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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, 2007
 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.)1580 Laskin Road, Virginia Beach, Virginia
    
    23451(Address of principal executive offices)
    
    (Zip code)
 (757) 422-4055
  Title of each class
    
    Exchange on which registeredCommon Stock, No Par Value
    
    The NASDAQ Stock Market, LLC
  o þ
 o þ
 þ o
 o
  large accelerated filer o
    
    accelerated filer þ
    
    non-accelerated filer o
    
    smaller reporting company o
 o þ
     Document
    
    Where Incorporated1.
    
    Proxy Statement for the Annual Meeting of Shareholders
to be held May 19, 2008 to be mailed to shareholders
within 120 days of December 31, 2007.
    
    Part III




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##### 



Form 10-K Table of Contents
 Index
    
    PAGEPART IItem 1. Description of Business
    
    
    3Item 1A. Risk Factors
    
    
    11Item 1B. Unresolved Staff Comments
    
    
    17Item 2. Properties
    
    
    17Item 3. Legal Proceedings
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    18Item 6. Selected Financial Data
    
    
    20Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 8. Financial Statements and Supplementary Data
    
    
    49Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    92Item 9A. Controls and Procedures
    
    
    92Item 9B. Other Information
    
    
    95PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    95Item 11. Executive Compensation
    
    
    95Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    95Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    96Item 14. Principal Accounting Fees and Services
    
    
    96PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    96Exhibit 3.1Exhibit 3.2Exhibit 3.3Exhibit 10.4Exhibit 10.5Exhibit 10.7Exhibit 10.8Exhibit 10.9Exhibit 10.10Exhibit 21Exhibit 23Exhibit 31.1Exhibit 31.2Exhibit 32
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PART I
 
 ITEM 1.  DESCRIPTION OF BUSINESS
 General
     Market Area and Growth Strategy
  st
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th
 People . . .
 
    
    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 community banks. The Bank has divided its markets into six
regions. Each region has its own Market President whose knowledge of his region, presence
in his 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 new 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 national and super-regional banks. By providing our customers with personalized
service and a big bank product suite, we expect to continue our strong growth.
    
    Expand franchise in high growth markets.    We will actively consider both acquisitions
and de novo financial center opportunities in existing and new market areas. During 2007,
we have acquired The Bank of Richmond, N.A., and opened three new de novo financial centers
(two in Raleigh, North Carolina, and our first financial center in Wilmington, North
Carolina). We are focused on markets in central and eastern Virginia and central 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 intend to
open our next financial centers in Chapel Hill and Wake Forest, North Carolina, and
Charlottesville and Lynchburg, Virginia.
    
    Grow insurance agency through acquisitions.    Our independent insurance agency was
created through the acquisition and integration of three independent insurance agencies.
During 2007, we successfully
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integrated the acquisitions of two insurance agencies we acquired in the fourth quarter of
2006, and acquired, as a separate subsidiary, a mortgage insurance and real estate
settlement agency in the Greater Hampton Roads area of Virginia. We will actively consider
acquisitions in both our existing market areas and in other growing markets in eastern and
central Virginia and eastern and central North Carolina that have favorable market
demographics for our insurance agency subsidiary.
    
    Grow non-interest income through mortgage subsidiary.    We operate our own mortgage
subsidiary. We intend to actively seek mortgage originations in both our existing market
areas and in other growing markets in eastern and central Virginia and eastern and central
North Carolina.
    
    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.
We believe the investments we have made in the expansion of 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.
 Competition
    Other Products and Services
 Other Banking Products and Services.
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Other Financial Services.
  Employees
  SUPERVISION AND REGULATION
  Gateway Financial Holdings, Inc.
     Page 6




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Enforcement Authority
 Interstate Acquisitions
 Capital Adequacy
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Source of Strength for Subsidiary.
 Dividends.
 Change of Control.
 Gateway Bank & Trust Co.
  Transactions with Affiliates
 Loans to Insiders
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Regulation of Lending Activities
 Financial Centers
   Reserve Requirements.
 Community Reinvestment.
 Governmental Monetary Policies
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Dividends
   Capital Adequacy
 Changes in Management
 Enforcement Authority
 Prompt Corrective Action
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Deposit Insurance.
 Future legislation and regulations.
  
 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.
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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;
    
    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.
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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.
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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.
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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.
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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.
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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- 322 S Broad St (4)
    
    
    5,400
    
    
    
    2006Elizabeth City 112 Corporate Dr (6)
    
    
    25,000
    
    
    
    2006Elizabeth City- 1145 N Road St (1)
    
    
    9,000
    
    
    
    1999Elizabeth City- 1404 W Ehringhaus St (3)
    
    
    2,000
    
    
    
    2003Elizabeth City 400 W Ehringhaus St (4)
    
    
    5,000
    
    
    
    2004Elizabeth City 802 W Ehringhaus St (2)
    
    
    3,200
    
    
    
    2004Hertford- 147 N Church St (2)
    
    
    2,000
    
    
    
    2002Kitty Hawk- 3600 Croatan Hwy (1)
    
    
    6,500
    
    
    
    2002Kitty Hawk- 5406 Croatan Hwy (1)
    
    
    4,200
    
    
    
    2006Moyock- 100 Moyock Commons Dr (4)
    
    
    4,000
    
    
    
    2004Nags Head- 2808 @ Croatan Hwy (5)
    
    
    4,800
    
    
    
    2004Plymouth- 433 US Hwy 64 E (4)
    
    
    5,200
    
    
    
    2000Raleigh- 2209 Century Dr (3)
    
    
    2,500
    
    
    
    2006Raleigh-8470 Falls of Neuse Rd (3)
    
    
    4,486
    
    
    
    2007Raleigh- 2235 Access Medical Dr (3)
    
    
    46,989
    
    
    
    2007Roper- 102 W Buncomb St (3)
    
    
    550
    
    
    
    2000Wilmington- 901 Military Cutoff Rd (3)
    
    
    7,600
    
    
    
    2007Chesapeake- 111 Gainsboro Square (5)
    
    
    7,200
    
    
    
    2002Chesapeake- 575 Cedar Rd (3)
    
    
    2,400
    
    
    
    2003Chesapeake- 1403 Greenbrier Parkway (3)
    
    
    3,800
    
    
    
    2006Emporia- 5205 Main St (3)
    
    
    6,500
    
    
    
    2004Midlothian- 13804 Hull St (3)
    
    
    5,928
    
    
    
    2007Newport News- 753 Thimble Shoals Blvd (2)
    
    
    2,800
    
    
    
    2006Norfolk- 539 21st St (3)
    
    
    10,000
    
    
    
    2006Richmond- 5300 Patterson Ave (3)
    
    
    5,948
    
    
    
    2007Richmond- 2730 Buford Rd (3)
    
    
    2,768
    
    
    
    2007Richmond- 8905 Fargo Rd (3)
    
    
    1,568
    
    
    
    2007Richmond- 8209 W Broad St (3)
    
    
    3,588
    
    
    
    2007Richmond- 12090 W Broad St (3)
    
    
    9,462
    
    
    
    2007Suffolk- 2825 Godwin Dr (3)
    
    
    3,200
    
    
    
    2004Virginia Beach- 4460 Corporation Lane Suite 100 (3)
    
    
    4,000
    
    
    
    2000Virginia Beach- 713 Independence Blvd (3)
    
    
    2,200
    
    
    
    2003Virginia Beach- 1580 Laskin Rd (5)
    
    
    7,500
    
    
    
    2005Virginia Beach- 641 Lynnhaven Parkway (3)
    
    
    20,000
    
    
    
    2006Virginia Beach- 3801 Pacific Ave (3)
    
    
    1,200
    
    
    
    2006
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Approximate Square
    
    Year Established/Office Location
    
    Footage
    
    AcquiredVirginia Beach- 2098 Princess Anne Rd (3)
    
    
    2,500
    
    
    
    2005Virginia Beach- 3001 Shore Dr (3)
    
    
    2,000
    
    
    
    2003
 
 (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.  
 ITEM 3  LEGAL PROCEEDINGS
  
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5  MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
  High
    
    Low
    
    Dividend2006
    
    
    
    First Quarter
    
    $
    15.74
    
    
    $
    14.90
    
    
    $
    0.03Second Quarter
    
    
    15.69
    
    
    
    14.45
    
    
    
    0.03Third Quarter
    
    
    15.01
    
    
    
    14.01
    
    
    
    0.05Fourth Quarter
    
    
    14.73
    
    
    
    13.95
    
    
    
    0.052007
    
    
    
    First Quarter
    
    $
    14.44
    
    
    $
    13.80
    
    
    $
    0.05Second Quarter
    
    
    14.71
    
    
    
    13.17
    
    
    
    0.08Third Quarter
    
    
    15.83
    
    
    
    12.74
    
    
    
    0.08Fourth Quarter
    
    
    14.41
    
    
    
    11.85
    
    
    
    0.08
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Total Number
    
    
    Maximumof Shares
    
    
    Number ofPurchased as
    
    
    Shares ThatPart of Publicly
    
    
    May Yet BeTotal Number of
    
    
    Average Price
    
    
    Announced
    
    
    Purchased UnderPeriod
    
    Shares Purchased
    
    
    Paid Per Share
    
    
    Program
    
    
    the Program (1)October 1, 2007 to October 31, 2007
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    200,000November 1, 2 007 to November 30, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    200,000December 1, 2007 to December 31, 2007
    
    
    100,637
    
    
    
    12.33
    
    
    
    100,637
    
    
    
    99,363Total
    
    
    100.637
    
    
    $
    12.33
    
    
    
    100,637
    
    
    
    99,363
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ITEM 6  SELECTED FINANCIAL DATA
  For the Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands, except per share data)Operating Data:Total interest income
    
    $
    109,559
    
    
    $
    73,097
    
    
    $
    39,679
    
    
    $
    19,632
    
    
    $
    13,486Total interest expense
    
    
    60,474
    
    
    
    36,099
    
    
    
    16,376
    
    
    
    6,691
    
    
    
    5,341Net interest income
    
    
    49,085
    
    
    
    36,998
    
    
    
    23,303
    
    
    
    12,941
    
    
    
    8,145Provision for loan losses
    
    
    4,900
    
    
    
    3,400
    
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200Net interest income after
provision for loan losses
    
    
    44,185
    
    
    
    33,598
    
    
    
    21,103
    
    
    
    11,516
    
    
    
    6,945Total non-interest income
    
    
    17,765
    
    
    
    9,270
    
    
    
    8,067
    
    
    
    5,857
    
    
    
    4,485Total non-interest expense
    
    
    44,941
    
    
    
    34,974
    
    
    
    23,266
    
    
    
    14,653
    
    
    
    10,230Income before income taxes
    
    
    17,009
    
    
    
    7,894
    
    
    
    5,904
    
    
    
    2,720
    
    
    
    1,200Provision for income taxes
    
    
    5,990
    
    
    
    2,625
    
    
    
    1,965
    
    
    
    710
    
    
    
    Net income
    
    $
    11,019
    
    
    $
    5,269
    
    
    $
    3,939
    
    
    $
    2,010
    
    
    $
    1,200Per Share Data: (1)Net income basic
    
    $
    0.91
    
    
    $
    0.49
    
    
    $
    0.48
    
    
    $
    0.37
    
    
    $
    0.30Net income diluted
    
    
    0.89
    
    
    
    0.47
    
    
    
    0.46
    
    
    
    0.34
    
    
    
    0.29Dividends
    
    
    0.29
    
    
    
    0.16
    
    
    
