2,026
    
    
    
    721
    
    
    
    275
    
    
    
    996Time deposits
    
    
    3,839
    
    
    
    1,846
    
    
    
    5,685
    
    
    
    329
    
    
    
    (454
    )
    
    
    (125
    )Borrowings
    
    
    1,063
    
    
    
    911
    
    
    
    1,974
    
    
    
    585
    
    
    
    (106
    )
    
    
    479Total interest expense
    
    
    5,903
    
    
    
    3,782
    
    
    
    9,685
    
    
    
    1,635
    
    
    
    (285
    )
    
    
    1,350Net interest income
increase
    
    $
    9,369
    
    
    $
    993
    
    
    $
    10,362
    
    
    $
    4,432
    
    
    $
    364
    
    
    $
    4,796
 RESULTS OF OPERATIONS
Years Ended December 31, 2005 and 2004
 Overview.
 Page25




---



##### 



Net Interest Income.
  Provision for Loan Losses.
 Non-Interest Income.
 Non-Interest Expenses.
 Income Taxes.
 Page26




---



##### 



RESULTS OF OPERATIONS
Years Ended December 31, 2004 and 2003
 Overview.
 Net Interest Income.
  Provision for Loan Losses.
 Non-Interest Income.
 Page27




---



##### 



Non-Interest Expenses.
 Income Taxes.
 LIQUIDITY AND CAPITAL RESOURCES
     Page28




---



##### 



CAPITAL RATIOS
  At December 31, 2005Actual
    
    
    Minimum
    
    
    Well-CapitalizedRatio
    
    
    Requirement
    
    
    RequirementTotal risk-based capital ratio
    
    
    14.00
    %
    
    
    8.0
    %
    
    
    10.0
    %Tier 1 risk-based capital ratio
    
    
    13.13
    %
    
    
    4.0
    %
    
    
    6.0
    %Leverage ratio
    
    
    12.47
    %
    
    
    4.0
    %
    
    
    5.0
    %
  CONTRACTUAL OBLIGATIONS AND COMMITMENTS
  Payments Due by PeriodOn DemandOr Within
    
    
    
    
    
    
    
    
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    5 Years(In thousands)Federal funds purchased
    
    $
    5,000
    
    
    $
    5,000
    
    
    $
    
    
    
    $
    
    
    
    $
    FHLB advances
    
    
    114,200
    
    
    
    57,200
    
    
    
    5,000
    
    
    
    26,500
    
    
    
    25,500Junior subordinated debentures
    
    
    15,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,465Lease obligations
    
    
    14,669
    
    
    
    1,318
    
    
    
    2,220
    
    
    
    1,916
    
    
    
    9,215Deposits
    
    
    646,262
    
    
    
    587,140
    
    
    
    51,010
    
    
    
    8,101
    
    
    
    11Total contractual cash obligations
    
    $
    795,596
    
    
    $
    650,658
    
    
    $
    58,230
    
    
    $
    36,517
    
    
    $
    50,191
  Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Within
    
    
    
    
    
    
    
    
    
    
    AfterOther Commitments
    
    Committed
    
    
    1 Year
    
    
    2-3 Years
    
    
    4-5 Years
    
    
    5 Years(In thousands)Undisbursed home equity credit lines
    
    $
    42,711
    
    
    $
    42,711
    
    
    $
    
    
    
    $
    
    
    
    $
    Other commitments and credit lines
    
    
    82,427
    
    
    
    82,427
    
    
    
    
    
    
    
    
    
    
    
    Undisbursed portion of construction loans
    
    
    80,279
    
    
    
    80,279
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    6,323
    
    
    
    6,323
    
    
    
    
    
    
    
    
    
    
    
    Construction projects
    
    
    8,500
    
    
    
    8,500
    
    
    
    
    
    
    
    
    
    
    
    Total other commitments
    
    $
    220,240
    
    
    $
    220,240
    
    
    $
    
    
    
    $
    
    
    
    $
    
  Page29




---



##### 



ASSET/LIABILITY MANAGEMENT
       Page30




---



##### 



Terms to Repricing at December 31, 2005Over 3
    
    
    Total3 Months
    
    
    Months to
    
    
    Within
    
    
    Over 12or Less
    
    
    12 Months
    
    
    12 Months
    
    
    Months
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    300,333
    
    
    $
    23,431
    
    
    $
    323,764
    
    
    $
    342,888
    
    
    $
    666,652Interest-earning deposits
    
    
    3,668
    
    
    
    
    
    
    
    3,668
    
    
    
    
    
    
    
    3,668Investment securities available for sale
    
    
    6,421
    
    
    
    4,924
    
    
    
    11,345
    
    
    
    112,428
    
    
    
    123,773FHLB/FRB stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,305
    
    
    
    8,305Total interest-earning assets
    
    $
    310,422
    
    
    $
    28,355
    
    
    $
    338,777
    
    
    $
    463,621
    
    
    $
    802,398Percentage of total interest-earning assets
    
    
    38.69
    %
    
    
    3.53
    %
    
    
    42.22
    %
    
    
    57.78
    %
    
    
    100.00
    %Cumulative percentage to total interest-earning assets
    
    
    38.69
    %
    
    
    42.22
    %
    
    
    42.22
    %
    
    
    100.00
    %
    
    
    100.00
    %Interest-bearing liabilities:Deposits:Savings, NOW and money market
    
    $
    189,684
    
    
    $
    
    
    
    $
    189,684
    
    
    $
    
    
    
    $
    189,684Time
    
    
    31,657
    
    
    
    276,637
    
    
    
    308,294
    
    
    
    59,122
    
    
    
    367,416Borrowings
    
    
    72,665
    
    
    
    
    
    
    
    72,665
    
    
    
    62,000
    
    
    
    134,665Total interest-bearing liabilities
    
    $
    294,006
    
    
    $
    276,637
    
    
    $
    570,643
    
    
    $
    121,122
    
    
    $
    691,765Percentage of total interest-bearing
liabilities
    
    
    42.50
    %
    
    
    39.99
    %
    
    
    82.49
    %
    
    
    17.51
    %
    
    
    100.00
    %Cumulative percentage of total interest-
bearing liabilities
    
    
    42.50
    %
    
    
    82.49
    %
    
    
    82.49
    %
    
    
    100.00
    %
    
    
    100.00
    %Interest sensitivity gap
    
    $
    16,416
    
    
    $
    (248,282
    )
    
    $
    (231,866
    )
    
    $
    342,499
    
    
    $
    110,633Cumulative interest sensitivity gap
    
    $
    16,416
    
    
    $
    (231,866
    )
    
    $
    (231,866
    )
    
    $
    110,633
    
    
    $
    110,633Cumulative interest sensitivity gap as a
percentage of total interest-earning assets
    
    
    2.05
    %
    
    
    (28.90
    )%
    
    
    (28.90
    )%
    
    
    13.79
    %
    
    
    13.79
    %Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities
    
    
    105.58
    %
    
    
    59.37
    %
    
    
    59.37
    %
    
    
    115.99
    %
    
    
    115.99
    %
  CRITICAL ACCOUNTING POLICIES
  Page 31




---



##### 



Allowance for loan losses
  Goodwill
 OFF-BALANCE SHEET ARRANGEMENTS
  RECENT ACCOUNTING PRONOUNCEMENTS
  Page 32




---



##### 



LENDING ACTIVITIES
 General
  At December 31,2005
    
    
    2004Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in thousands)Commercial
    
    $
    80,816
    
    
    
    12.1
    %
    
    $
    69,075
    
    
    
    18.0
    %Real estate
 construction
    
    
    114,018
    
    
    
    17.1
    %
    
    
    131,431
    
    
    
    34.4
    %Real estate
 commercial mortgage
    
    
    221,526
    
    
    
    33.2
    %
    
    
    90,197
    
    
    
    23.6
    %Real estate
 1-4 family mortgage
    
    
    82,987
    
    
    
    12.4
    %
    
    
    51,768
    
    
    
    13.5
    %Consumer
    
    
    98,881
    
    
    
    14.8
    %
    
    
    10,641
    
    
    
    2.8
    %Home equity lines of credit
    
    
    69,246
    
    
    
    10.4
    %
    
    
    29,351
    
    
    
    7.7
    %Subtotal
    
    
    667,474
    
    
    
    100.0
    %
    
    
    382,462
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (6,283
    )
    
    
    
    
    
    
    (4,163
    )Unamortized net deferred (fees) costs
    
    
    (822
    )
    
    
    
    
    
    
    (506
    )Net loans
    
    $
    660,369
    
    
    
    
    
    
    $
    377,793
 At December 31,2003
    
    
    2002Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in thousands)Commercial
    
    $
    52,554
    
    
    
    22.7
    %
    
    $
    42,767
    
    
    
    26.5
    %Real estate
 construction
    
    
    55,970
    
    
    
    24.2
    %
    
    
    22,861
    
    
    
    14.2
    %Real estate
 commercial mortgage
    
    
    68,094
    
    
    
    29.3
    %
    
    
    48,362
    
    
    
    29.9
    %Real estate
 1-4 family mortgage
    
    
    32,191
    
    
    
    13.9
    %
    
    
    31,957
    
    
    
    19.8
    %Consumer
    
    
    10,458
    
    
    
    4.5
    %
    
    
    7,707
    
    
    
    4.7
    %Home equity lines of credit
    
    
    12,615
    
    
    
    5.4
    %
    
    
    7,834
    
    
    
    4.9
    %Subtotal
    
    
    231,882
    
    
    
    100.0
    %
    
    
    161,488
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (2,759
    )
    
    
    
    
    
    
    (1,721
    )Unamortized net deferred (fees) costs
    
    
    (142
    )
    
    
    
    
    
    
    Net loans
    
    $
    228,981
    
    
    
    
    
    
    $
    159,767
 Page 33




---



##### 



At December 31,2001PercentAmount
    
    
    of Total(Dollars in thousands)Commercial
    
    $
    61,364
    
    
    