    0.09
    
    
    
    0.02
    
    
    
    Book value per common share
    
    
    11.24
    
    
    
    9.99
    
    
    
    9.46
    
    
    
    7.98
    
    
    
    6.20Tangible book value
per common share
    
    
    7.17
    
    
    
    8.84
    
    
    
    8.4
    
    
    
    7             6.66
    
    
    
    5.31Balance Sheet Data:Total assets
    
    $
    1,868,185
    
    
    $
    1,207,477
    
    
    $
    883,373
    
    
    $
    535,728
    
    
    $
    314,826Loans receivable
    
    
    1,522,401
    
    
    
    994,592
    
    
    
    666,652
    
    
    
    381,956
    
    
    
    231,740Allowance for loan losses
    
    
    15,339
    
    
    
    9,405
    
    
    
    6,283
    
    
    
    4,163
    
    
    
    2,759Deposits
    
    
    1,408,919
    
    
    
    923,725
    
    
    
    646,262
    
    
    
    406,259
    
    
    
    238,452Borrowings
    
    
    282,102
    
    
    
    166,929
    
    
    
    134,665
    
    
    
    63,926
    
    
    
    50,000Stockholders equity
    
    
    164,407
    
    
    
    109,640
    
    
    
    98,744
    
    
    
    64,318
    
    
    
    24,971Selected Performance Ratios:Return on average assets
    
    
    0.71
    %
    
    
    0.51
    %
    
    
    0.58
    %
    
    
    0.49
    %
    
    
    0.43
    %Return on average equity
    
    
    8.45
    %
    
    
    5.06
    %
    
    
    5.77
    %
    
    
    5.12
    %
    
    
    4.93
    %Net interest margin (2)
    
    
    3.49
    %
    
    
    3.87
    %
    
    
    3.81
    %
    
    
    3.59
    %
    
    
    3.24
    %Net interest spread (3)
    
    
    3.12
    %
    
    
    3.35
    %
    
    
    3.44
    %
    
    
    3.33
    %
    
    
    2.98
    %Non-interest income as a
percentage of
net interest income and
non-interest
income
    
    
    26.57
    %
    
    
    20.04
    %
    
    
    25.72
    %
    
    
    31.16
    %
    
    
    35.51
    %Non-interest income as a
percentage of
average assets
    
    
    1.15
    %
    
    
    0.89
    %
    
    
    1.19
    %
    
    
    1.44
    %
    
    
    1.61
    %Non-interest expense
to average assets
    
    
    2.90
    %
    
    
    3.35
    %
    
    
    3.43
    %
    
    
    3.59
    %
    
    
    3.67
    %Efficiency ratio (4)
    
    
    67.23
    %
    
    
    75.80
    %
    
    
    74.17
    %
    
    
    77.95
    %
    
    
    81.00
    %
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For the Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands, except per share data)Asset Quality Ratios:Nonperforming loans to period-end loans
    
    
    0.22
    %
    
    
    0.33
    %
    
    
    0.03
    %
    
    
    0.13
    %
    
    
    0.52
    %Allowance for loan losses to period-end
loans
    
    
    1.01
    %
    
    
    0.95
    %
    
    
    0.94
    %
    
    
    1.09
    %
    
    
    1.19
    %Allowance for loan losses to
nonperforming loans
    
    
    450.22
    %
    
    
    287.70
    %
    
    
    3079.90
    %
    
    
    849.59
    %
    
    
    228.02
    %Nonperforming assets to total
assets (5)
    
    
    0.21
    %
    
    
    0.27
    %
    
    
    0.02
    %
    
    
    0.09
    %
    
    
    0.38
    %Net loan charge-offs to average
loans outstanding
    
    
    0.09
    %
    
    
    0.04
    %
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.11
    %Capital Ratios:(6)Total risk-based capital
    
    
    11.40
    %
    
    
    12.99
    %
    
    
    15.17
    %
    
    
    17.40
    %
    
    
    12.68
    %Tier 1 risk-based capital
    
    
    10.43
    %
    
    
    12.11
    %
    
    
    14.31
    %
    
    
    16.41
    %
    
    
    11.59
    %Leverage ratio
    
    
    9.76
    %
    
    
    11.38
    %
    
    
    13.73
    %
    
    
    13.89
    %
    
    
    9.33
    %Equity to assets ratio
    
    
    8.80
    %
    
    
    9.08
    %
    
    
    10.19
    %
    
    
    12.01
    %
    
    
    7.93
    %Other Data:Number of banking offices
    
    
    33
    
    
    
    24
    
    
    
    18
    
    
    
    16
    
    
    
    10Number of full time equivalent employees
    
    
    420
    
    
    
    327
    
    
    
    247
    
    
    
    191
    
    
    
    123
 
 (1)
    
    Restated for 11 for- 10 stock split in 2006, 11 for- 10 stock split in 2005, 21-for-20
stock split in 2004, and 21-for-20 stock split occurring during 2003.(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)
    
    Nonperforming assets consists of nonaccrual loans, restructured loans, and real estate owned,
where applicable.(6)
    
    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 21




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##### Table of Contents



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 April 25, 2006 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 May 15, 2006 to stockholders of record on April 28, 2006. 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 stockholders of record on May 30, 2005. 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
      Page 22




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##### Table of Contents



FINANCIAL CONDITION
December 31, 2007 and 2006
   Page 23




---



##### Table of Contents



NET INTEREST INCOME
 
 Page 24




---



##### Table of Contents



Average Balances and Average Rates Earned and Paid.
 For the Years Ended December 31,2007
    
    
    2006
    
    
    2005Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate(Dollars in thousands)Interest-earning assets:Loans
    
    $
    1,262,516
    
    
    $
    102,041
    
    
    
    8.08
    %
    
    $
    835,527
    
    
    $
    67,517
    
    
    
    8.08
    %
    
    $
    523,492
    
    
    $
    36,358
    
    
    
    6.95
    %Interest-earning deposits
    
    
    5,628
    
    
    
    341
    
    
    
    6.06
    %
    
    
    2,707
    
    
    
    140
    
    
    
    5.17
    %
    
    
    3,668
    
    
    
    138
    
    
    
    3.76
    %Trading and investment securities available
for sale taxable
    
    
    113,777
    
    
    
    5,909
    
    
    
    5.19
    %
    
    
    102,506
    
    
    
    4,632
    
    
    
    4.52
    %
    
    
    72,579
    
    
    
    2,731
    
    
    
    3.76
    %Investment securities available for
sale tax exempt
    
    
    11,243
    
    
    
    423
    
    
    
    3.76
    %
    
    
    6,850
    
    
    
    238
    
    
    
    3.47
    %
    
    
    6,327
    
    
    
    204
    
    
    
    3.22
    %FHLB/FRB stock
    
    
    12,594
    
    
    
    845
    
    
    
    6.71
    %
    
    
    9,175
    
    
    
    570
    
    
    
    6.21
    %
    
    
    5,038
    
    
    
    248
    
    
    
    4.92
    %Total interest-earning assets
    
    
    1,405,758
    
    
    
    109,559
    
    
    
    7.79
    %
    
    
    956,765
    
    
    
    73,097
    
    
    
    7.64
    %
    
    
    611,104
    
    
    
    39,679
    
    
    
    6.49
    %Other assets
    
    
    143,989
    
    
    
    
    
    
    
    
    
    
    
    86,553
    
    
    
    
    
    
    
    
    
    
    
    67,916Total assets
    
    $
    1,549,747
    
    
    
    
    
    
    
    
    
    
    $
    1,043,318
    
    
    
    
    
    
    
    
    
    
    $
    679,020Interest-bearing liabilities:Deposits:Savings, NOW, and money market
    
    $
    330,980
    
    
    
    11,491
    
    
    
    3.47
    %
    
    $
    245,038
    
    
    
    7,918
    
    
    
    3.23
    %
    
    $
    178,577
    
    
    
    3,579
    
    
    
    2.00
    %Time deposits
    
    
    751,226
    
    
    
    38,103
    
    
    
    5.07
    %
    
    
    450,786
    
    
    
    20,571
    
    
    
    4.56
    %
    
    
    267,494
    
    
    
    9,115
    
    
    
    3.41
    %Borrowings
    
    
    211,830
    
    
    
    10,880
    
    
    
    5.14
    %
    
    
    145,725
    
    
    
    7,610
    
    
    
    5.22
    %
    
    
    91,005
    
    
    
    3,682
    
    
    
    4.05
    %Total interest-bearing liabilities
    
    
    1,294,036
    
    
    
    60,474
    
    
    
    4.67
    %
    
    
    841,549
    
    
    
    36,099
    
    
    
    4.29
    %
    
    
    537,076
    
    
    
    16,376
    
    
    
    3.05
    %Demand deposits
    
    
    116,190
    
    
    
    
    
    
    
    
    
    
    
    93,346
    
    
    
    
    
    
    
    
    
    
    
    72,369Other liabilities
    
    
    9,130
    
    
    
    
    
    
    
    
    
    
    
    4,216
    
    
    
    
    
    
    
    
    
    
    
    1,317Stockholders equity
    
    
    130,391
    
    
    
    
    
    
    
    
    
    
    
    104,207
    
    
    
    
    
    
    
    
    
    
    
    68,258Total liabilities and stockholders equity
    
    $
    1,549,747
    
    
    
    
    
    
    
    
    
    
    $
    1,043,318
    
    
    
    
    
    
    
    
    
    
    $
    679,020Net interest income and interest rate spread
    
    
    
    
    
    $
    49,085
    
    
    
    3.12
    %
    
    
    
    
    
    $
    36,998
    
    
    
    3.35
    %
    
    
    
    
    
    $
    23,303
    
    
    
    3.44
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.49
    %
    
    
    
    
    
    
    
    
    
    
    3.87
    %
    
    
    
    
    
    
    
    
    
    
    3.81
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    108.63
    %
    
    
    
    
    
    
    
    
    
    
    113.69
    %
    
    
    
    
    
    
    
    
    
    
    113.78
    %
 Page 25




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##### Table of Contents



RATE/VOLUME ANALYSIS
  Year Ended
    
    
    Year EndedDecember 31, 2007 vs. 2006
    
    
    December 31, 2006 vs. 2005Increase (Decrease) Due to
    
    
    Increase (Decrease) Due toVolume
    
    
    Rate
    
    
    Total
    
    
    Volume
    
    
    Rate
    
    
    Total(Dollars in thousands)Interest income:Loans
    
    $
    34,507
    
    
    $
    17
    
    
    $
    34,524
    
    
    $
    23,443
    
    
    $
    7,716
    
    
    $
    31,159Interest-earning deposits
    
    
    164
    
    
    
    37
    
    
    
    201
    
    
    
    (43
    )
    
    
    45
    
    
    
    2Trading and investment securities
available for sale:Taxable
    
    
    547
    
    
    
    730
    
    
    
    1,277
    
    
    
    1,239
    
    
    
    662
    
    
    
    1,901Tax-exempt
    
    
    159
    
    
    
    26
    
    
    
    185
    
    
    
    18
    
    
    
    16
    
    
    
    34FHLB/FRB stock
    
    
    221
    
    
    
    54
    
    
    
    275
    
    
    
    230
    
    
    
    92
    
    
    
    322Total interest income
    
    
    35,598
    
    
    
    864
    
    
    
    36,462
    
    
    
    24,887
    
    
    
    8,531
    
    
    
    33,418Interest expense:Deposits:Savings, NOW, and
money market
    
    
    2,880
    
    
    
    693
    
    
    
    3,573
    
    
    
    1,740
    
    
    
    2,599
    
    
    
    4,339Time deposits
    
    
    14,475
    
    
    
    3,057
    
    
    
    17,532
    
    
    
    7,305
    
    
    
    4,151
    
    
    
    11,456Borrowings
    
    
    3,430
    
    
    
    (160
    )
    
    
    3,270
    
    
    
    2,701
    
    
    
    1,227
    
    
    
    3,928Total interest expense
    
    
    20,785
    
    
    
    3,590
    
    
    
    24,375
    
    
    
    11,746
    
    
    
    7,977
    
    
    
    19,723Net interest income
increase
    
    $
    14,813
    
    
    $
    (2,726
    )
    
    $
    12,087
    
    
    $
    13,141
    
    
    $
    554
    
    
    $
    13,695
 RESULTS OF OPERATIONS
Years Ended December 31, 2007 and 2006
 Overview.
  Page 26




---



##### Table of Contents



Net Interest Income.
   Provision for Loan Losses.
 Page 27




---



##### Table of Contents



Non-Interest Income.
    Non-Interest Expenses.
 Page 28




---



##### Table of Contents



Provision for Income Taxes.
 RESULTS OF OPERATIONS
Years Ended December 31, 2006 and 2005
 Overview.
  Net Interest Income.
 Page 29




---



##### Table of Contents



Provision for Loan Losses.
 Non-Interest Income.
  Non-Interest Expenses.
 Income Taxes.
 Page 30




---



##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
     CAPITAL RATIOS
  At December 31, 2007Actual
    
    Minimum
    
    Well-CapitalizedRatio
    
    Requirement
    
    RequirementTotal risk-based capital ratio
    
    
    11.19
    %
    
    
    8.0
    %
    
    
    10.0
    %Tier 1 risk-based capital ratio
    
    
    10.24
    %
    
    
    4.0
    %
    
    
    6.0
    %Leverage ratio
    
    
    9.46
    %
    
    
    4.0
    %
    
    
    5.0
    %
  Page 31




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##### Table of Contents



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
    
    $
    28,000
    
    
    $
    28,000
    
    
    $
    
    
    
    $
    
    
    
    $
    FHLB advances
    
    
    174,000
    
    
    
    5,000
    
    
    
    6,500
    
    
    
    145,000
    
    
    
    17,500Reverse purchase agreements
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000Junior subordinated debentures
    
    
    56,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,102Line of credit with a bank
    
    
    4,000
    
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    Lease obligations
    
    
    19,010
    
    
    
    1,574
    
    
    
    2,737
    
    
    
    2,349
    
    
    
    12,350Deposits
    
    
    1,408,919
    
    
    
    1,349,704
    
    
    
    42,826
    
    
    
    16,368
    
    
    
    21Total contractual cash obligations
    
    $
    1,710,031
    
    
    $
    1,384,277
    
    
    $
    56,063
    
    
    $
    173,717
    
    
    $
    95,973
  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
    
    $
    69,789
    
    
    $
    69,789
    
    
    $
    
    
    
    $
    
    
    
    $
    Other commitments and credit lines
    
    
    269,640
    
    
    
    269,640
    
    
    
    
    
    
    
    
    
    
    
    Undisbursed portion of construction loans
    
    
    122,475
    
    
    
    122,475
    
    
    
    
    
    
    
    
    
    
    
    Standby letters of credit
    
    
    19,411
    
    
    
    19,411
    
    
    
    
    
    
    
    
    
    
    
    Commitments to originate mortgage
Loans, fixed and variable rate
    
    
    12,181
    
    
    
    12,181
    
    
    
    
    
    
    
    
    
    
    
    Total other commitments
    
    $
    493,496
    
    
    $
    493,496
    
    
    $
    
    
    
    $
    
    
    
    $
    
  ASSET/LIABILITY MANAGEMENT
  Page 32




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Page 33




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##### Table of Contents



Terms to Repricing at December 31, 2007Over 3
    
    
    Total3 Months
    
    
    Months to
    
    
    Within
    
    
    Over 12or Less
    
    
    12 Months
    
    
    12 Months
    
    
    Months
    
    
    Total(Dollars in thousands)Interest-earning assets:Loans
    
    $
    911,465
    
    
    $
    93,632
    
    
    $
    1,005,097
    
    
    $
    517,304
    
    
    $
    1,522,401Interest-earning deposits
    
    
    1,092
    
    
    
    
    
    
    
    1,092
    
    
    
    
    
    
    
    1,092Investment securities available for sale
    
    
    5,720
    
    
    
    492
    
    
    
    6,212
    
    
    
    120,538
    
    
    
    126,750Trading securities
    
    
    23,011
    
    
    
    
    
    
    
    23,011
    
    
    
    
    
    
    
    23,011FHLB/FRB stock
    
    
    15,660
    
    
    
    
    
    
    
    15,660
    
    
    
    
    
    
    
    15,660Total interest-earning assets
    
    $
    956,948
    
    
    $
    94,124
    
    
    $
    1,051,072
    
    
    $
    637,842
    
    
    $
    1,688,914Percentage of total interest-earning assets
    
    
    56.66
    %
    
    
    5.57
    %
    
    
    62.23
    %
    
    
    37.77
    %
    
    
    100.00
    %Cumulative percentage to total interest-
earning assets
    
    
    56.66
    %
    
    
    62.23
    %
    
    
    62.23
    %
    
    
    100.00
    %
    
    
    100.00
    %Interest-bearing liabilities:Deposits:Savings, NOW and money market
    
    $
    402,523
    
    
    $
    
    
    
    $
    402,523
    
    
    $
    
    
    
    $
    402,523Time
    
    
    274,389
    
    
    
    548,907
    
    
    
    823,296
    
    
    
    59,215
    
    
    
    882,511Borrowings
    
    
    88,102
    
    
    
    5,000
    
    
    
    93,102
    
    
    
    189,000
    
    
    
    282,102Total interest-bearing liabilities
    
    $
    765,014
    
    
    $
    553,907
    
    
    $
    1,318,921
    
    
    $
    248,215
    
    
    $
    1,567,136Percentage of total interest-bearing liabilities
    
    
    48.82
    %
    
    
    35.34
    %
    
    
    84.16
    %
    
    
    15.84
    %
    
    
    100.00
    %Cumulative percentage of total interest-
bearing liabilities
    
    
    48.82
    %
    
    
    84.16
    %
    
    
    84.16
    %
    
    
    100.00
    %
    
    
    100.00
    %Interest sensitivity gap
    
    $
    191,934
    
    
    $
    (459,783
    )
    
    $
    (267,849
    )
    
    $
    389,627
    
    
    $
    121,778Cumulative interest sensitivity gap
    
    $
    191,934
    
    
    $
    (267,849
    )
    
    $
    (267,849
    )
    
    $
    121,778
    
    
    $
    121,778Cumulative interest sensitivity gap as a
percentage of total interest-earning assets
    
    
    11.36
    %
    
    
    (15.86
    )%
    
    
    (15.86
    )%
    
    
    7.21
    %
    
    
    7.21
    %Cumulative ratio of interest-sensitive assets
to interest-sensitive liabilities
    
    
    125.09
    %
    
    
    79.69
    %
    
    
    79.69
    %
    
    
    107.77
    %
    
    
    107.77
    %
  CRITICAL ACCOUNTING POLICIES
  Page 34




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##### Table of Contents



Allowance for loan losses
  Goodwill and Other Intangible Assets.
  Stock Compensation Plans
 Page 35




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##### Table of Contents



OFF-BALANCE SHEET ARRANGEMENTS
  RECENT ACCOUNTING PRONOUNCEMENTS
  LENDING ACTIVITIES
 General
  Page 36




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##### Table of Contents



At December 31,2007
    
    
    2006Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in thousands)Commercial & industrial
    
    $
    263,283
    
    
    
    17.3
    %
    
    $
    137,658
    
    
    
    13.8
    %Real estate  construction
    
    
    604,335
    
    
    
    39.7
    %
    
    
    381,788
    
    
    
    38.4
    %Real estate  commercial mortgage
    
    
    321,806
    
    
    
    21.1
    %
    
    
    229,752
    
    
    
    23.1
    %Real estate  1-4 family mortgage
    
    
    193,549
    
    
    
    12.7
    %
    
    
    128,920
    
    
    
    13.0
    %Consumer
    
    
    22,133
    
    
    
    1.4
    %
    
    
    15,347
    
    
    
    1.5
    %Mortgage loans held for sale
    
    
    5,624
    
    
    
    .4
    %
    
    
    15,576
    
    
    
    1.6
    %Home equity lines of credit
    
    
    113,191
    
    
    
    7.4
    %
    
    
    85,882
    
    
    
    8.6
    %Subtotal
    
    
    1,523,921
    
    
    
    100.0
    %
    
    
    994,923
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (15,339
    )
    
    
    
    
    
    
    (9,405
    )Unamortized net deferred (fees) costs
    
    
    (1,520
    )
    
    
    
    
    
    
    (331
    )Net loans
    
    $
    1,507,062
    
    
    
    
    
    
    $
    985,187
 At December 31,2005
    
    
    2004Percent
    
    
    
    
    
    
    PercentAmount
    
    
    of Total
    
    
    Amount
    
    
    of Total(Dollars in thousands)Commercial & industrial
    
    $
    75,935
    
    
    
    11.4
    %
    
    $
    69,075
    
    
    
    18.0
    %Real estate  construction
    
    
    256,720
    
    
    
    38.4
    %
    
    
    131,431
    
    
    
    34.4
    %Real estate  commercial mortgage
    
    
    155,396
    
    
    
    23.3
    %
    
    
    90,197
    
    
    
    23.6
    %Real estate  1-4 family mortgage
    
    
    97,215
    
    
    
    14.6
    %
    
    
    51,768
    
    
    
    13.5
    %Consumer
    
    
    12,962
    
    
    
    1.9
    %
    
    
    10,641
    
    
    
    2.8
    %Home equity lines of credit
    
    
    69,246
    
    
    
    10.4
    %
    
    
    29,350
    
    
    
    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 31,2003PercentAmount
    
    
    of Total(Dollars in thousands)Commercial
    
    $
    52,554
    
    
    
    22.7
    %Real estate  construction
    
    
    55,970
    
    
    
    24.2
    %Real estate  commercial mortgage
    
    
    68,094
    
    
    
    29.3
    %Real estate  1-4 family mortgage
    
    
    32,191
    
    
    
    13.9
    %Consumer
    
    
    10,458
    
    
    
    4.5
    %Home equity lines of credit
    
    
    12,615
    
    
    
    5.4
    %Subtotal
    
    
    231,882
    
    
    
    100.0
    %Less: Allowance for loan losses
    
    
    (2,759
    )Unamortized net deferred (fees) costs
    
    
    (142
    )Net loans
    
    $
    228,981
 Page 37




---



##### Table of Contents



Within 1 Year
    
    
    1-5 Years
    
    
    After 5 Years
    
    
    Total(Dollars in thousands)Real estate  construction
    
    $
    498,226
    
    
    $
    79,947
    
    
    $
    26,163
    
    
    $
    604,336Commercial and industrial
    
    
    173,267
    
    
    
    77,902
    
    
    
    12,116
    
    
    
    263,285Total
    
    $
    671,493
    
    
    $
    157,849
    
    
    $
    38,279
    
    
    $
    867,621Fixed rate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    187,794Variable rate loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,334$
    196,128
 Commercial & Industrial Loans.
  Real Estate Loans.
    Page 38