    57.2
    %Real estate
 construction
    
    
    10,050
    
    
    
    9.4
    %Real estate
 commercial mortgage
    
    
    15,373
    
    
    
    14.3
    %Real estate
 1-4 family mortgage
    
    
    7,074
    
    
    
    6.6
    %Consumer
    
    
    7,692
    
    
    
    7.2
    %Home equity lines of credit
    
    
    5,659
    
    
    
    5.3
    %Subtotal
    
    
    107,212
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (1,435
    )Unamortized net deferred (fees) costs
    
    
    28Net loans
    
    $
    105,805
  Within 1 Year
    
    
    1-5 Years
    
    
    After 5 Years
    
    
    Total(Dollars in thousands)Commercial
    
    $
    62,230
    
    
    $
    17,996
    
    
    $
    590
    
    
    $
    80,816Real estate
 construction
    
    
    85,344
    
    
    
    26,483
    
    
    
    2,191
    
    
    
    114,018Total
    
    $
    147,574
    
    
    $
    44,479
    
    
    $
    2,781
    
    
    $
    194,834Fixed rate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,260Variable rate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    47,260
 Commercial Loans.
  Real Estate Loans.
  Page 34




---



##### 



Consumer Loans and Home Equity Lines of Credits.
 Loan Approvals.
 Commitments and Contingent Liabilities
  Asset Quality
  Page 35




---



##### 



Nonperforming Assets
  At December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Nonaccrual loans
    
    $
    204
    
    
    $
    490
    
    
    $
    1,210
    
    
    $
    1,328
    
    
    $
    Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    204
    
    
    
    490
    
    
    
    1,210
    
    
    
    1,328
    
    
    
    Real estate owned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230
    
    
    
    230Total nonperforming assets
    
    $
    204
    
    
    $
    490
    
    
    $
    1,210
    
    
    $
    1,558
    
    
    $
    230Accruing loans past due 90 days or more
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Potential problem loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for loan losses
    
    
    6,283
    
    
    
    4,163
    
    
    
    2,759
    
    
    
    1,721
    
    
    
    1,435Nonperforming loans to period end loans
    
    
    0.03
    %
    
    
    0.13
    %
    
    
    0.52
    %
    
    
    0.82
    %
    
    
    Allowance for loan losses to
period end loans
    
    
    0.94
    %
    
    
    1.09
    %
    
    
    1.19
    %
    
    
    1.07
    %
    
    
    1.34
    %Allowance for loan losses to
nonperforming loans
    
    
    3,079.90
    %
    
    
    849.59
    %
    
    
    228.02
    %
    
    
    129.59
    %
    
    
    Nonperforming assets to total assets
    
    
    0.02
    %
    
    
    0.09
    %
    
    
    0.38
    %
    
    
    0.67
    %
    
    
    0.14
    %
  Page 36




---



##### 



Analysis of Allowance for Loan Losses
      Page 37




---



##### 



At December 31,2005
    
    
    2004% of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans (1)
    
    
    Amount
    
    
    Loans (1)(Dollars in thousands)Balance applicable to:Commercial
    
    $
    881
    
    
    
    12.1
    %
    
    $
    667
    
    
    
    18.0
    %Real estate
 construction
    
    
    2,149
    
    
    
    17.1
    %
    
    
    1,577
    
    
    
    34.4
    %Real estate
 mortgage
    
    
    1,724
    
    
    
    45.6
    %
    
    
    1,477
    
    
    
    37.1
    %Consumer
    
    
    989
    
    
    
    14.8
    %
    
    
    128
    
    
    
    2.8
    %Home equity lines of credit
    
    
    540
    
    
    
    10.4
    %
    
    
    294
    
    
    
    7.7
    %Unallocated
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    Total
    
    $
    6,283
    
    
    
    100.0
    %
    
    $
    4,163
    
    
    
    100.0
    %
 At December 31,2003
    
    
    2002% of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans (1)
    
    
    Amount
    
    
    Loans (1)(Dollars in thousands)Balance applicable to:Commercial
    
    $
    683
    
    
    
    22.7
    %
    
    $
    482
    
    
    
    26.5
    %Real estate
 construction
    
    
    672
    
    
    
    24.2
    %
    
    
    229
    
    
    
    14.2
    %Real estate
 mortgage
    
    
    1,102
    
    
    
    43.2
    %
    
    
    803
    
    
    
    49.7
    %Consumer
    
    
    125
    
    
    
    4.5
    %
    
    
    77
    
    
    
    4.7
    %Home equity lines of credit
    
    
    139
    
    
    
    5.4
    %
    
    
    78
    
    
    
    4.9
    %Unallocated
    
    
    38
    
    
    
    
    
    
    
    52
    
    
    
    Total
    
    $
    2,759
    
    
    
    100.0
    %
    
    $
    1,721
    
    
    
    100.0
    %
 Page 38




---



##### 



At December 31,2001% of TotalAmount
    
    
    Loans (1)(Dollars in thousands)Balance applicable to:Commercial
    
    $
    900
    
    
    
    57.2
    %Real estate
 construction
    
    
    120
    
    
    
    9.4
    %Real estate
 mortgage
    
    
    150
    
    
    
    20.9
    %Consumer
    
    
    90
    
    
    
    7.2
    %Home equity lines of credit
    
    
    50
    
    
    
    5.3
    %Unallocated
    
    
    125
    
    
    
    Total
    
    $
    1,435
    
    
    
    100.0
    %
 
 (1)
  At or for the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(Dollars in thousands)Balance at beginning of period
    
    $
    4,163
    
    
    $
    2,759
    
    
    $
    1,721
    
    
    $
    1,435
    
    
    $
    1,028Charge-offs:Commercial
    
    
    
    
    
    
    
    
    
    
    (195
    )
    
    
    (146
    )
    
    
    (20
    )Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18
    )
    
    
    Consumer
    
    
    (87
    )
    
    
    (174
    )
    
    
    (20
    )
    
    
    (30
    )
    
    
    (17
    )Home equity lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (87
    )
    
    
    (174
    )
    
    
    (215
    )
    
    
    (194
    )
    
    
    (37
    )Recoveries:Commercial
    
    
    
    
    
    
    125
    
    
    
    1
    
    
    
    
    
    
    
    Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4Consumer
    
    
    7
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    Home equity lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    7
    
    
    
    153
    
    
    
    1
    
    
    
    
    
    
    
    4Net charge-offs
    
    
    (80
    )
    
    
    (21
    )
    
    
    (214
    )
    
    
    (194
    )
    
    
    (33
    )Allowance for loan losses on
loans purchased
    
    
    
    
    
    
    
    
    
    
    52
    
    
    
    
    
    
    
    Provision for loan losses charged
to operations
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200
    
    
    
    480
    
    
    
    440Balance at end of period
    
    $
    6,283
    
    
    $
    4,163
    
    
    $
    2,759
    
    
    $
    1,721
    
    
    $
    1,435Ratio of net loan charge-offs to
average loans outstanding
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.11
    %
    
    
    0.15
    %
    
    
    0.04
    %
 INVESTMENT ACTIVITIES
  Page 39




---



##### 



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)December 31, 2005U.S. government agencies
    
    $
    42,555
    
    
    $
    
    
    
    $
    1,327
    
    
    $
    41,228Corporate debt/equity securities
    
    
    6,619
    
    
    
    1,373
    
    
    
    117
    
    
    
    7,875Mortgage-backed securities
    
    
    67,935
    
    
    
    13
    
    
    
    581
    
    
    
    67,367Municipal securities
    
    
    7,372
    
    
    
    18
    
    
    
    87
    
    
    
    7,303$
    124,481
    
    
    $
    1,404
    
    
    $
    2,112
    
    
    $
    123,773December 31, 2004U.S. government agencies
    
    $
    43,709
    
    
    $
    6
    
    
    $
    471
    
    
    $
    43,244Corporate debt/equity securities
    
    
    2,613
    
    
    
    49
    
    
    
    1
    
    
    
    2,661Mortgage-backed securities
    
    
    40,408
    
    
    
    146
    
    
    
    86
    
    
    
    40,468Municipal securities
    
    
    6,239
    
    
    
    17
    
    
    
    21
    
    
    
    6,235$
    92,969
    
    
    $
    218
    
    
    $
    579
    
    
    $
    92,608December 31, 2003U.S. government agencies
    
    $
    24,678
    
    
    $
    147
    
    
    $
    50
    
    
    $
    24,775Corporate debt/equity securities
    
    
    2,083
    
    
    
    75
    
    
    
    
    
    
    
    2,158Mortgage-backed securities
    
    
    16,725
    
    
    
    160
    
    
    
    45
    
    
    
    16,840$
    43,486
    
    
    $
    382
    
    
    $
    95
    
    
    $
    43,773
  WeightedAmortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    YieldSecurities available for sale:
    
    (Dollars in thousands)U.S. Government agencies:Due within one year
    
    $
    5,001
    
    
    $
    4,924
    
    
    
    2.65
    %Due after one but within five years
    
    
    37,053
    
    
    
    35,803
    
    
    
    3.52
    %Due after five but within ten years
    
    
    501
    
    
    
    501
    
    
    
    4.56
    %42,555
    
    
    
    41,228
    
    
    
    3.43
    %Corporate debt/equity securities:Due within one year
    
    
    5,048
    
    
    
    6,421
    
    
    
    0.55
    %Due after one but within five years
    
    
    1,571
    
    
    
    1,454
    
    
    
    6.24
    %Due after five but within ten years
    
    
    
    
    
    
    
    
    
    
    0.00
    %6,619
    
    
    
    7,875
    
    
    
    1.60
    %Mortgage-backed securities:Due after ten years
    
    
    67,935
    
    
    
    67,367
    
    
    
    5.13
    %67,935
    
    
    
    67,367
    
    
    
    5.13
    %Municipal securities:Due after one but within five years
    
    
    2,551
    
    
    
    2,503
    
    
    
    3.56
    %Due after five but within ten years
    
    
    1,334
    
    
    
    1,319
    
    
    
    5.10
    %Due after ten years
    
    
    3,487
    
    
    
    3,481
    
    
    
    5.74
    %7,372
    
    
    
    7,303
    
    
    
    4.88
    %Total securities available for sale:Due within one year
    
    
    10,049
    
    
    
    11,345
    
    
    
    1.15
    %Due after one but within five years
    
    
    41,175
    
    
    
    39,759
    
    
    
    3.62
    %Due after five but within ten years
    
    
    1,835
    
    
    
    1,820
    
    
    
    4.95
    %Due after ten years
    
    
    71,422
    
    
    
    70,849
    
    
    
    5.16
    %$
    124,481
    
    
    $
    123,773
    
    
    
    4.19
    %
 Page 40




---



##### 



SOURCES OF FUNDS
 Deposit Activities
   At December 31,2005
    
    
    2004
    
    
    2003Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in thousands)Interest-bearing NOW, money
market and savings accounts
    
    $
    178,577
    
    
    
    2.00
    %
    
    $
    118,242
    
    
    
    1.31
    %
    
    $
    55,852
    
    
    
    1.00
    %Time deposits
    
    
    267,494
    
    
    
    3.41
    %
    
    
    137,440
    
    
    
    2.50
    %
    
    
    125,100
    
    
    
    2.84
    %Total interest-bearing deposits
    
    
    446,071
    
    
    
    2.85
    %
    
    
    255,682
    
    
    
    1.95
    %
    
    
    180,952
    
    
    
    2.27
    %Demand and other non-interest-bearing
deposits
    
    
    79,901
    
    
    
    
    
    
    
    52,218
    
    
    
    
    
    
    
    27,943Total average deposits
    
    $
    525,972
    
    
    
    2.41
    %
    
    $
    307,900
    
    
    
    1.62
    %
    
    $
    208,895
    
    
    
    1.97
    %
  At December 31, 2005(Dollars in thousands)Remaining maturity:Less than three months
    
    $
    9,662Over three months through six months
    
    
    59,847Over six months through one year
    
    
    61,239Over one year through three years
    
    
    16,974Over three years through five years
    
    
    3,725Total
    
    $
    151,447
 Page 41




---



##### 



Borrowings
  InterestMaturity
    
    Rate
    
    
    2005
    
    
    2004February 4, 2005
    
    
    2.14
    %
    
    $
    
    
    
    $
    5,000,000July 21, 2005
    
    
    2.44
    %
    
    
    
    
    
    
    20,000,000February 27, 2006
    
    
    5.45
    %
    
    
    200,000
    
    
    
    600,000March 17, 2010
    
    
    5.71
    %
    
    
    1,500,000
    
    
    
    1,500,000November 10, 2010
    
    
    5.43
    %
    
    
    5,000,000
    
    
    
    5,000,000January 24, 2012
    
    
    3.88
    %
    
    
    5,500,000
    
    
    
    5,500,000October 23, 2006
    
    
    3.89
    %
    
    
    5,000,000
    
    
    
    April 21, 2008
    
    
    4.22
    %
    
    
    5,000,000
    
    
    
    April 25, 2012
    
    
    3.88
    %
    
    
    10,000,000
    
    
    
    May 19, 2010
    
    
    3.87
    %
    
    
    10,000,000
    
    
    
    June 24, 2010
    
    
    3.88
    %
    
    
    10,000,000
    
    
    
    July 23, 2012
    
    
    3.87
    %
    
    
    10,000,000
    
    
    
    November 22, 2006
    
    
    4.58
    %
    
    
    52,000,000
    
    
    
    $
    114,200,000
    
    
    $
    37,600,000
     Page 42




---



##### 



Interim Financial Information (Unaudited)
  Three Months EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(In thousands)2005Interest income
    
    $
    7,380
    
    
    $
    9,095
    
    
    $
    10,662
    
    
    $
    12,542Interest expense
    
    
    2,709
    
    
    
    3,677
    
    
    
    4,528
    
    
    
    5,462Net interest income
    
    
    4,671
    
    
    
    5,418
    
    
    
    6,134
    
    
    
    7,080Provision for loan losses
    
    
    400
    
    
    
    500
    
    
    
    550
    
    
    
    750Noninterest income
    
    
    1,671
    
    
    
    2,052
    
    
    
    2,007
    
    
    
    2,337Noninterest expense
    
    
    4,801
    
    
    
    5,617
    
    
    
    6,031
    
    
    
    6,817Income before income tax expense
    
    
    1,141
    
    
    
    1,353
    
    
    
    1,560
    
    
    
    1,850Income tax expense
    
    
    339
    
    
    
    451
    
    
    
    545
    
    
    
    630Net income
    
    $
    802
    
    
    $
    902
    
    
    $
    1,015
    
    
    $
    1,220Basic earnings per share
    
    $
    0.11
    
    
    $
    0.12
    
    
    $
    0.14
    
    
    $
    0.16Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.16
 Three Months EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(In thousands)2004Interest income
    
    $
    3,990
    
    
    $
    4,419
    
    
    $
    5,030
    
    
    $
    6,193Interest expense
    
    
    1,387
    
    
    
    1,473
    
    
    
    1,645
    
    
    
    2,156Net interest income
    
    
    2,603
    
    
    
    2,946
    
    
    
    3,385
    
    
    
    4,007Provision for loan losses
    
    
    275
    
    
    
    300
    
    
    
    400
    
    
    
    450Noninterest income
    
    
    1,150
    
    
    
    1,427
    
    
    
    1,588
    
    
    
    1,692Noninterest expense
    
    
    3,020
    
    
    
    3,438
    
    
    
    3,803
    
    
    
    4,392Income before income tax expense
    
    
    458
    
    
    
    635
    
    
    
    770
    
    
    
    857Income tax expense
    
    
    97
    
    
    
    172
    
    
    
    223
    
    
    
    218Net income
    
    $
    361
    
    
    $
    463
    
    
    $
    547
    
    
    $
    639Basic earnings per share
    
    $
    0.10
    
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.09Diluted earnings per share
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.09
 Page 43




---



##### 



ITEM 8  FINANCIAL STATEMENTS
 GATEWAY FINANCIAL HOLDINGS, INC. & SUBSIDIARY
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Page No.Report of Independent Registered Public Accounting Firm
    
    
    45Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    46Consolidated Statements of Operations
for the years ended December 31, 2005, 2004 and 2003
    
    
    47Consolidated Statements of Comprehensive Income
for the years ended December 31, 2005, 2004 and 2003
    
    
    48Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2005, 2004 and 2003
    
    
    49Consolidated Statements of Cash Flows
for the years ended December 31, 2005, 2004 and 2003
    
    
    50Notes to Consolidated Financial Statements
    
    
    51
 Page 44




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  
    Internal Control
 Integrated Framework
 Greenville, North Carolina
March 28, 2006
 Page 45




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
 2005
    
    
    2004(In thousands, except share data)ASSETSCash and due from banks
    
    $
    18,475
    
    
    $
    9,028Interest-earning deposits in other banks
    
    
    3,668
    
    
    
    1,245Investment securities available for sale, at fair value (Note C)
    
    
    123,773
    
    
    
    92,608Loans (Note D)
    
    
    666,652
    
    
    
    381,956Allowance for loan losses (Note D)
    
    
    (6,283
    )
    
    
    (4,163
    )NET LOANS
    
    
    660,369
    
    
    
    377,793Accrued interest receivable
    
    
    5,883
    
    
    
    2,697Stock in Federal Reserve Bank, at cost
    
    
    2,097
    
    
    
    722Stock in Federal Home Loan Bank of Atlanta, at cost
    
    
    6,208
    
    
    
    2,321Premises and equipment, net (Note E)
    
    
    29,551
    
    
    
    18,895Core deposit intangibles, net (Note R)
    
    
    2,790
    
    
    
    3,169Goodwill (Notes O and R)
    
    
    7,456
    
    
    
    7,473Bank-owned life insurance
    
    
    17,187
    
    
    
    16,507Other assets
    
    
    4,965
    
    
    
    3,270TOTAL ASSETS
    
    $
    882,422
    
    
    $
    535,728LIABILITIES AND STOCKHOLDERS EQUITYDepositsDemand
    
    $
    89,162
    
    
    $
    52,348Savings
    
    
    8,347
    
    
    
    10,860Money market and NOW
    
    
    181,337
    
    
    
    157,639Time (Note F)
    
    
    367,416
    
    
    
    185,412TOTAL DEPOSITS
    
    
    646,262
    
    
    
    406,259Short term borrowings (Note G)
    
    
    62,000
    
    
    
    35,861Long term borrowings (Note G)
    
    
    72,665
    
    
    
    28,065Accrued expenses and other liabilities
    
    
    2,751
    
    
    
    1,225TOTAL LIABILITIES
    
    
    783,678
    
    
    
    471,410Commitments (Notes D and L)Stockholders Equity (Notes I, K and N)Preferred stock, 1,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, no par value, 20,000,000 shares authorized, 9,493,440 and 6,659,073 shares issued and
outstanding at December 31, 2005 and 2004, respectively
    
    
    94,109
    
    
    
    62,631Retained earnings
    
    
    5,113
    
    
    
    1,908Deferred compensation  restricted stock
    
    
    (43
    )
    
    
    Accumulated other comprehensive loss
    
    
    (435
    )
    
    
    (221
    )TOTAL STOCKHOLDERS EQUITY
    
    
    98,744
    
    
    
    64,318TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    882,422
    
    
    $
    535,728
 
 See accompanying notes. Page 46




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands, exceptper share data)INTEREST INCOMEInterest and fees on loans
    
    $
    36,358
    
    
    $
    17,509
    
    
    $
    11,511Investment securities available for saleTaxable
    
    
    2,731
    
    
    