---



##### Table of Contents



Consumer Loans and Home Equity Lines of Credits.
 Loan Approvals.
 Commitments and Contingent Liabilities
  Asset Quality
   Page 39




---



##### Table of Contents



Nonperforming Assets
  At December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Nonaccrual loans
    
    $
    3,407
    
    
    $
    3,269
    
    
    $
    204
    
    
    $
    490
    
    
    $
    1,210Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming loans
    
    
    3,407
    
    
    
    3,269
    
    
    
    204
    
    
    
    490
    
    
    
    1,210Real estate owned
    
    
    482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total nonperforming assets
    
    $
    3,889
    
    
    $
    3,269
    
    
    $
    204
    
    
    $
    490
    
    
    $
    1,210Accruing loans past due 90 days or more
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Allowance for loan losses
    
    
    15,339
    
    
    
    9,405
    
    
    
    6,283
    
    
    
    4,163
    
    
    
    2,759Nonperforming loans to period end loans
    
    
    .22
    %
    
    
    0.33
    %
    
    
    0.03
    %
    
    
    0.13
    %
    
    
    0.52
    %Allowance for loan losses to
period end loans
    
    
    1.01
    %
    
    
    0.95
    %
    
    
    0.94
    %
    
    
    1.09
    %
    
    
    1.19
    %Allowance for loan losses to
nonperforming loans
    
    
    450.22
    %
    
    
    287.70
    %
    
    
    3,079.90
    %
    
    
    849.59
    %
    
    
    228.02
    %Nonperforming assets to total assets
    
    
    .21
    %
    
    
    0.27
    %
    
    
    0.02
    %
    
    
    0.09
    %
    
    
    0.38
    %
  Analysis of Allowance for Loan Losses
  Page 40




---



##### Table of Contents



Page 41




---



##### Table of Contents



At December 31,2007
    
    
    2006% of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans (1)
    
    
    Amount
    
    
    Loans (1)(Dollars in thousands)Balance applicable to:Commercial & industrial
    
    $
    3,105
    
    
    
    17.28
    %
    
    $
    1,852
    
    
    
    11.37
    %Real estate  construction
    
    
    5,886
    
    
    
    39.66
    %
    
    
    3,377
    
    
    
    38.46
    %Real estate  commercial mortgage
    
    
    3,102
    
    
    
    21.12
    %
    
    
    2,083
    
    
    
    23.28
    %Real estate  1-4 family mortgage
    
    
    1,550
    
    
    
    13.06
    %
    
    
    1,087
    
    
    
    14.56
    %Consumer
    
    
    301
    
    
    
    1.45
    %
    
    
    192
    
    
    
    1.95
    %Home equity lines of credit
    
    
    1,395
    
    
    
    7.43
    %
    
    
    814
    
    
    
    10.38
    %Total
    
    $
    15,339
    
    
    
    100.0
    %
    
    $
    9,405
    
    
    
    100.0
    %
 At December 31,2005
    
    
    2004% of Total
    
    
    
    
    
    
    % of TotalAmount
    
    
    Loans (1)
    
    
    Amount
    
    
    Loans (1)(Dollars in thousands)Balance applicable to:Commercial & industrial
    
    $
    833
    
    
    
    11.4
    %
    
    $
    667
    
    
    
    18.0
    %Real estate  construction
    
    
    2,464
    
    
    
    38.4
    %
    
    
    1,577
    
    
    
    34.4
    %Real estate  mortgage
    
    
    2,277
    
    
    
    37.9
    %
    
    
    1,477
    
    
    
    37.1
    %Consumer
    
    
    169
    
    
    
    1.9
    %
    
    
    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% of TotalAmount
    
    
    Loans (1)(Dollars in thousands)Balance applicable to:Commercial
    
    $
    683
    
    
    
    22.7
    %Real estate  construction
    
    
    672
    
    
    
    24.2
    %Real estate  mortgage
    
    
    1,102
    
    
    
    43.2
    %Consumer
    
    
    125
    
    
    
    4.5
    %Home equity lines of credit
    
    
    139
    
    
    
    5.4
    %Unallocated
    
    
    38
    
    
    
    Total
    
    $
    2,759
    
    
    
    100.0
    %
 
 (1)
    
    Represents total of all outstanding loans in each category as a percent of total
loans outstanding. Page 42




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##### Table of Contents



At or for the Years Ended December 31,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    9,405
    
    
    $
    6,283
    
    
    $
    4,163
    
    
    $
    2,759
    
    
    $
    1,721Charge-offs:Commercial
    
    
    (435
    )
    
    
    (42
    )
    
    
    
    
    
    
    
    
    
    
    (195
    )Real estate
    
    
    (404
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    (316
    )
    
    
    (263
    )
    
    
    (87
    )
    
    
    (174
    )
    
    
    (20
    )Home equity lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (1,155
    )
    
    
    (305
    )
    
    
    (87
    )
    
    
    (174
    )
    
    
    (215
    )Recoveries:Commercial
    
    
    36
    
    
    
    3
    
    
    
    
    
    
    
    125
    
    
    
    1Real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    31
    
    
    
    24
    
    
    
    7
    
    
    
    28
    
    
    
    Home equity lines of credit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    67
    
    
    
    27
    
    
    
    7
    
    
    
    153
    
    
    
    1Net charge-offs
    
    
    (1,088
    )
    
    
    (278
    )
    
    
    (80
    )
    
    
    (21
    )
    
    
    (214
    )Allowance acquired from The Bank
Of Richmond acquisition
    
    
    2,122
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Allowance for loan losses on
Loans purchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Provision for loan losses charged
to operations
    
    
    4,900
    
    
    
    3,400
    
    
    
    2,200
    
    
    
    1,425
    
    
    
    1,200Balance at end of period
    
    $
    15,339
    
    
    $
    9,405
    
    
    $
    6,283
    
    
    $
    4,163
    
    
    $
    2,759Ratio of net loan charge-offs to
average loans outstanding
    
    
    0.09
    %
    
    
    0.04
    %
    
    
    0.02
    %
    
    
    0.01
    %
    
    
    0.11
    %
 Page 43




---



##### Table of Contents



INVESTMENT ACTIVITIES
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)December 31, 2007U.S. government agencies
    
    $
    4,395
    
    
    $
    68
    
    
    $
    
    
    
    $
    4,463Corporate debt/equity securities
    
    
    38,568
    
    
    
    40
    
    
    
    2,302
    
    
    
    36,306Mortgage-backed securities
    
    
    72,889
    
    
    
    650
    
    
    
    3
    
    
    
    73,536Municipal securities
    
    
    12,564
    
    
    
    31
    
    
    
    150
    
    
    
    12,445$
    128,416
    
    
    $
    789
    
    
    $
    2,455
    
    
    $
    126,750December 31, 2006U.S. government agencies
    
    $
    36,900
    
    
    $
    
    
    
    $
    922
    
    
    $
    35,978Corporate debt/equity securities
    
    
    8,415
    
    
    
    403
    
    
    
    10
    
    
    
    8,808Mortgage-backed securities
    
    
    42,748
    
    
    
    9
    
    
    
    616
    
    
    
    42,141Municipal securities
    
    
    6,612
    
    
    
    14
    
    
    
    78
    
    
    
    6,548$
    94,675
    
    
    $
    426
    
    
    $
    1,626
    
    
    $
    93,475December 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
    
    
    $
    123,773
 Page 44




---



##### Table of Contents



WeightedAmortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    YieldCorporate debt/equity securities:Due within one year
    
    $
    7,864
    
    
    $
    5,620
    
    
    
    6.53
    %Due after one but within five years
    
    
    2,560
    
    
    
    2,541
    
    
    
    6.42
    %Due after five but within ten years
    
    
    3,016
    
    
    
    3,017
    
    
    
    5.45
    %Due after ten years
    
    
    25,128
    
    
    
    25,128
    
    
    
    8.28
    %38,568
    
    
    
    36,306
    
    
    
    7.58
    %U.S. agency and mortgage-backed securities:Due after one but within five years
    
    
    997
    
    
    
    1,006
    
    
    
    5.26
    %Due after five but within ten years
    
    
    4,197
    
    
    
    4,267
    
    
    
    5.19
    %Due after ten years
    
    
    72,090
    
    
    
    72,726
    
    
    
    5.41
    %77,284
    
    
    
    77,999
    
    
    
    5.39
    %Municipal securities:Due within one year
    
    
    595
    
    
    
    593
    
    
    
    2.54
    %Due after one but within five years
    
    
    1,204
    
    
    
    1,196
    
    
    
    3.90
    %Due after five but within ten years
    
    
    1,875
    
    
    
    1,880
    
    
    
    4.43
    %Due after ten years
    
    
    8,890
    
    
    
    8,776
    
    
    
    4.32
    %12,564
    
    
    
    12,445
    
    
    
    4.21
    %Total securities available for sale:Due within one year
    
    
    8,459
    
    
    
    6,213
    
    
    
    6.24
    %Due after one but within five years
    
    
    4,761
    
    
    
    4,743
    
    
    
    5.56
    %Due after five but within ten years
    
    
    9,088
    
    
    
    9,164
    
    
    
    5.00
    %Due after ten years
    
    
    106,108
    
    
    
    106,630
    
    
    
    6.08
    %$
    128,416
    
    
    $
    126,750
    
    
    
    5.89
    %
  SOURCES OF FUNDS
 Deposit Activities
   At December 31,2007
    
    
    2006
    
    
    2005Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate(Dollars in thousands)Interest-bearing NOW, money
market and savings accounts
    
    $
    330,980
    
    
    
    3.47
    %
    
    $
    245,038
    
    
    
    3.23
    %
    
    $
    178,577
    
    
    
    2.00
    %Time deposits
    
    
    751,226
    
    
    
    5.07
    %
    
    
    450,786
    
    
    
    4.56
    %
    
    
    267,494
    
    
    
    3.41
    %Total interest-bearing deposits
    
    
    1,082,206
    
    
    
    4.58
    %
    
    
    695,824
    
    
    
    4.09
    %
    
    
    446,071
    
    
    
    2.85
    %Demand and other non-interest-bearing
deposits
    
    
    116,190
    
    
    
    
    
    
    
    93,346
    
    
    
    
    
    
    
    79,901Total average deposits
    
    $
    1,198,396
    
    
    
    4.14
    %
    
    $
    789,170
    
    
    
    3.61
    %
    
    $
    525,972
    
    
    
    2.41
    %
 Page 45




---



##### Table of Contents



At December 31, 2007(Dollars in thousands)Remaining maturity:Less than three months
    
    $
    80,263Over three months through six months
    
    
    122,529Over six months through one year
    
    
    49,443Over one year through three years
    
    
    15,024Over three years through five years
    
    
    4,015Total
    
    $
    271,274
 Borrowings
  Interest
    
    
    (Dollars in thousands)Maturity
    
    Rate
    
    
    2007
    
    
    2006May 4, 2012
    
    
    4.25
    %
    
    $
    15,000
    
    
    $
    March 17, 2010
    
    
    5.71
    %
    
    
    1,500
    
    
    
    1,500November 10, 2010
    
    
    5.43
    %
    
    
    5,000
    
    
    
    5,000July 31, 2017
    
    
    2.96
    %
    
    
    7,500
    
    
    
    August 7, 2017
    
    
    2.88
    %
    
    
    10,000
    
    
    
    April 21, 2008
    
    
    4.22
    %
    
    
    5,000
    
    
    
    5,000April 25, 2012
    
    
    4.85
    %
    
    
    
    
    