    1,835
    
    
    
    1,851Tax-exempt
    
    
    204
    
    
    
    64
    
    
    
    Interest-earning bank deposits
    
    
    138
    
    
    
    102
    
    
    
    21Other interest and dividends
    
    
    248
    
    
    
    122
    
    
    
    103TOTAL INTEREST INCOME
    
    
    39,679
    
    
    
    19,632
    
    
    
    13,486INTEREST EXPENSEMoney market, NOW and savings deposits
    
    
    3,579
    
    
    
    1,553
    
    
    
    557Time deposits (Note F)
    
    
    9,115
    
    
    
    3,430
    
    
    
    3,555Short-term borrowings
    
    
    1,140
    
    
    
    404
    
    
    
    213Long-term borrowings
    
    
    2,542
    
    
    
    1,304
    
    
    
    1,016TOTAL INTEREST EXPENSE
    
    
    16,376
    
    
    
    6,691
    
    
    
    5,341NET INTEREST INCOME
    
    
    23,303
    
    
    
    12,941
    
    
    
    8,145PROVISION FOR LOAN LOSSES (Note D)
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    21,103
    
    
    
    11,516
    
    
    
    6,945NON-INTEREST INCOMEService charges on deposit accounts
    
    
    2,308
    
    
    
    1,500
    
    
    
    898Mortgage operations
    
    
    836
    
    
    
    872
    
    
    
    1,111Insurance operations
    
    
    2,388
    
    
    
    1,832
    
    
    
    1,480Brokerage operations
    
    
    656
    
    
    
    463
    
    
    
    240Gain on sale of securities
    
    
    282
    
    
    
    159
    
    
    
    244Gain on sale of membership interest in mortgage company
    
    
    
    
    
    
    281
    
    
    
    Income from bank-owned life insurance
    
    
    679
    
    
    
    401
    
    
    
    146Other service charges and fees
    
    
    623
    
    
    
    259
    
    
    
    141Other
    
    
    295
    
    
    
    90
    
    
    
    225TOTAL NON-INTEREST INCOME
    
    
    8,067
    
    
    
    5,857
    
    
    
    4,485NON-INTEREST EXPENSEPersonnel costs
    
    
    11,583
    
    
    
    7,838
    
    
    
    5,549Occupancy and equipment
    
    
    4,592
    
    
    
    2,884
    
    
    
    1,864Data processing fees
    
    
    941
    
    
    
    606
    
    
    
    397Other (Note J)
    
    
    6,150
    
    
    
    3,325
    
    
    
    2,420TOTAL NON-INTEREST EXPENSE
    
    
    23,266
    
    
    
    14,653
    
    
    
    10,230INCOME BEFORE INCOME TAXES
    
    
    5,904
    
    
    
    2,720
    
    
    
    1,200INCOME TAXES (Note H)
    
    
    1,965
    
    
    
    710
    
    
    
    NET INCOME
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200NET INCOME PER COMMON SHAREBasic
    
    $
    .53
    
    
    $
    .41
    
    
    $
    .33Diluted
    
    $
    .51
    
    
    $
    .37
    
    
    $
    .32
 
 See accompanying notes. Page 47




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands)Net income
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200Other comprehensive income (loss):Securities available for sale:Unrealized holding gains (losses) on available-for-sale
securities
    
    
    (67
    )
    
    
    (489
    )
    
    
    (157
    )Tax effect
    
    
    26
    
    
    
    188
    
    
    
    38Reclassification of gains recognized in net income
    
    
    (282
    )
    
    
    (159
    )
    
    
    (244
    )Tax effect
    
    
    109
    
    
    
    62
    
    
    
    58Total other comprehensive loss
    
    
    (214
    )
    
    
    (398
    )
    
    
    (305
    )Comprehensive income
    
    $
    3,725
    
    
    $
    1,612
    
    
    $
    895
 
 See accompanying notes. Page 48




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2005, 2004 and 2003
 Deferred
    
    
    AccumulatedRetained
    
    
    Compensation
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Earnings
    
    
    - Restricted
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    (Deficit)
    
    
    Stock
    
    
    Income (Loss)
    
    
    Equity(Amounts in thousands, except share data)Balance at December 31, 2002
    
    
    3,006,007
    
    
    $
    24,788
    
    
    $
    (1,302
    )
    
    $
    
    
    
    $
    482
    
    
    $
    23,968Net income
    
    
    
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    1,200Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (305
    )
    
    
    (305
    )Shares issued in exercise of
common stock warrants
    
    
    11,662
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    112Shares issued in 21-for-20 stock
split effected as a 5% stock
dividend
    
    
    149,873
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash paid for fractional shares
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4
    )Balance at December 31, 2003
    
    
    3,167,542
    
    
    
    24,896
    
    
    
    (102
    )
    
    
    
    
    
    
    177
    
    
    
    24,971Net income
    
    
    
    
    
    
    
    
    
    
    2,010
    
    
    
    
    
    
    
    
    
    
    
    2,010Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (398
    )
    
    
    (398
    )Shares issued in exercise of
common stock warrants
    
    
    1,320,817
    
    
    
    12,111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,111Shares issued in subsidiary
acquisition
    
    
    38,013
    
    
    
    503
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    503Shares issued from options
exercise
    
    
    39,517
    
    
    
    311
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    311Issuance of common stock
    
    
    1,932,000
    
    
    
    24,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,915Shares issued in 21-for-20 stock
split effected as a 5% stock
dividend
    
    
    161,184
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Cash dividends ($.02 per share)
    
    
    
    
    
    
    
    
    
    
    (95
    )
    
    
    
    
    
    
    
    
    
    
    (95
    )Cash paid for fractional shares
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Balance at December 31, 2004
    
    
    6,659,073
    
    
    
    62,726
    
    
    
    1,813
    
    
    
    
    
    
    
    (221
    )
    
    
    64,318Net income
    
    
    
    
    
    
    
    
    
    
    3,939
    
    
    
    
    
    
    
    
    
    
    
    3,939Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    (214
    )Restricted stock awards
    
    
    10,230
    
    
    
    133
    
    
    
    
    
    
    
    (133
    )
    
    
    
    
    
    
    Earned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    90
    
    
    
    
    
    
    
    90Issuance of shares pursuant to
dividend reinvestment plan
    
    
    9,025
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147Shares issued from options
exercise
    
    
    142,159
    
    
    
    1,225
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225Issuance of common stock
    
    
    2,000,000
    
    
    
    29,855
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,855Shares issued in 11-for-10 stock
split effected as a 10% stock
dividend
    
    
    671,740
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefits from the exercise
of options
    
    
    
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12Sale of common stock
    
    
    1,213
    
    
    
    11
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11Cash dividends ($0.09 per share)
    
    
    
    
    
    
    
    
    
    
    (631
    )
    
    
    
    
    
    
    
    
    
    
    (631
    )Cash paid for fractional shares
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )Balance at December 31, 2005
    
    
    9,493,440
    
    
    $
    94,109
    
    
    $
    5,113
    
    
    $
    (43
    )
    
    $
    (435
    )
    
    $
    98,744
 
 See accompanying notes. Page 49




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200Adjustments to reconcile net income to net
cash provided by operating activities:Amortization of intangibles
    
    
    379
    
    
    
    130
    
    
    
    59Depreciation and other amortization
    
    
    1,761
    
    
    
    1,310
    
    
    
    1,286Deferred income taxes
    
    
    (185
    )
    
    
    (308
    )
    
    
    (368
    )Realized gain on available-for-sale securities
    
    
    (282
    )
    
    
    (159
    )
    
    
    (244
    )Income from bank-owned life insurance
    
    
    (680
    )
    
    
    (401
    )
    
    
    (146
    )Realized gain on sale of loans
    
    
    (127
    )
    
    
    
    
    
    
    (98
    )Realized loss on sale of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    27Realized (gain) loss on sale of premises and equipment
    
    
    (6
    )
    
    
    14
    
    
    
    (118
    )Provision for loan losses
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200Change in assets and liabilities:(Increase) decrease in accrued interest receivable
    
    
    (3,186
    )
    
    
    (1,396
    )
    
    
    (117
    )(Increase) decrease in other assets
    
    
    (1,360
    )
    
    
    92
    
    
    
    (1,171
    )Increase in accrued expenses and other liabilities
    
    
    1,526
    
    
    
    (252
    )
    
    
    300Increase (decrease) in accrued compensation
    
    
    90
    
    
    
    
    
    
    
    NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    4,069
    
    
    
    2,465
    
    
    
    1,810CASH FLOWS FROM INVESTING ACTIVITIESPurchases of available-for-sale securities
    
    
    (58,113
    )
    
    
    (87,212
    )
    
    
    (31,925
    )Maturities, sales and calls of available-for-sale securities
    
    
    26,646
    
    
    
    37,620
    
    
    
    32,089Proceeds from sale of loans
    
    
    2,536
    
    
    
    
    
    
    
    1,973Net increase in loans from originations and repayments
    
    
    (287,185
    )
    
    
    (149,605
    )
    
    
    (68,809
    )Proceeds from sale of foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    203Proceeds from sale of bank premises and equipment
    
    
    234
    
    
    
    209
    
    
    
    330Purchase of premises and equipment
    
    
    (12,408
    )
    
    
    (6,033
    )
    
    
    (1,971
    )Purchase of Federal Reserve Bank stock
    
    
    (1,375
    )
    
    
    
    
    
    
    (255
    )Purchase of Federal Home Loan Bank stock
    
    
    (3,887
    )
    
    
    (271
    )
    
    
    (380
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (9,000
    )
    
    
    (6,960
    )Net cash received in financial center and subsidiary acquisitions
    
    
    
    
    
    
    117,361
    
    
    
    11,260NET CASH USED BY INVESTING ACTIVITIES
    
    
    (333,552
    )
    
    
    (96,931
    )
    