    
    10,000May 8, 2012
    
    
    4.23
    %
    
    
    10,000
    
    
    
    September 17, 2012
    
    
    3.78
    %
    
    
    10,000
    
    
    
    July 23, 2012
    
    
    4.85
    %
    
    
    
    
    
    
    10,000September 19, 2012
    
    
    3.80
    %
    
    
    25,000
    
    
    
    October 4, 2011
    
    
    4.35
    %
    
    
    
    
    
    
    20,000October 24, 2011
    
    
    4.35
    %
    
    
    
    
    
    
    5,000August 8, 2011
    
    
    4.56
    %
    
    
    
    
    
    
    35,000November 23, 2007
    
    
    5.50
    %
    
    
    
    
    
    
    14,500September 1, 2011
    
    
    4.49
    %
    
    
    
    
    
    
    10,000September 27, 2012
    
    
    3.72
    %
    
    
    20,000
    
    
    
    October 22, 2012
    
    
    3.65
    %
    
    
    25,000
    
    
    
    July 25, 2012
    
    
    4.53
    %
    
    
    15,000
    
    
    
    July 31, 2012
    
    
    4.17
    %
    
    
    7,500
    
    
    
    August 28, 2012
    
    
    3.99
    %
    
    
    10,000
    
    
    
    December 12, 2012
    
    
    2.95
    %
    
    
    7,500
    
    
    
    $
    174,000
    
    
    $
    116,000
    Page 46




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##### Table of Contents



Page 47




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##### Table of Contents



Interim Financial Information (Unaudited)
  Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2007Interest income
    
    $
    21,580
    
    
    $
    26,047
    
    
    $
    30,759
    
    
    $
    31,173Interest expense
    
    
    11,541
    
    
    
    14,338
    
    
    
    17,200
    
    
    
    17,395Net interest income
    
    
    10,039
    
    
    
    11,709
    
    
    
    13,559
    
    
    
    13,778Provision for loan losses
    
    
    1,200
    
    
    
    1,350
    
    
    
    750
    
    
    
    1,600Noninterest income
    
    
    4,649
    
    
    
    3,117
    
    
    
    6,118
    
    
    
    3,881Noninterest expense
    
    
    9,526
    
    
    
    10,417
    
    
    
    12,353
    
    
    
    12,645Income before income tax expense
    
    
    3,962
    
    
    
    3,059
    
    
    
    6,574
    
    
    
    3,414Income tax expense
    
    
    1,448
    
    
    
    1,040
    
    
    
    2,358
    
    
    
    1,144Net income
    
    $
    2,514
    
    
    $
    2,019
    
    
    $
    4,216
    
    
    $
    2,270Basic earnings per share
    
    $
    0.23
    
    
    $
    0.17
    
    
    $
    0.33
    
    
    $
    0.17Diluted earnings per share
    
    
    0.22
    
    
    
    0.17
    
    
    
    0.32
    
    
    
    0.172006Interest income
    
    $
    15,204
    
    
    $
    18,031
    
    
    $
    19,220
    
    
    $
    20,642Interest expense
    
    
    6,982
    
    
    
    8,719
    
    
    
    9,727
    
    
    
    10,671Net interest income
    
    
    8,222
    
    
    
    9,312
    
    
    
    9,493
    
    
    
    9,971Provision for loan losses
    
    
    1,200
    
    
    
    800
    
    
    
    600
    
    
    
    800Noninterest income
    
    
    1,013
    
    
    
    1,296
    
    
    
    4,416
    
    
    
    2,545Noninterest expense
    
    
    7,840
    
    
    
    8,559
    
    
    
    9,018
    
    
    
    9,557Income before income tax expense
    
    
    195
    
    
    
    1,249
    
    
    
    4,291
    
    
    
    2,159Income tax expense (benefit)
    
    
    (29
    )
    
    
    385
    
    
    
    1,513
    
    
    
    756Net income
    
    $
    224
    
    
    $
    864
    
    
    $
    2,778
    
    
    $
    1,403Basic earnings per share
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.26
    
    
    $
    0.13Diluted earnings per share
    
    
    0.02
    
    
    
    0.08
    
    
    
    0.25
    
    
    
    0.13
 Page 48




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##### Table of Contents



ITEM 8  FINANCIAL STATEMENTS
 GATEWAY FINANCIAL HOLDINGS, INC. & SUBSIDIARY
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
 Page No.Report of Independent Registered Public Accounting Firm
    
    
    50Consolidated Balance Sheets as of December 31, 2007 and 2006
    
    
    51Consolidated Statements of Operations
for the years ended December 31, 2007, 2006 and 2005
    
    
    52Consolidated Statements of Comprehensive Income
for the years ended December 31, 2007, 2006 and 2005
    
    
    53Consolidated Statements of Changes in Stockholders Equity
for the years ended December 31, 2007, 2006 and 2005
    
    
    54Consolidated Statements of Cash Flows
for the years ended December 31, 2007, 2006 and 2005
    
    
    55Notes to Consolidated Financial Statements
    
    
    57
 Page 49




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal Control 
Integrated Framework
 
 Greenville, North Carolina
March 10, 2008
 Page 50




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
 2007
    
    
    2006(In thousands, except share data)ASSETSCash and due from banks
    
    $
    19,569
    
    
    $
    22,077Interest-earning deposits in other banks
    
    
    1,092
    
    
    
    4,717Trading securities (Note C)
    
    
    23,011
    
    
    
    Investment securities available for sale, at fair value (Note C)
    
    
    126,750
    
    
    
    93,475Loans (Note D)
    
    
    1,522,401
    
    
    
    994,592Allowance for loan losses (Note D)
    
    
    (15,339
    )
    
    
    (9,405
    )NET LOANS
    
    
    1,507,062
    
    
    
    985,187Accrued interest receivable
    
    
    12,330
    
    
    
    8,742Stock in Federal Reserve Bank, at cost
    
    
    5,348
    
    
    
    3,609Stock in Federal Home Loan Bank of Atlanta, at cost
    
    
    10,312
    
    
    
    6,970Premises and equipment, net (Note E)
    
    
    73,614
    
    
    
    38,456Intangible assets, net (Note R)
    
    
    5,069
    
    
    
    4,163Goodwill (Notes O and R)
    
    
    46,006
    
    
    
    8,452Bank-owned life insurance
    
    
    26,105
    
    
    
    25,051Other assets
    
    
    11,917
    
    
    
    6,578TOTAL ASSETS
    
    $
    1,868,185
    
    
    $
    1,207,477LIABILITIES AND STOCKHOLDERS EQUITYDepositsDemand
    
    $
    123,885
    
    
    $
    108,007Savings
    
    
    16,685
    
    
    
    7,249Money market and NOW
    
    
    385,838
    
    
    
    261,409Time (Note F)
    
    
    882,511
    
    
    
    547,060TOTAL DEPOSITS
    
    
    1,408,919
    
    
    
    923,725Short term borrowings (Note G)
    
    
    33,000
    
    
    
    14,500Long term borrowings (Note G)  $14,865 at fair value at December 31, 2007
    
    
    249,102
    
    
    
    152,429Accrued expenses and other liabilities
    
    
    12,757
    
    
    
    7,183TOTAL LIABILITIES
    
    
    1,703,778
    
    
    
    1,097,837Commitments (Notes D and K)Stockholders Equity (Notes J and N)Non-cumulative, perpetual preferred stock, $1,000 liquidation value per share,
1,000,000 shares authorized, 23,266 issued and outstanding
at December 31, 2007 and none issued at December 31, 2006
    
    
    23,182
    
    
    
    Common stock, no par value, 30,000,000 shares authorized,
12,558,625 and 10,978,014 shares issued and outstanding at December 31, 2007 and 2006, respectively
    
    
    127,258
    
    
    
    101,669Retained earnings
    
    
    14,991
    
    
    
    8,708Accumulated other comprehensive loss
    
    
    (1,024
    )
    
    
    (737
    )TOTAL STOCKHOLDERS EQUITY
    
    
    164,407
    
    
    
    109,640TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    1,868,185
    
    
    $
    1,207,477
 See accompanying notes.
 Page 51




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2007, 2006 and 2005
 2007
    
    
    2006
    
    
    2005(Amounts in thousands, exceptper share data)INTEREST INCOMEInterest and fees on loans
    
    $
    102,041
    
    
    $
    67,517
    
    
    $
    36,358Trading account securities
    
    
    1,902
    
    
    
    
    
    
    
    Investment securities available for saleTaxable
    
    
    4,007
    
    
    
    4,632
    
    
    
    2,731Tax-exempt
    
    
    423
    
    
    
    238
    
    
    
    204Interest-earning bank deposits
    
    
    341
    
    
    
    140
    
    
    
    138Other interest and dividends
    
    
    845
    
    
    
    570
    
    
    
    248TOTAL INTEREST INCOME
    
    
    109,559
    
    
    
    73,097
    
    
    
    39,679INTEREST EXPENSEMoney market, NOW and savings deposits
    
    
    11,491
    
    
    
    7,918
    
    
    
    3,579Time deposits (Note F)
    
    
    38,103
    
    
    
    20,571
    
    
    
    9,115Short-term borrowings
    
    
    1,367
    
    
    
    2,429
    
    
    
    1,140Long-term borrowings
    
    
    9,513
    
    
    
    5,181
    
    
    
    2,542TOTAL INTEREST EXPENSE
    
    
    60,474
    
    
    
    36,099
    
    
    
    16,376NET INTEREST INCOME
    
    
    49,085
    
    
    
    36,998
    
    
    
    23,303PROVISION FOR LOAN LOSSES (Note D)
    
    
    4,900
    
    
    
    3,400
    
    
    
    2,200NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    44,185
    
    
    
    33,598
    
    
    
    21,103NON-INTEREST INCOMEService charges on deposit accounts
    
    
    3,938
    
    
    
    3,294
    
    
    
    2,308Mortgage operations
    
    
    3,029
    
    
    
    1,584
    
    
    
    836Insurance operations
    
    
    5,245
    
    
    
    2,883
    
    
    
    2,388Brokerage operations
    
    
    794
    
    
    
    744
    
    
    
    656Gain on sale of securities
    
    
    163
    
    
    
    842
    
    
    
    282Gain (Loss) on disposition of premises & equipment
    
    
    
    
    
    
    (292
    )
    
    
    6Gain (loss) and net cash settlement on
economic hedge (Note S)
    
    
    584
    
    
    
    (1,918
    )
    
    
    Gain from trading securities
    
    
    355
    
    
    
    
    
    
    
    Income from bank-owned life insurance
    
    
    1,054
    
    
    
    864
    
    
    
    679Other service charges and fees
    
    
    1,408
    
    
    
    1,019
    
    
    
    623Other
    
    
    1,195
    
    
    
    250
    
    
    
    289TOTAL NON-INTEREST INCOME
    
    
    17,765
    
    
    
    9,270
    
    
    
    8,067NON-INTEREST EXPENSEPersonnel costs
    
    
    24,978
    
    
    
    17,287
    
    
    
    11,583Occupancy and equipment
    
    
    8,254
    
    
    
    6,865
    
    
    
    4,592Data processing fees
    
    
    1,990
    
    
    
    1,652
    
    
    
    941Other (Note I)
    
    
    9,719
    
    
    
    9,170
    
    
    
    6,150TOTAL NON-INTEREST EXPENSE
    
    
    44,941
    
    
    
    34,974
    
    
    
    23,266INCOME BEFORE INCOME TAXES
    
    
    17,009
    
    
    
    7,894
    
    
    
    5,904INCOME TAXES (Note H)
    
    
    5,990
    
    
    
    2,625
    
    
    
    1,965NET INCOME
    
    $
    11,019
    
    
    $
    5,269
    
    
    $
    3,939NET INCOME PER COMMON SHAREBasic
    
    $
    0.91
    
    
    $
    0.49
    
    
    $
    0.48Diluted
    
    $
    0.89
    
    
    $
    0.47
    
    
    $
    0.46
 See accompanying notes.
 Page 52




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 2007, 2006 and 2005
 2007
    
    
    2006
    
    
    2005(Amounts in thousands)Net income
    
    $
    11,019
    
    
    $
    5,269
    
    
    $
    3,939Other comprehensive loss:Securities available for sale:Unrealized holding gains (losses) on available-for-sale
securities
    
    
    (1,863
    )
    
    
    351
    
    
    
    (67
    )Tax effect
    
    
    761
    
    
    
    (127
    )
    
    
    26Reclassification of gains recognized in net income
    
    
    (163
    )
    
    
    (842
    )
    
    
    (282
    )Tax effect
    
    
    61
    
    
    
    316
    
    
    
    109Total other comprehensive loss
    
    
    (1,204
    )
    
    
    (302
    )
    
    
    (214
    )Comprehensive income
    
    $
    9,815
    
    
    $
    4,967
    
    
    $
    3,725
 See accompanying notes.
 Page 53




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2007, 2006 and 2005
 Deferred
    
    
    AccumulatedCompensation
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Retained
    
    
    - Restricted
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Earnings
    
    
    Stock
    
    
    Income (Loss)
    
    
    Equity(Amounts in thousands, except share data)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
    )
    
    
    
    
    
    
    Unearned 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
    )
    
    
    98,744Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,269
    
    
    
    
    
    
    
    
    
    
    
    5,269Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (302
    )
    
    
    (302
    )Issuance of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    12,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock based compensation related to restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171Stock based compensation related to stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51Adjustment to deferred compensation for the adoption of SFAS No. 123(R)


    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    Issuance of shares pursuant to dividend reinvestment plan
    
    
    
    
    
    
    
    
    
    
    32,573
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    515Shares issued for subsidiary acquisitions
    
    
    
    
    
    
    
    
    
    
    143,966
    
    
    
    2,088
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,088Shares issued from options exercise
    
    
    
    
    
    
    
    
    
    
    13,763
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Shares issued upon exercise of overallotment option
    
    
    
    
    
    
    
    
    
    
    300,000
    
    
    
    4,383
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,383Shares issued in 11 for 10 stock split effected as a 10% stock dividend
    
    
    
    
    
    
    
    
    
    
    981,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Tax benefits from the exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    293Cash dividends ($0.16 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,674
    )
    
    
    
    
    
    
    
    
    
    
    (1,674
    )Balance at December 31, 2006
    
    
    
    
    
    
    
    
    
    
    10,978,014
    
    
    
    101,669
    
    
    
    8,708
    
    
    
    
    
    
    
    (737
    )
    
    
    109,640Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,019
    
    
    
    
    
    
    
    
    
    
    
    11,019Cumulative effect adjustment resulting from the adoption of
SFAS No. 159, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,197
    )
    
    
    
    
    
    
    917
    
    
    
    (280
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,204
    )
    
    
    (1,204
    )Issuance of restricted stock awards
    
    
    
    
    
    
    
    
    
    
    61,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of non-cumulative, perpetual preferred stock
    
    
    23,266
    
    
    
    23,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,182Stock based compensation related to restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278Stock based compensation related to stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102Issuance of shares pursuant to dividend reinvestment plan
    
    
    
    
    
    
    
    
    
    
    30,122
    
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    433Acquisition of The Bank of Richmond:Common stock issued
    
    
    
    
    
    
    
    
    
    
    1,845,631
    
    
    
    26,168
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,168Fair value of stock options assumed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,624
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,624Shares issued for subsidiary acquisitions
    
    
    
    
    
    
    
    
    
    
    29,502
    
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425Shares issued from options exercise
    
    
    
    
    
    
    
    
    
    
    14,493
    
    
    
    116
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116Tax benefits from the exercise of options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43Shares repurchased
    
    
    
    
    
    
    
    
    
    
    (400,637
    )
    
    
    (5,600
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,600
    )Cash dividends on common stock ($0.29 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,461
    )
    
    
    
    
    
    
    
    
    
    
    (3,461
    )Cash dividends on non-cumulative, perpetual preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78
    )
    
    
    
    
    
    
    
    
    
    
    (78
    )Balance at December 31, 2007
    
    
    23,266
    
    
    $
    23,182
    
    
    
    12,558,625
    
    
    $
    127,258
    
    
    $
    14,991
    
    
    $
    
    
    
    $
    (1,024
    )
    
    $
    164,407
 See accompanying notes.
 Page 54




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2007, 2006 and 2005
 2007
    
    
    2006
    
    
    2005(Amounts in thousands)CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    11,019
    
    
    $
    5,269
    
    
    $
    3,939Adjustments to reconcile net income to net
cash provided (used) by operating activities:Amortization of intangibles
    
    
    558
    
    
    
    361
    
    
    
    379Depreciation and amortization
    
    
    2,834
    
    
    
    2,444
    
    
    
    1,761(Gain) loss on market value of economic hedge
    
    
    (1,225
    )
    
    
    1,225
    
    
    
    Deferred income taxes
    
    
    (270
    )
    
    
    (1,319
    )
    
    
    (185
    )Realized gain on available-for-sale securities
    
    
    (163
    )
    
    
    (842
    )
    
    
    (282
    )Unrealized and realized gain on trading securities
    
    
    (355
    )
    
    
    
    
    
    
    Income from bank-owned life insurance
    
    
    (1,054
    )
    
    
    (864
    )
    
    
    (680
    )Realized gain on sale of loans
    
    
    (48
    )
    
    
    (56
    )
    
    
    (127
    )Proceeds from sale of loans
    
    
    586
    
    
    
    799
    
    
    
    2,536Unrealized gain on fair value on junior subordinated debt
    
    
    (960
    )
    
    
    
    
    
    
    Proceeds from sale of mortgage loans held for sale
    
    
    183,473
    
    
    
    58,593
    
    
    
    Mortgage loan originations held for sale
    
    
    (173,521
    )
    
    
    (74,169
    )
    
    
    Realized (gain) loss on sale of premises and equipment
    
    
    
    
    
    
    292
    
    
    
    (6
    )Provision for loan losses
    
    
    4,900
    
    
    
    3,400
    
    
    
    2,200Stock based compensation
    
    
    380
    
    
    
    222
    
    
    
    Deferred compensation  restricted stock
    
    
    
    
    
    
    
    
    
    
    90Change in assets and liabilities:Increase in accrued interest receivable
    
    
    (2,714
    )
    
    
    (2,859
    )
    
    
    (3,186
    )Increase in other assets
    
    
    (4,230
    )
    
    
    (171
    )
    
    
    (1,360
    )Increase in accrued expenses and other liabilities
    
    
    5,233
    
    
    
    2,594
    
    
    
    1,526NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES
    
    
    24,443
    
    
    
    (5,081
    )
    
    
    6,605CASH FLOWS FROM INVESTING ACTIVITIESCash received (paid) from investment securities available for sale transactions:Purchases of available-for-sale securities
    
    
    (115,102
    )
    
    
    (7,621
    )
    
    
    (58,113
    )Maturities and calls of available-for-sale securities
    
    
    10,714
    
    
    
    15,055
    
    
    
    5,106Proceeds from sale of available-for-sale securities
    
    
    21,518
    
    
    
    23,133
    
    
    
    21,540Cash received (paid) from trading securities transactions:Purchases of trading securities
    
    
    (69,962
    )
    
    
    
    
    
    
    Maturities and calls of trading securities
    
    
    56,000
    
    
    
    
    
    
    
    Proceeds from sale of trading securities
    
    
    42,315
    
    
    
    
    
    
    
    Cash and cash equivalents acquired with The Bank of Richmond acquisition
    
    
    17,974
    
    
    
    
    
    
    
    Cash paid for The Bank of Richmond acquisition
    
    
    (26,710
    )
    
    
    
    
    
    
    Cash paid for subsidiary acquisition
    
    
    (445
    )
    
    
    
    
    
    
    Net increase in loans from originations and repayments
    
    
    (370,907
    )
    
    
    (313,385
    )
    
    
    (287,185
    )Proceeds from sale of bank premises and equipment
    
    
    
    
    
    
    6
    
    
    
    234Purchase of premises and equipment
    
    
    (29,195
    )
    
    
    (11,528
    )
    
    
    (12,408
    )Purchase of Federal Reserve Bank stock
    
    
    (1,739
    )
    
    
    (1,512
    )
    
    
    (1,375
    )Purchase of Federal Home Loan Bank stock
    
    
    (3,018
    )
    
    
    (762
    )
    
    
    (3,887
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (7,000
    )
    
    
    NET CASH USED BY INVESTING ACTIVITIES
    
    
    (468,557
    )
    
    
    (303,614
    )
    
    
    (336,088
    )CASH FLOWS FROM FINANCING ACTIVITIESIncrease in deposits
    
    
    307,622
    
    
    
    277,463
    
    
    
    240,003Net increase (decrease) in short-term borrowings
    
    
    18,450
    
    
    
    (47,500
    )
    
    
    21,339Net increase in long term borrowings
    
    
    71,500
    
    
    
    64,300
    
    
    
    49,400Proceeds from issuance of junior subordinated debentures
    
    
    25,774
    
    
    
    15,464
    
    
    
    Proceeds from exercise of stock options
    
    
    116
    
    
    
    102
    
    
    
    1,237Proceeds from issuance of common stock
    
    
    
    
    
    
    4,383
    
    
    
    29,866Proceeds from issuance of preferred stock
    
    
    23,182
    
    
    
    
    
    
    
    Proceeds from dividend reinvestment
    
    
    433
    
    
    
    515
    
    
    
    147Repurchase of common stock
    
    
    (5,600
    )
    
    
    
    
    
    
    Cash paid for dividends
    
    
    (3,539
    )
    
    
    (1,674
    )
    
    
    (631
    )Tax benefit from the exercise of stock options
    
    
    43
    
    
    
    293
    
    
    
    Cash paid for fractional shares
    
    
    
    
    
    
    
    
    
    
    (8
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    437,981
    
    
    
    313,346
    
    
    
    341,353NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (6,133
    )
    
    
    4,651
    
    
    
    11,870CASH AND CASH EQUIVALENTS, BEGINNING
    
    
    26,794
    
    
    
    22,143
    
    
    
    10,273CASH AND CASH EQUIVALENTS, ENDING
    
    $
    20,661
    
    
    $
    26,794
    
    
    $
    22,143
 See accompanying notes.
 Page 55




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##### Table of Contents



2007
    
    
    2006
    
    
    2005(Amounts in thousands)SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest paid
    
    $
    56,243
    
    
    $
    34,656
    
    
    $
    15,689Income taxes paid
    
    $
    7,931
    
    
    $
    3,723
    
    
    $
    748SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING ACTIVITIESTransfer from loans to real estate owned
    
    $
    482
    
    
    $
    
    
    
    $
    Investments securities transferred from available for sale to trading
    
    $
    51,012
    
    
    $
    
    
    
    $
    Unrealized holding losses on available-for-sale securities, net
    
    $
    (1,204
    )
    
    $
    (302
    )
    