    
    (64,445
    )CASH FLOWS FROM FINANCING ACTIVITIESIncrease in deposits
    
    
    240,003
    
    
    
    41,001
    
    
    
    47,248Net increase in short-term borrowings
    
    
    21,339
    
    
    
    1,600
    
    
    
    7,600Net increase (decrease) in long term borrowings
    
    
    49,400
    
    
    
    4,861
    
    
    
    2,999Proceeds from issuance of junior subordinated debentures
    
    
    
    
    
    
    7,217
    
    
    
    8,000Proceeds from exercise of stock options
    
    
    1,237
    
    
    
    311
    
    
    
    Proceeds from issuance of common stock
    
    
    29,866
    
    
    
    24,915
    
    
    
    Proceeds from the conversion of common stock warrants
    
    
    
    
    
    
    12,111
    
    
    
    112Proceeds from dividend reinvestment
    
    
    147
    
    
    
    
    
    
    
    Cash paid dividends
    
    
    (631
    )
    
    
    (95
    )
    
    
    Cash paid for fractional shares
    
    
    (8
    )
    
    
    (10
    )
    
    
    (4
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    341,353
    
    
    
    91,911
    
    
    
    65,955NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS
    
    
    11,870
    
    
    
    (2,555
    )
    
    
    3,320CASH AND CASH EQUIVALENTS, BEGINNING
    
    
    10,273
    
    
    
    12,828
    
    
    
    9,508CASH AND CASH EQUIVALENTS, ENDING
    
    $
    22,143
    
    
    $
    10,273
    
    
    $
    12,828SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid
    
    $
    15,689
    
    
    $
    6,788
    
    
    $
    5,290Income taxes paid
    
    $
    748
    
    
    $
    1,220
    
    
    $
    162SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIESUnrealized holding gains (losses) on available-for-sale securities, net
    
    $
    (214
    )
    
    $
    (398
    )
    
    $
    (305
    )Deconsolidation of grantor trust
    
    
    
    
    
    
    248
    
    
    $
    
 
 Noncash assets acquired and liabilities assumed in a business combination are presented in
Note O.See accompanying notes. Page 50




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE A  ORGANIZATION AND OPERATIONS
      NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Use of Estimates
  Page 51




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Cash and Cash Equivalents
  Investment Securities Held to Maturity
  Investment Securities Available for Sale
  Loans
  Allowance for Loan Losses
  Page 52




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Foreclosed Real Estate
  Premises and Equipment
  Federal Home Loan Bank and Federal Reserve Bank Stock
  Intangible Assets
  Income Taxes
  Comprehensive Income
  Page 53




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Mortgage Operations
  Stock Compensation Plans
  2005
    
    
    2004
    
    
    2003(Amounts in thousands,except per share data)Net income:As reported
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects
    
    
    1,748
    
    
    
    1,429
    
    
    
    203Pro forma
    
    $
    2,191
    
    
    $
    581
    
    
    $
    997Basic net income per share:As reported
    
    $
    .53
    
    
    $
    .41
    
    
    $
    .33Pro forma
    
    
    .29
    
    
    
    .12
    
    
    
    .27Diluted net income per share:As reported
    
    $
    .51
    
    
    $
    .37
    
    
    $
    .32Pro forma
    
    
    .28
    
    
    
    .11
    
    
    
    .26
 Per Share Results
  Page 54




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Per Share Results (Continued)
  2005
    
    
    2004
    
    
    2003Weighted average outstanding shares used for
basic EPS
    
    
    7,467,380
    
    
    
    4,926,636
    
    
    
    3,648,445Plus incremental shares from assumed exercise of:Stock options
    
    
    308,432
    
    
    
    247,647
    
    
    
    101,941Restricted stock
    
    
    2,381
    
    
    
    
    
    
    
    Warrants
    
    
    
    
    
    
    196,690
    
    
    
    53,335Weighted average outstanding shares
used for diluted EPS
    
    
    7,778,193
    
    
    
    5,370,973
    
    
    
    3,803,721
   Derivative financial instruments
    Page 55




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Derivative financial instruments (Continued)
    Recent Accounting Pronouncements
   Page 56




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements (Continued)
      Page 57




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Reclassifications
  NOTE C  INVESTMENT SECURITIES
  December 31, 2005Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Amounts in thousands)Securities available-for-sale:U. S. government securities
and obligations of U.S.
government agencies
    
    $
    42,555
    
    
    $
    
    
    
    $
    1,327
    
    
    $
    41,228Corporate debt/equity securities
    
    
    6,619
    
    
    
    1,373
    
    
    
    117
    
    
    
    7,875Mortgage-backed securities
    
    
    67,935
    
    
    
    13
    
    
    
    581
    
    
    
    67,367Municipal securities
    
    
    7,372
    
    
    
    18
    
    
    
    87
    
    
    
    7,303$
    124,481
    
    
    $
    1,404
    
    
    $
    2,112
    
    
    $
    123,773
 December 31, 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Amounts in thousands)Securities available-for-sale:U. S. government securities
and obligations of U.S.
government agencies
    
    $
    43,709
    
    
    $
    6
    
    
    $
    471
    
    
    $
    43,244Corporate debt/equity securities
    
    
    2,613
    
    
    
    49
    
    
    
    1
    
    
    
    2,661Mortgage-backed securities
    
    
    40,408
    
    
    
    146
    
    
    
    86
    
    
    
    40,468Municipal securities
    
    
    6,239
    
    
    
    17
    
    
    
    21
    
    
    
    6,235$
    92,969
    
    
    $
    218
    
    
    $
    579
    
    
    $
    92,608
 Page 58




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE C  INVESTMENT SECURITIES (Continued)
  2005Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealizedvalue
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    lossesSecurities available for sale:U.S. government securities
and obligations of U.S.
government agencies
    
    $
    
    
    
    $
    
    
    
    $
    40,727
    
    
    $
    1,327
    
    
    $
    40,727
    
    
    $
    1,327Corporate
    
    
    981
    
    
    
    58
    
    
    
    472
    
    
    
    59
    
    
    
    1,453
    
    
    
    117Mortgage-backed securities
    
    
    9,216
    
    
    
    260
    
    
    
    8,545
    
    
    
    321
    
    
    
    17,761
    
    
    
    581Municipal securities
    
    
    3,937
    
    
    
    52
    
    
    
    2,089
    
    
    
    35
    
    
    
    6,026
    
    
    
    87Total temporarily impaired
securities
    
    $
    14,134
    
    
    $
    370
    
    
    $
    51,833
    
    
    $
    1,742
    
    
    $
    65,967
    
    
    $
    2,112
 2004Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealizedvalue
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    lossesSecurities available for sale:U.S. government securities
and obligations of U.S.
government agencies
    
    $
    42,729
    
    
    $
    471
    
    
    $
    
    
    
    $
    
    
    
    $
    42,729
    
    
    $
    471Corporate
    
    
    536
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    536
    
    
    
    1Mortgage-backed securities
    
    
    18,254
    
    
    
    83
    
    
    
    359
    
    
    
    3
    
    
    
    18,613
    
    
    
    86Municipal securities
    
    
    2,494
    
    
    
    21
    
    
    
    
    
    
    
    
    
    
    
    2,494
    
    
    
    21Total temporarily impaired
securities
    
    $
    64,013
    
    
    $
    576
    
    
    $
    359
    
    
    $
    3
    
    
    $
    64,372
    
    
    $
    579
 Page 59




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005, 2004 and 2003
 NOTE C  INVESTMENT SECURITIES (Continued)
   Amortized
    
    
    FairCost
    
    
    Value(Dollars in thousands)Due within one year
    
    $
    10,049
    
    
    $
    11,345Due after one year through five years
    
    
    41,175
    
    
    
    39,759Due after five years through ten years
    
    
    1,835
    
    
    
    1,820Due after ten years
    
    
    71,422
    
    
    
    70,849$
    124,481
    
    
    $
    123,773
   NOTE D  LOANS
  December 31,2005
    
    
    2004(Dollars in thousands)Commercial
    
    $
    80,816
    
    
    $
    69,075Real estate  construction
    
    
    114,018
    
    
    
    131,431Real estate  commercial mortgage
    
    
    221,526
    
    
    
    90,197Real estate  1-4 family mortgage
    
    
    82,987
    
    
    
    51,768Consumer
    
    
    98,881
    
    
    
    10,641Home equity lines of credit
    
    
    69,246
    
    
    
    29,351Subtotal
    
    
    667,474
    
    
    
    382,462Less: Allowance for loan losses
    
    
    (6,283
    )
    
    
    (4,163
    )Unamortized net deferred fees
    
    
    (822
    )
    
    
    (506
    )Net loans
    
    $
    660,369
    
    
    $
    377,793
 Page 60




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE D  LOANS (Continued)
    2005Balance at beginning of year
    
    $
    14,417Additions
    
    
    34,890Loans of newly elected directors
    
    
    8,667Loans of retiring directors
    
    
    (196
    )Loan repayments
    
    
    (19,219
    )Balance at end of year
    
    $
    38,559
   2005
    
    
    2004
    
    
    2003(Amounts in thousands)Balance at beginning of year
    
    $
    4,163
    
    
    $
    2,759
    
    
    $
    1,721Provision charged to operations
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200Allowance for loan losses on loans purchased
    
    
    
    
    
    
    
    
    
    
    52Charge-offs
    
    
    (87
    )
    
    
    (174
    )
    
    
    (215
    )Recoveries
    
    
    7
    
    
    
    153
    
    
    
    1Net charge-offs
    
    
    (80
    )
    
    
    (21
    )
    
    
    (214
    )Balance at end of year
    
    $
    6,283
    
    
    $
    4,163
    
    
    $
    2,759
 Page 61




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE E  PREMISES AND EQUIPMENT
  2005
    
    
    2004(Amounts in thousands)Land
    
    $
    2,942
    
    
    $
    2,443Furniture and equipment
    
    
    6,692
    
    
    