    $
    (214
    )Business combinations:Fair value of assets acquired
    
    $
    236,560
    
    
    $
    2,740
    
    
    $
    Fair value of liabilities assumed
    
    $
    179,188
    
    
    $
    652
    
    
    $
    Fair value of common stock issued and stock options assumed
    
    $
    30,217
    
    
    $
    2,088
    
    
    $
    
 See accompanying notes.
 Page 56




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE A  ORGANIZATION AND OPERATIONS
    Consolidation of Variable Interest Entities
  NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Page 57




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GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Use of Estimates
  Cash and Cash Equivalents
  Investment Securities Held to Maturity
  Trading Securities
  Investment Securities Available for Sale
  Mortgage Loans Held for Sale
  Page 58




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Loans
  Allowance for Loan Losses
  Foreclosed Real Estate
  Premises and Equipment
  Page 59




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Federal Home Loan Bank and Federal Reserve Bank Stock
  Intangible Assets and Goodwill
   Income Taxes
   Page 60




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Comprehensive Income
  Mortgage Operations
  Stock Compensation Plans
    Per Share Results
  Page 61




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Per Share Results (Continued)
  2007
    
    2006
    
    2005Weighted average outstanding shares used for
basic EPS
    
    
    11,960,932
    
    
    
    10,811,980
    
    
    
    8,214,118Plus incremental shares from assumed exercise of:Stock options
    
    
    362,712
    
    
    
    293,166
    
    
    
    339,275Restricted stock
    
    
    23,226
    
    
    
    16,557
    
    
    
    2,619Weighted average outstanding shares
used for diluted EPS
    
    
    12,346,870
    
    
    
    11,121,703
    
    
    
    8,556,012
   Derivative financial instruments
   Fair value measurements
  Page 62




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
  Recent Accounting Pronouncements
   Page 63




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE B  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 Recent Accounting Pronouncements (Continued)
     Reclassifications
  Page 64




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE C  INVESTMENT SECURITIES
   December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available-for-sale:U. S. government securities
and obligations of U.S.
government agencies
    
    $
    4,395
    
    
    $
    68
    
    
    $
    
    
    
    $
    4,463Corporate debt/equity securities
    
    
    38,568
    
    
    
    40
    
    
    
    2,302
    
    
    
    36,306Mortgage-backed securities
    
    
    72,889
    
    
    
    650
    
    
    
    3
    
    
    
    73,536Municipal securities
    
    
    12,564
    
    
    
    31
    
    
    
    150
    
    
    
    12,445$
    128,416
    
    
    $
    789
    
    
    $
    2,455
    
    
    $
    126,750
 December 31, 2006Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities available-for-sale:U. S. government securities
and obligations of U.S.
government agencies
    
    $
    36,900
    
    
    $
    
    
    
    $
    922
    
    
    $
    35,978Corporate debt/equity securities
    
    
    8,415
    
    
    
    403
    
    
    
    10
    
    
    
    8,808Mortgage-backed securities
    
    
    42,748
    
    
    
    9
    
    
    
    616
    
    
    
    42,141Municipal securities
    
    
    6,612
    
    
    
    14
    
    
    
    78
    
    
    
    6,548$
    94,675
    
    
    $
    426
    
    
    $
    1,626
    
    
    $
    93,475
  Page 65




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE C  INVESTMENT SECURITIES (Continued)
 2007Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealizedvalue
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    losses(Dollars in thousands)Securities available for sale:Corporate debt/equity securities
    
    $
    7,137
    
    
    $
    2,244
    
    
    $
    961
    
    
    $
    58
    
    
    $
    8,098
    
    
    $
    2,302Mortgage-backed securities
    
    
    249
    
    
    
    1
    
    
    
    1,017
    
    
    
    2
    
    
    
    1,266
    
    
    
    3Municipal securities
    
    
    7,590
    
    
    
    130
    
    
    
    2,491
    
    
    
    20
    
    
    
    10,081
    
    
    
    150Total temporarily impaired
securities
    
    $
    14,976
    
    
    $
    2,375
    
    
    $
    4,469
    
    
    $
    80
    
    
    $
    19,445
    
    
    $
    2,455
 2006Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealizedvalue
    
    
    losses
    
    
    value
    
    
    losses
    
    
    value
    
    
    losses(Dollars in thousands)Securities available for sale:U.S. government securities
and obligations of U.S.
government agencies
    
    $
    
    
    
    $
    
    
    
    $
    35,978
    
    
    $
    922
    
    
    $
    35,978
    
    
    $
    922Corporate
    
    
    
    
    
    
    
    
    
    
    1,542
    
    
    
    10
    
    
    
    1,542
    
    
    
    10Mortgage-backed securities
    
    
    21,749
    
    
    
    302
    
    
    
    7,989
    
    
    
    314
    
    
    
    29,738
    
    
    
    616Municipal securities
    
    
    1,313
    
    
    
    12
    
    
    
    2,924
    
    
    
    66
    
    
    
    4,237
    
    
    
    78Total temporarily impaired
securities
    
    $
    23,062
    
    
    $
    314
    
    
    $
    48,433
    
    
    $
    1,312
    
    
    $
    71,495
    
    
    $
    1,626
   Amortized
    
    
    FairCost
    
    
    Value(Dollars in thousands)Due within one year
    
    $
    8,459
    
    
    $
    6,213Due after one year through five years
    
    
    4,761
    
    
    
    4,743Due after five years through ten years
    
    
    9,088
    
    
    
    9,164Due after ten years
    
    
    106,108
    
    
    
    106,630$
    128,416
    
    
    $
    126,750
 Page 66




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE C  INVESTMENT SECURITIES (Continued)
   NOTE D  LOANS
  December 31,2007
    
    
    2006(Dollars in thousands)Commercial and industrial
    
    $
    263,283
    
    
    $
    137,658Real estate  construction, acquisition and development
    
    
    604,335
    
    
    
    381,788Real estate  commercial mortgage
    
    
    321,806
    
    
    
    229,752Mortgage loans held for sale
    
    
    5,624
    
    
    
    15,576Real estate  1- 4 family mortgage
    
    
    193,549
    
    
    
    128,920Consumer
    
    
    22,133
    
    
    
    15,347Home equity lines of credit
    
    
    113,191
    
    
    
    85,882Subtotal
    
    
    1,523,921
    
    
    
    994,923Less: Allowance for loan losses
    
    
    (15,339
    )
    
    
    (9,405
    )Unamortized net deferred fees
    
    
    (1,520
    )
    
    
    (331
    )Net loans
    
    $
    1,507,062
    
    
    $
    985,187
   Page 67




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE D  LOANS (Continued)
  2007Balance at beginning of year
    
    $
    50,374Additions
    
    
    54,028Loan repayments
    
    
    (38,061
    )Balance at end of year
    
    $
    66,341
   2007
    
    
    2006
    
    
    2005(Dollars in thousands)Balance at beginning of year
    
    $
    9,405
    
    
    $
    6,283
    
    
    $
    4,163Provision charged to operations
    
    
    4,900
    
    
    
    3,400
    
    
    
    2,200Allowance acquired from The Bank
of Richmond acquisition
    
    
    2,122
    
    
    
    
    
    
    
    Charge-offs
    
    
    (1,155
    )
    
    
    (305
    )
    
    
    (87
    )Recoveries
    
    
    67
    
    
    
    27
    
    
    
    7Net charge-offs
    
    
    (1,088
    )
    
    
    (278
    )
    
    
    (80
    )Balance at end of year
    
    $
    15,339
    
    
    $
    9,405
    
    
    $
    6,283
 NOTE E  PREMISES AND EQUIPMENT
  2007
    
    
    2006(Dollars in thousands)Land
    
    $
    8,374
    
    
    $
    4,799Furniture and equipment
    
    
    12,308
    
    
    
    9,692Vehicles
    
    
    1,039
    
    
    
    763Buildings and improvements
    
    
    49,610
    
    
    
    25,942Construction in progress
    
    
    10,800
    
    
    
    3,135Accumulated depreciation
    
    
    (8,517
    )
    
    
    (5,875
    )Total
    
    $
    73,614
    
    
    $
    38,456
   Page 68




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE E  PREMISES AND EQUIPMENT (Continued)
 2008
    
    $
    1,5742009
    
    
    1,4302010
    
    
    1,3072011
    
    
    1,2272012
    
    
    1,122Thereafter
    
    
    12,350$
    19,010
    NOTE F  DEPOSITS
   $100,000
    
    
    Underand Over
    
    
    $100,000
    
    
    Total2008
    
    $
    252,235
    
    
    $
    571,061
    
    
    $
    823,2962009
    
    
    4,035
    
    
    
    16,593
    
    
    
    20,6282010
    
    
    9,100
    
    
    
    13,098
    
    
    
    22,1982011
    
    
    1,889
    
    
    
    3,659
    
    
    
    5,5482012
    
    
    4,015
    
    
    
    6,805
    
    
    
    10,8202013
    
    
    
    
    
    
    21
    
    
    
    21Total
    
    $
    271,274
    
    
    $
    611,237
    
    
    $
    882,511
 Page 69




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE G  BORROWINGS
  December 31,2007
    
    
    2006(Dollars in thousands)Federal funds purchased
    
    $
    28,000
    
    
    $
    Federal Home Loan Bank
    
    
    5,000
    
    
    
    14,500Total short-term borrowings
    
    $
    33,000
    
    
    $
    14,500Federal Home Loan Bank
    
    $
    169,000
    
    
    $
    101,500Line of credit with a bank
    
    
    4,000
    
    
    
    Reverse repurchase agreements
    
    
    20,000
    
    
    
    20,000Junior Subordinated Debentures
    
    
    56,102
    
    
    
    30,929Total long-term borrowings
    
    $
    249,102
    
    
    $
    152,429
  InterestMaturity
    
    Rate
    
    
    2007
    
    
    2006(Dollars in thousands)May 4, 2012
    
    
    4.25
    %
    
    $
    15,000
    
    
    $
    March 17, 2010
    
    
    5.71
    %
    
    
    1,500
    
    
    
    1,500November 10, 2010
    
    
    5.43
    %
    
    
    5,000
    
    
    
    5,000July 31, 2017
    
    
    2.96
    %
    
    
    7,500
    
    
    
    August 7, 2017
    
    
    2.88
    %
    
    
    10,000
    
    
    
    April 21, 2008
    
    
    4.22
    %
    
    
    5,000
    
    
    
    5,000April 25, 2012
    
    
    4.85
    %
    
    
    
    
    
    
    10,000May 8, 2012
    
    
    4.23
    %
    
    
    10,000
    
    
    
    September 17, 2012
    
    
    3.78
    %
    
    
    10,000
    
    
    
    July 23, 2012
    
    
    4.85
    %
    
    
    
    
    
    
    10,000September 19, 2012
    
    
    3.80
    %
    
    
    25,000
    
    
    
    October 4, 2011
    
    
    4.35
    %
    
    
    
    
    
    
    20,000October 24, 2011
    
    
    4.35
    %
    
    
    
    
    
    
    5,000August 8, 2011
    
    
    4.56
    %
    
    
    
    
    
    
    35,000November 23, 2007
    
    
    5.50
    %
    
    
    
    
    
    
    14,500September 1, 2011
    
    
    4.49
    %
    
    
    
    
    
    
    10,000September 27, 2012
    
    
    3.72
    %
    
    
    20,000
    
    
    
    October 22, 2012
    
    
    3.65
    %
    
    
    25,000
    
    
    
    July 25, 2012
    
    
    4.53
    %
    
    
    15,000
    
    
    