    5,172Vehicles
    
    
    617
    
    
    
    412Buildings and improvements
    
    
    14,927
    
    
    
    11,350Construction in progress
    
    
    8,350
    
    
    
    2,010Accumulated depreciation
    
    
    (3,977
    )
    
    
    (2,492
    )Total
    
    $
    29,551
    
    
    $
    18,895
   2006
    
    $
    1,3182007
    
    
    1,1662008
    
    
    1,0542009
    
    
    1,0242010
    
    
    892Thereafter
    
    
    9,215$
    14,669
    NOTE F  DEPOSITS
  Page 62




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE F  DEPOSITS (Continued)
  $100,000
    
    
    Underand Over
    
    
    $100,000
    
    
    Total2006
    
    $
    130,748
    
    
    $
    177,547
    
    
    $
    308,2952007
    
    
    15,081
    
    
    
    28,769
    
    
    
    43,8502008
    
    
    1,893
    
    
    
    5,267
    
    
    
    7,1602009
    
    
    104
    
    
    
    1,800
    
    
    
    1,9042010
    
    
    3,621
    
    
    
    2,576
    
    
    
    6,197Thereafter
    
    
    
    
    
    
    10
    
    
    
    10Total
    
    $
    151,447
    
    
    $
    215,969
    
    
    $
    367,416
 NOTE G  BORROWINGS
  December 31,2005
    
    
    2004(Dollars in thousands)Federal fund purchased
    
    $
    5,000
    
    
    $
    10,861Federal Home Loan Bank
    
    
    114,200
    
    
    
    37,600Junior Subordinated Debentures
    
    
    15,465
    
    
    
    15,465Total borrowings
    
    $
    134,665
    
    
    $
    63,926
  InterestMaturity
    
    Rate
    
    
    2005
    
    
    2004February 4, 2005
    
    
    2.14
    %
    
    
    
    
    
    
    5,000,000July 21, 2005
    
    
    2.44
    %
    
    
    
    
    
    
    20,000,000February 27, 2006
    
    
    5.45
    %
    
    
    200,000
    
    
    
    600,000March 17, 2010
    
    
    5.71
    %
    
    
    1,500,000
    
    
    
    1,500,000November 10, 2010
    
    
    5.43
    %
    
    
    5,000,000
    
    
    
    5,000,000January 24, 2012
    
    
    3.88
    %
    
    
    5,500,000
    
    
    
    5,500,000October 23, 2006
    
    
    3.89
    %
    
    
    5,000,000
    
    
    
    April 21, 2008
    
    
    4.22
    %
    
    
    5,000,000
    
    
    
    April 25, 2012
    
    
    3.88
    %
    
    
    10,000,000
    
    
    
    May 19, 2010
    
    
    3.88
    %
    
    
    10,000,000
    
    
    
    June 24, 2010
    
    
    3.88
    %
    
    
    10,000,000
    
    
    
    July 23, 2012
    
    
    3.87
    %
    
    
    10,000,000
    
    
    
    November 22, 2006
    
    
    4.58
    %
    
    
    52,000,000
    
    
    
    $
    114,200,000
    
    
    $
    37,600,000
  Page 63




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE G  BORROWINGS (Continued)
      Page 64




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE H  INCOME TAXES
  2005
    
    
    2004
    
    
    2003(In thousands)Current tax provision:Federal
    
    $
    1,841
    
    
    $
    837
    
    
    $
    341State
    
    
    309
    
    
    
    181
    
    
    
    792,150
    
    
    
    1,018
    
    
    
    420Deferred tax provision:Federal
    
    
    (181
    )
    
    
    (65
    )
    
    
    (43
    )State
    
    
    (4
    )
    
    
    (16
    )
    
    
    (9
    )(185
    )
    
    
    (81
    )
    
    
    (52
    )Provision for income tax expense before
adjustment to deferred tax asset valuation
allowance
    
    
    1,965
    
    
    
    937
    
    
    
    368Decrease in valuation allowance
    
    
    
    
    
    
    (227
    )
    
    
    (368
    )Net provision for income taxes
    
    $
    1,965
    
    
    $
    710
    
    
    $
    
  2005
    
    
    2004
    
    
    2003(In thousands)Tax computed at the statutory federal rate
    
    $
    2,007
    
    
    $
    925
    
    
    $
    408Increase (decrease) resulting from:State income taxes, net of federal benefit
    
    
    201
    
    
    
    109
    
    
    
    46Adjustment to deferred tax asset valuation allowance
    
    
    
    
    
    
    (227
    )
    
    
    (368
    )Non-taxable interest income
    
    
    (59
    )
    
    
    (17
    )
    
    
    Non-taxable income from bank owned life insurance
    
    
    (231
    )
    
    
    (137
    )
    
    
    (50
    )Other permanent differences
    
    
    47
    
    
    
    57
    
    
    
    (36
    )Provision for income taxes
    
    $
    1,965
    
    
    $
    710
    
    
    $
    
  Page 65




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE H  INCOME TAXES (CONTINUED)
 2005
    
    
    2004(In thousands)Deferred tax assets relating to:Allowance for loan losses
    
    $
    2,285
    
    
    $
    1,512Equity investment basis difference
    
    
    10
    
    
    
    122Unrealized losses on securities
available for sale
    
    
    273
    
    
    
    139Other
    
    
    40
    
    
    
    22Total deferred tax assets
    
    
    2,608
    
    
    
    1,795Deferred tax liabilities relating to:Depreciation
    
    
    (527
    )
    
    
    (488
    )Deferred loan costs
    
    
    (383
    )
    
    
    (240
    )Amortization of intangible assets
    
    
    (253
    )
    
    
    (125
    )Prepaid expenses
    
    
    (259
    )
    
    
    (75
    )Total deferred tax liabilities
    
    
    (1,422
    )
    
    
    (928
    )Net recorded deferred tax assets
    
    $
    1,186
    
    
    $
    867
  NOTE I  COMMON STOCK WARRANTS
  NOTE J  OTHER NON-INTEREST EXPENSE
  2005
    
    
    2004
    
    
    2003(Dollars in thousands)Professional services
    
    $
    1,399
    
    
    $
    643
    
    
    $
    433Postage, printing and office supplies
    
    
    1,355
    
    
    
    847
    
    
    
    666Advertising and promotion
    
    
    541
    
    
    
    478
    
    
    
    213Amortization of intangibles
    
    
    379
    
    
    
    130
    
    
    
    59Other
    
    
    2,476
    
    
    
    1,227
    
    
    
    1,049Total
    
    $
    6,150
    
    
    $
    3,325
    
    
    $
    2,420
 Page 66




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE K  REGULATORY MATTERS
   Minimum to be WellCapitalized underMinimum for Capital
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    Action ProvisionsAmount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio(Dollars in thousands)As of December 31, 2005:Total Capital (to Risk-Weighted Assets)
    
    $
    100,659
    
    
    
    14.00
    %
    
    $
    58,111
    
    
    
    8.00
    %
    
    $
    72,639
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    94,376
    
    
    
    13.13
    %
    
    
    29,055
    
    
    
    4.00
    %
    
    
    43,583
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    94,376
    
    
    
    12.47
    %
    
    
    30,271
    
    
    
    4.00
    %
    
    
    37,839
    
    
    
    5.00
    %As of December 31, 2004:Total Capital (to Risk-Weighted Assets)
    
    $
    63,295
    
    
    
    15.14
    %
    
    $
    33,443
    
    
    
    8.00
    %
    
    $
    41,803
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    59,132
    
    
    
    14.15
    %
    
    
    16,722
    
    
    
    4.00
    %
    
    
    25,082
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    59,132
    
    
    
    11.94
    %
    
    
    19,806
    
    
    
    4.00
    %
    
    
    24,757
    
    
    
    5.00
    %
  NOTE L  OFF-BALANCE SHEET RISK
  Page 67




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE L  OFF-BALANCE SHEET RISK (Continued)
   Financial instruments whose contract
amounts represent credit risk:Commitments to extend credit
    
    $
    82,427Undisbursed lines of credit
    
    
    122,990Standby letters of credit
    
    
    6,323Construction commitments
    
    
    8,500
 NOTE M  DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
   Cash and Due from Banks and Interest-Earning Deposits With Banks
  Investment Securities
  Loans
  Page 68




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE M  DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
 Accrued Interest
  Stock in Federal Reserve Bank and Federal Home Loan Bank of Atlanta
  Bank Owned Life Insurance
  Deposits
  Borrowings
  Financial Instruments with Off-Balance Sheet Risk
   2005
    
    
    2004Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In thousands)Financial assets:Cash and due from banks
    
    $
    18,475
    
    
    $
    18,475
    
    
    $
    9,028
    
    
    $
    9,028Interest-earning deposits with banks
    
    
    3,668
    
    
    
    3,668
    
    
    
    1,245
    
    
    
    1,245Investment securities
    
    
    123,773
    
    
    
    123,773
    
    
    
    92,608
    
    
    
    92,608Accrued interest receivable
    
    
    5,883
    
    
    
    5,883
    
    
    
    2,697
    
    
    
    2,697Federal Reserve Bank stock
    
    
    2,097
    
    
    
    2,097
    
    
    
    722
    
    
    
    722Federal Home Loan Bank stock
    
    
    6,208
    
    
    
    6,208
    
    
    
    2,321
    
    
    
    2,321Loans
    
    
    666,652
    
    
    
    669,600
    
    
    
    377,793
    
    
    
    381,303Bank owned life insurance
    
    
    17,187
    
    
    
    17,187
    
    
    
    16,507
    
    
    
    16,507Financial liabilities:Deposits
    
    
    646,262
    
    
    
    647,704
    
    
    
    406,259
    
    
    
    408,594Borrowings
    
    
    134,665
    
    
    
    129,606
    
    
    
    63,926
    
    
    
    64,653Accrued interest payable
    
    
    1,126
    
    
    
    1,126
    
    
    
    439
    
    
    
    439
 Page 69




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE N  EMPLOYEE AND DIRECTOR BENEFIT PLANS
 401(k) Retirement Plan
  Stock Option Plans
  Outstanding Options
    
    
    Exercisable OptionsShares
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAvailable
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    for Future
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    Exercisein Plans
    
    
    Grants
    
    
    Outstanding
    
    
    Price
    
    
    Outstanding
    
    
    PriceAt December 31, 2002
    
    
    792,899
    
    
    
    19,487
    
    
    
    773,412
    
    
    $
    7.19
    
    
    
    578,555
    
    
    $
    7.28Options granted/vested
    
    
    
    
    
    
    (2,888
    )
    
    
    2,888
    
    
    
    10.64
    
    
    
    86,961
    
    
    
    7.20Options forfeited
    
    
    
    
    
    
    6,660
    
    
    
    (6,660
    )
    
    
    6.75
    
    
    
    (2,669
    )
    
    
    6.75At December 31, 2003
    
    
    792,899
    
    
    
    23,259
    
    
    
    769,640
    
    
    
    7.20
    
    
    
    662,847
    
    
    
    7.27Options authorized
    
    
    506,000
    
    
    
    506,000
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    
    
    
    
    (527,152
    )
    
    
    527,152
    
    
    
    14.39
    
    
    
    465,620
    
    
    
    13.48Options exercised
    
    
    (43,469
    )
    
    
    
    
    
    
    (43,469
    )
    
    
    7.25
    
    
    
    (43,469
    )
    
    
    7.25Options forfeited
    
    
    
    
    
    
    5,343
    
    
    
    (5,343
    )
    
    
    7.15
    
    
    
    (5,343
    )
    
    
    7.15At December 31, 2004
    
    
    1,255,430
    
    
    
    7,450
    
    
    
    1,247,980
    
    
    
    10.24
    
    
    
    1,079,655
    
    
    
    9.95Options authorized
    
    
    660,000
    
    
    
    660,000
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    
    
    
    
    (147,500
    )
    
    
    147,500
    
    
    
    17.66
    
    
    
    304,727
    
    
    
    17.62Options exercised
    
    
    (148,324
    )
    
    
    
    
    
    
    (148,324
    )
    
    
    8.25
    
    
    
    (148,324
    )
    
    
    8.25Options forfeited
    
    
    
    
    
    
    9,900
    
    
    
    (9,900
    )
    
    
    12.89
    
    
    
    (9,900
    )
    
    
    12.89At December 31, 2005
    
    
    1,767,106
    
    
    
    529,850
    
    
    
    1,237,256
    
    
    $
    11.35
    
    
    
    1,226,158
    
    
    $
    11.36
  Page 70




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE N  EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Employment Contracts
  NOTE O  ACQUISITIONS
  (Amounts in Thousands)Purchase price:Portion paid in cash
    
    $
    69Issuance of common stock
    
    
    503Total purchase price
    
    $
    572Assets acquired:Property and equipment
    
    $
    123Goodwill
    
    
    337Other intangibles
    
    
    112Total assets acquired
    
    $
    572
  Purchase price:Portion paid in cash
    
    $
    71Total purchase price
    
    $
    71Assets acquired:Property and equipment
    
    $
    10Goodwill
    
    
    31Loans
    
    
    30Total assets acquired
    
    $
    71
  Page 71




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE O  ACQUISITIONS (Continued)
  Assets Acquired:Cash and cash equivalents
    
    $
    117,501Loans
    
    
    602Premises and equipment
    
    
    1,955Core deposit intangibles
    
    
    2,692Goodwill
    
    
    4,130Total assets acquired
    
    $
    126,880Liabilities Assumed:Deposits
    
    $
    126,806Other liabilities
    
    
    74Total liabilities assumed
    
    $
    126,880
    Assets Acquired:Cash and cash equivalents
    
    $
    11,260Loans
    
    
    3,532Allowance for loan losses
    
    
    (52
    )Premises and equipment
    
    
    522Core deposit intangibles
    
    
    317Goodwill
    
    
    1,034Other assets
    
    
    10$
    16,623Liabilities Assumed:Deposits
    
    $
    16,541Other liabilities
    
    
    82$
    16,623
 Page 72




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE P  PARENT COMPANY FINANCIAL DATA
  Condensed Balance Sheets
December 31, 2005 and 2004
 2005
    
    
    2004Asset:Cash on deposit in subsidiary
    
    $
    3,909
    
    
    $
    8,952Investment in securities available for sale
    
    
    6,421
    
    
    
    513Investment in subsidiaries
    
    
    103,808
    
    
    
    70,149Other assets
    
    
    640
    
    
    
    203Total assets
    
    $
    114,778
    
    
    $
    79,817Liabilities:Junior subordinated debentures
    
    $
    15,465
    
    
    $
    15,465Other liabilities
    
    
    569
    
    
    
    34Total liabilities
    
    
    16,034
    
    
    
    15,499Stockholders equity:Common stock
    
    
    94,109
    
    
    
    62,631Retained earnings
    
    
    5,113
    
    
    
    1,908Deferred Compensation  restricted stock
    
    
    (43
    )
    
    
    Accumulated other comprehensive loss
    
    
    (435
    )
    
    
    (221
    )Total stockholders equity
    
    
    98,744
    
    
    
    64,318Total liabilities and stockholders equity
    
    $
    114,778
    
    
    $
    79,817
 Condensed Statements of Operations
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Equity in income of subsidiary
    
    $
    4,716
    
    
    $
    2,584
    
    
    $
    1,336Interest income
    
    
    18
    
    
    
    19
    
    
    
    27Gain on sale of securities
    
    
    199
    
    
    
    
    
    
    
    Interest expense
    
    
    (939
    )
    
    
    (541
    )
    
    
    (143
    )Other expense
    
    
    (55
    )
    
    
    (52
    )
    
    
    (20
    )$
    3,939
    
    
    $
    2,010
    
    
    $
    1,200
 Page 73




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##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE P  PARENT COMPANY FINANCIAL DATA (Continued)
 Condensed Statements of Cash Flows
Years Ended December 31, 2005, 2004 and 2003
 2005
    
    
    2004
    
    
    2003Operating activities:Net income
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200Equity in income of subsidiary
    
    
    (4,716
    )
    
    
    (2,584
    )
    
    
    (1,336
    )Amortization of debt issuance costs
    
    
    55
    
    
    
    52
    
    
    
    20Realized gain on sale of securities
    
    
    (199
    )
    
    
    
    
    
    
    Deferred Compensation
    
    
    90
    
    
    
    
    
    
    
    (Increase) decrease in other assets
    
    
    (482
    )
    
    
    (35
    )
    
    
    (240
    )Increase in other liabilities
    
    
    6
    
    
    
    20
    
    
    
    14(1,307
    )
    
    
    (537
    )
    
    
    (342
    )Investing activities:Purchases of available for sale securities
    
    
    (5,102
    )
    
    
    (513
    )
    
    
    Investment in subsidiaries
    
    
    (30,000
    )
    
    
    (37,323
    )
    
    
    (5,243
    )Proceeds from the sale of securities
    
    
    766
    
    
    
    
    
    
    
    Upstream dividend received from the Bank
    
    
    
    
    
    
    105
    
    
    
    (34,336
    )
    
    
    (37,731
    )
    
    
    (5,243
    )Financing activities:Proceeds from junior subordinated
debentures, net of debt issuance costs
    
    
    
    
    
    
    7,217
    
    
    
    8,248Proceeds from the conversion of common
stock warrants
    
    
    
    
    
    
    12,111
    
    
    
    112Proceeds from stock offering
    
    
    29,855
    
    
    
    24,915
    
    
    
    Proceeds from options exercise
    
    
    1,237
    
    
    
    311
    
    
    
    Dividend reinvestment
    
    
    147
    
    
    
    
    
    
    
    Cash dividends paid
    
    
    (631
    )
    
    
    (95
    )
    
    
    Cash paid for fractional shares
    
    
    (8
    )
    
    
    (10
    )
    
    
    (4
    )30,600
    
    
    
    44,449
    
    
    
    8,356Net increase (decrease) in cash
    
    
    (5,043
    )
    
    
    6,181
    
    
    
    2,771Cash, beginning of year
    
    
    8,952
    
    
    
    2,771
    
    
    
    Cash, end of year
    
    $
    3,909
    
    
    $
    8,952
    
    
    $
    2,771
 Page 74




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE Q  BUSINESS SEGMENT REPORTING
  At or for the Year Ended December 31, 2005Consolidated
    
    
    Adjustments
    
    
    Banking
    
    
    Brokerage
    
    
    InsuranceTotal interest expense
    
    $
    16,376
    
    
    $
    
    
    
    $
    16,376
    
    
    $
    
    
    
    $
    Net interest income
    
    
    23,303
    
    
    
    
    
    
    
    23,270
    
    
    
    
    
    
    
    33Provision for loan losses
    
    
    2,200
    
    
    
    
    
    
    
    2,200
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    21,103
    
    
    
    
    
    
    
    21,070
    
    
    
    
    
    
    
    33Non-interest income
    
    
    8,067
    
    
    
    (713
    )
    
    
    5,736
    
    
    
    656
    
    
    
    2,388Non-interest expense
    
    
    23,266
    
    
    
    
    
    
    
    20,902
    
    
    
    464
    
    
    
    1,900Income before income taxes
    
    
    5,904
    
    
    
    (713
    )
    
    
    5,904
    
    
    
    192
    
    
    
    521Provision for income taxes
    
    
    1,965
    
    
    
    
    
    
    
    1,965
    
    
    
    
    
    
    
    Net income
    
    $
    3,939
    
    
    $
    (713
    )
    
    $
    3,939
    
    
    $
    192
    
    
    $
    521Period end total assets
    
    $
    882,422
    
    
    $
    (3,837
    )
    
    $
    883,247
    
    
    $
    488
    
    
    $
    2,524
 At or for the Year Ended December 31, 2004Consolidated
    
    
    Adjustments
    
    
    Banking
    
    
    Brokerage
    
    InsuranceTotal interest income
    
    $
    19,632
    
    
    $
    
    
    
    $
    19,609
    
    
    $
    
    
    
    $
    23Total interest expense
    
    
    6,691
    
    
    
    
    
    
    
    6,691
    
    
    
    
    
    
    
    Net interest income
    
    
    12,941
    
    
    
    
    
    
    
    12,918
    
    
    
    
    
    
    
    23Provision for loan losses
    
    
    1,425
    
    
    
    
    
    
    
    1,425
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    11,516
    
    
    
    
    
    
    
    11,493
    
    
    
    
    
    
    
    23Non-interest income
    
    
    5,857
    
    
    
    (562
    )
    
    
    3,963
    
    
    
    463
    
    
    
    1,993Non-interest expense
    
    
    14,653
    
    
    
    (161
    )
    
    
    12,736
    
    
    
    400
    
    
    
    1,678Income before income taxes
    
    
    2,720
    
    
    
    (401
    )
    
    
    2,720
    
    
    
    63
    
    
    
    338Provision for income taxes
    
    
    710
    
    
    
    
    
    
    
    710Net income
    
    $
    2,010
    
    
    $
    (401
    )
    
    $
    2,010
    
    
    $
    63
    
    
    $
    338Period end total assets
    
    $
    535,728
    
    
    $
    (2,219
    )
    
    $
    535,751
    
    
    $
    286
    
    
    $
    1,910
 At or for the Year Ended December 31, 2003Consolidated
    
    
    Adjustments
    
    
    Banking
    
    
    Brokerage
    
    InsuranceTotal interest income
    
    $
    13,486
    
    
    $
    
    
    
    $
    13,486
    
    
    $
    
    
    
    $
    Total interest expense
    
    
    5,341
    
    
    
    
    
    
    
    5,341
    
    
    
    
    
    
    
    Net interest income
    
    
    8,145
    
    
    
    
    
    
    
    8,145
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    1,200
    
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    6,945
    
    
    
    
    
    
    
    6,945
    
    
    
    
    
    
    
    Non-interest income
    
    
    4,485
    
    
    
    (215
    )
    
    
    2,874
    
    
    
    240
    
    
    
    1,586Non-interest expense
    
    
    10,230
    
    
    
    (106
    )
    
    
    8,618
    
    
    
    235
    
    
    
    1,483Income before income taxes
    
    
    1,200
    
    
    
    (109
    )
    
    
    1,201
    
    
    
    5
    
    
    
    103Provision for income taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    1,200
    
    
    $
    (109
    )
    
    $
    1,201
    
    
    $
    5
    
    
    $
    103Period end total assets
    
    $
    314,826
    
    
    $
    (1,267
    )
    
    $
    314,786
    
    
    $
    103
    
    
    $
    1,204
 Page 75




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE R  INTANGIBLE ASSETS
  2005
    
    
    2004
    
    
    2003(In thousands)Intangibles assets subject to future amortization:Core deposit intangibles  gross
    
    $
    3,497
    
    
    $
    3,497
    
    
    $
    805Less accumulated amortization
    
    
    (707
    )
    
    
    (328
    )
    
    
    (198
    )Core deposit intangibles  net
    
    $
    2,790
    
    
    $
    3,169
    
    
    $
    607Intangible assets not subject to future amortization:Goodwill  banking segment
    
    $
    6,454
    
    
    $
    6,471
    
    
    $
    2,341Goodwill  insurance segment
    
    
    1,002
    
    
    
    1,002
    
    
    
    634$
    7,456
    
    
    $
    7,473
    
    
    $
    2,975
  2006
    
    $
    3792007
    
    
    3792008
    
    
    3792009
    
    
    3792010
    
    
    338Thereafter
    
    
    936$
    2,790
 NOTE S  DERIVATIVES
    Page 76




---



##### 



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2004 and 2003
 NOTE S  DERIVATIVES (Continued)
      Notional amount
    
    $
    150,000Weighted average pay rate
    
    
    7.25
    %Weighted average receive rate
    
    
    7.50
    %Weighted average maturity in years
    
    
    3.0Unrealized gain (loss) relating to interest rate swaps
    
    
    
    NOTE T  SUBSEQUENT EVENTS
  Page 77




---



##### 



ITEM
9  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  ITEM
9A  CONTROLS AND PROCEDURES
  Managements Report On Internal Control Over Financial Reporting
  Internal Control  Integrated Framework
      /s/ D. Ben Berry
    
    
    
    /s/ Theodore L. SalterD. Ben Berry
    
    
    
    Theodore L. SalterChairman, President and Chief Executive Officer
    
    
    
    Senior Executive Vice President and Chief Financial Officer
 Page 78




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
    Internal ControlIntegrated
Framework Internal ControlIntegrated Framework
 Page 79




---



##### 



Greenville, North Carolina
March 28, 2006
 Page 80




---



##### 



ITEM
9B  OTHER INFORMATION
  PART III
 ITEM 10  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; COMPLIANCE
WITH SECTION 16(a)
  ITEM
11  EXECUTIVE COMPENSATION
  ITEM
12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
   Equity Compensation Plan Information
 Number of securitiesremaining available forNumber of securities
    
    
    
    
    
    
    
    future issuance underto be issued
    
    
    Weighted-average
    
    
    equity compensation plansupon exercise of
    
    
    exercise price of
    
    
    (excluding securitiesPlan Category
    
    
    outstanding options
    
    
    outstanding options
    
    
    reflected in column(a))(a)
    
    
    
    
    (b)
    
    
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    
    1,237,256
    
    
    
    $
    10.97
    
    
    
    
    529,850Equity compensation
plans not approved
by security holders
    
    
    
    58,696
    
    
    
    $
    8.31
    
    
    
    
    Total
    
    
    
    1,237,256
    
    
    
    $
    11.35
    
    
    
    
    529,850
   Page 81




---



##### 



ITEM
13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  ITEM
14  PRINCIPAL ACCOUNTANT FEES AND SERVICES
  PART IV
 ITEM
15  EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  Exhibit No.
    
    DescriptionExhibit 3.1:
    
    Amended and Restated Articles of IncorporationExhibit 3.2:
    
    Bylaws (incorporated by reference to Exhibit 3(ii) to the Current Report on Form 8K
dated October 1, 2001)Exhibit 4.1:
    
    Specimen Certificate for Common Stock of Gateway Financial Holdings, Inc.
(incorporated by reference to Exhibit 4.1 of Amendment No. 1 to the Registration
Statement on Form S-3 filed September 20, 2001)Exhibit 10.1:
    
    1999 Incentive Stock Option Plan of Gateway Financial Holdings, Inc. (incorporated
by reference to Exhibit 10.1 to the Annual Report on Form 10K for the year ended
December 31, 2001 (2001 Annual Report))Exhibit 10.2:
    
    1999 Non-Statutory Stock Option Plan of Gateway Financial Holdings, Inc.
(incorporated by reference to Exhibit 10.2 to the 2001 Annual Report)Exhibit 10.3:
    
    2001 Non-Statutory Stock Option Plan of Gateway Financial Holdings, Inc.
(incorporated by reference to Exhibit 10.3 to the 2001 Annual Report)Exhibit 10.4
    
    Employment Agreement with D. Ben BerryExhibit 10.5
    
    Employment Agreement with David R. TwiddyExhibit 10.6
    
    2005 Omnibus Stock Ownership And Long Term Incentive PlanExhibit 21:
    
    Subsidiaries of the RegistrantExhibit 23:
    
    Consent of Dixon Hughes PLLCExhibit 31.1:
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Executive OfficerExhibit 31.2:
    
    Rule 13a-14(a)/15d-14(a) Certification by Chief Financial OfficerExhibit 32:
    
    Section 1350 Certifications
 Page 82




---



##### 



SIGNATURES
  GATEWAY FINANCIAL HOLDINGS, INC.Date: March 30, 2006
    By:
    /s/ D. Ben BerryD. Ben BerryChairman, President and Chief Executive Officer  NAME
    
    TITLE
    
    DATE/s/ D. Ben BerryD. Ben Berry
    
    Chairman, President and CEO
    
    March 30, 2006/s/ Theodore L. SalterTheodore L. Salter
    
    Chief Financial Officer
    
    March 30, 2006/s/ Mark A. JeffriesMark A. Jeffries
    
    Controller
    
    March 30, 2006/s/ H. Spencer BarrowH. Spencer Barrow
    
    Director
    
    March 30, 2006/s/ William Brumsey IIIWilliam Brumsey III
    
    Director
    
    March 30, 2006/s/ Jimmie Dixon, Jr.Jimmie Dixon, Jr.
    
    Director
    
    March 30, 2006/s/ James H. Ferebee, Jr.James H. Ferebee, Jr.
    
    Director
    
    March 30, 2006Charles R. Franklin, Jr.
    
    Director
    
    March 30, 2006/s/ Robert Y. Green, Jr.Robert Y. Green, Jr.
    
    Director
    
    March 30, 2006W. Taylor Johnson, Jr.
    
    Director
    
    March 30, 2006/s/ Robert Willard Luther, IIIRobert Willard Luther, III
    
    Director
    
    March 30, 2006/s/ Frances Morrisette NorrellFrances Morrisette Norrell
    
    Director
    
    March 30, 2006/s/ W. C. Owens, Jr.W. C. Owens, Jr.
    
    Director
    
    March 30, 2006Billy G. Roughton
    
    Director
    
    March 30, 2006/s/ Ollin B. SykesOllin B. Sykes
    
    Director
    
    March 30, 2006Frank T. Williams
    
    Director
    
    March 30, 2006Jerry T. Womack
    
    Director
    
    March 30, 2006
 Page 83