    July 31, 2012
    
    
    4.17
    %
    
    
    7,500
    
    
    
    August 28, 2012
    
    
    3.99
    %
    
    
    10,000
    
    
    
    December 12, 2012
    
    
    2.95
    %
    
    
    7,500
    
    
    
    $
    174,000
    
    
    $
    116,000
  Page 70




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE G  BORROWINGS (Continued)
       Page 71




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE G  BORROWINGS (Continued)
     NOTE H  INCOME TAXES
  2007
    
    
    2006
    
    
    2005(In thousands)Current tax provision:Federal
    
    $
    5,302
    
    
    $
    3,373
    
    
    $
    1,841State
    
    
    958
    
    
    
    571
    
    
    
    3096,260
    
    
    
    3,944
    
    
    
    2,150Deferred tax provision:Federal
    
    
    (233
    )
    
    
    (1,130
    )
    
    
    (181
    )State
    
    
    (37
    )
    
    
    (189
    )
    
    
    (4
    )(270
    )
    
    
    (1,319
    )
    
    
    (185
    )Net provision for income taxes
    
    $
    5,990
    
    
    $
    2,625
    
    
    $
    1,965
 Page 72




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE H  INCOME TAXES (Continued)
  2007
    
    
    2006
    
    
    2005(In thousands)Tax computed at the statutory federal rate
    
    $
    5,953
    
    
    $
    2,684
    
    
    $
    2,007Increase (decrease) resulting from:State income taxes, net of federal benefit
    
    
    599
    
    
    
    253
    
    
    
    184Non-taxable interest income
    
    
    (123
    )
    
    
    (65
    )
    
    
    (59
    )Non-taxable income from bank owned life insurance
    
    
    (369
    )
    
    
    (294
    )
    
    
    (231
    )Other permanent differences
    
    
    (70
    )
    
    
    47
    
    
    
    64Provision for income taxes
    
    $
    5,990
    
    
    $
    2,625
    
    
    $
    1,965
  2007
    
    
    2006(In thousands)Deferred tax assets relating to:Allowance for loan losses
    
    $
    5,816
    
    
    $
    3,464Equity investment basis difference
    
    
    
    
    
    
    6Unrealized loss on economic hedge
    
    
    
    
    
    
    460Unrealized loss on securities available for sale
    
    
    649
    
    
    
    462Deferred and stock based compensation
    
    
    529
    
    
    
    Fair value adjustment to net assets acquired in business combination
    
    
    275
    
    
    
    Other
    
    
    256
    
    
    
    187Total deferred tax assets
    
    
    7,525
    
    
    
    4,579Deferred tax liabilities relating to:Premises and equipment
    
    
    (743
    )
    
    
    (545
    )Deferred loan costs
    
    
    (1,017
    )
    
    
    (709
    )Intangible assets
    
    
    (1,697
    )
    
    
    (1,026
    )Unrealized fair value gains on trust preferred securities
    
    
    (230
    )
    
    
    Prepaid expenses
    
    
    (262
    )
    
    
    (248
    )Total deferred tax liabilities
    
    
    (3,949
    )
    
    
    (2,528
    )Net recorded deferred tax assets
    
    $
    3,576
    
    
    $
    2,051
   Page 73




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE I  OTHER NON-INTEREST EXPENSE
  2007
    
    
    2006
    
    
    2005(Dollars in thousands)Professional services
    
    $
    1,374
    
    
    $
    1,535
    
    
    $
    1,399Postage, printing and office supplies
    
    
    1,848
    
    
    
    1,504
    
    
    
    1,355Advertising and promotion
    
    
    770
    
    
    
    1,814
    
    
    
    541Amortization of intangibles
    
    
    558
    
    
    
    323
    
    
    
    380FDIC Assessment
    
    
    780
    
    
    
    92
    
    
    
    57Franchise Taxes
    
    
    895
    
    
    
    690
    
    
    
    183Other
    
    
    3,494
    
    
    
    3,212
    
    
    
    2,235Total
    
    $
    9,719
    
    
    $
    9,170
    
    
    $
    6,150
 NOTE J  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, 2007:Total Capital (to Risk-Weighted Assets)
    
    $
    180,479
    
    
    
    11.19
    %
    
    $
    129,033
    
    
    
    8.00
    %
    
    $
    161,291
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    165,139
    
    
    
    10.24
    %
    
    
    64,517
    
    
    
    4.00
    %
    
    
    96,775
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    165,139
    
    
    
    9.46
    %
    
    
    69,844
    
    
    
    4.00
    %
    
    
    87,305
    
    
    
    5.00
    %As of December 31, 2006:Total Capital (to Risk-Weighted Assets)
    
    $
    130,191
    
    
    
    12.28
    %
    
    $
    84,814
    
    
    
    8.00
    %
    
    $
    106,018
    
    
    
    10.00
    %Tier I Capital (to Risk-Weighted Assets)
    
    
    120,786
    
    
    
    11.39
    %
    
    
    42,407
    
    
    
    4.00
    %
    
    
    63,611
    
    
    
    6.00
    %Tier I Capital (to Average Assets)
    
    
    120,786
    
    
    
    10.62
    %
    
    
    45,929
    
    
    
    4.00
    %
    
    
    57,411
    
    
    
    5.00
    %
 Page 74




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE J  REGULATORY MATTERS (CONTINUED)
  NOTE K  OFF-BALANCE SHEET RISK
    Financial instruments whose contract
amounts represent credit risk:Commitments to extend credit
    
    $
    17,500Undisbursed lines of credit
    
    
    444,404Standby letters of credit
    
    
    19,411Commitments to originate mortgage loans,
Fixed and variable rate
    
    
    12,181
 NOTE L  FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
  Page 75




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GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE L  FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
   Balance Sheet
    
    
    
    
    
    
    Balance Sheet1/1/07 prior
    
    
    Net Gain/ (Loss)
    
    
    1/1/07 afterDescription
    
    to adoption
    
    
    upon adoption
    
    
    adoption of FVO(Dollars in Thousands)Trading securities
    
    $
    
    
    
    $
    
    
    
    $
    51,012Accumulated other comprehensive loss
    
    
    917
    
    
    
    (917
    )
    
    
    Junior subordinated debenture
    
    
    (15,465
    )
    
    
    (447
    )
    
    
    (15,912
    )Pretax cumulative effect of
adoption of the fair value option
    
    
    
    
    
    
    (1,364
    )
    
    
    Decrease in deferred tax asset
    
    
    
    
    
    
    167
    
    
    
    Cumulative effect of adoption
of the fair value option
(charge to retained earnings)
    
    
    
    
    
    $
    (1,197
    )
    Page 76




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE L  FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
    Changes in Fair Values for the12 Month Period Ended December 31, 2007Fair Value Measurements at
    
    
    for Items Measured at air Value Pursuant toDecember 31, 2007, Using
    
    
    Election of the Fair Value OptionTotalTotal Carrying
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Changes inAmount in The
    
    
    
    
    
    
    Quoted Prices
    
    
    Significant
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Fair ValueConsolidated
    
    
    Assets/Liabilities
    
    
    in Active
    
    
    Other
    
    
    Significant
    
    
    Trading
    
    
    Other
    
    
    
    
    
    
    Consolidated
    
    
    Included inBalance
    
    
    Measured at
    
    
    Markets for
    
    
    Observable
    
    
    Unobservable
    
    
    Gains
    
    
    Gains
    
    
    Interest
    
    
    Expense
    
    
    CurrentSheet
    
    
    Fair Value
    
    
    Identical Assets
    
    
    Inputs
    
    
    Inputs
    
    
    and
    
    
    and
    
    
    Income
    
    
    on Long-
    
    
    PeriodDescription
    
    12/31//07
    
    
    12/31/2007
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    Losses
    
    
    Losses
    
    
    on Loans
    
    
    term Debt
    
    
    EarningsTrading securities
    
    $
    23,011
    
    
    $
    23,011
    
    
    $
    
    
    
    $
    23,011
    
    
    $
    
    
    
    $
    355
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    355Available-
for-sale securities
    
    
    126,750
    
    
    
    126,750
    
    
    
    5,127
    
    
    
    121,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Junior
subordinated
debentures
    
    
    56,102
    
    
    
    14,865
    
    
    
    
    
    
    
    
    
    
    
    14,865
    
    
    
    
    
    
    
    960
    
    
    
    
    
    
    
    
    
    
    
    960Economic
hedge liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,225
    
    
    
    
    
    
    
    
    
    
    
    1,225
      Page 77




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE L  FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
 Cash and Due from Banks and Interest-Earning Deposits in Other Banks
  Investment Securities
  Loans
  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
  Page 78




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE L  FAIR VALUE MEASUREMENT AND DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
(Continued)
  2007
    
    
    2006Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair Value(In thousands)Financial assets:Cash and due from banks
    
    $
    19,569
    
    
    $
    19,569
    
    
    $
    22,077
    
    
    $
    22,077Interest-earning deposits in other banks
    
    
    1,092
    
    
    
    1,092
    
    
    
    4,717
    
    
    
    4,717Trading securities
    
    
    23,011
    
    
    
    23,011
    
    
    
    
    
    
    
    Investment securities available for sale
    
    
    126,750
    
    
    
    126,750
    
    
    
    93,475
    
    
    
    93,475Accrued interest receivable
    
    
    12,330
    
    
    
    12,330
    
    
    
    8,742
    
    
    
    8,742Federal Reserve Bank stock
    
    
    5,348
    
    
    
    5,348
    
    
    
    3,609
    
    
    
    3,609Federal Home Loan Bank stock
    
    
    10,312
    
    
    
    10,312
    
    
    
    6,970
    
    
    
    6,970Loans
    
    
    1,522,401
    
    
    
    1,533,000
    
    
    
    994,592
    
    
    
    989,650Bank owned life insurance
    
    
    26,105
    
    
    
    26,105
    
    
    
    25,051
    
    
    
    25,051Financial liabilities:Deposits
    
    
    1,408,919
    
    
    
    1,410,000
    
    
    
    923,725
    
    
    
    931,413Borrowings
    
    
    282,102
    
    
    
    280,500
    
    
    
    166,929
    
    
    
    167,846Accrued interest payable
    
    
    7,537
    
    
    
    7,537
    
    
    
    2,569
    
    
    
    2,569
 NOTE M  EMPLOYEE AND DIRECTOR BENEFIT PLANS
 401(k) Retirement Plan
  Stock Based Compensation
  Page 79




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE M  EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Stock Based Compensation (Continued)
     Outstanding Options
    
    
    Exercisable OptionsShares
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAvailable
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageShares
    
    
    for Future
    
    
    Number
    
    
    Exercise
    
    
    Number
    
    
    Exercisein Plans
    
    
    Grants
    
    
    Outstanding
    
    
    Price
    
    
    Outstanding
    
    
    PriceAt December 31, 2004
    
    
    1,380,973
    
    
    
    8,195
    
    
    
    1,372,778
    
    
    $
    9.31
    
    
    
    1,187,621
    
    
    $
    9.04Options authorized
    
    
    
    
    
    
    
    
    
    
    726,000
    
    
    
    726,000
    
    
    
    
    
    
    
    Options granted/vested
    
    
    
    
    
    
    (162,250
    )
    
    
    162,250
    
    
    
    16.05
    
    
    
    335,199
    
    
    
    16.02Options exercised
    
    
    (163,156
    )
    
    
    
    
    
    
    (163,156
    )
    
    
    7.50
    
    
    
    (163,156
    )
    
    
    7.50Options forfeited
    
    
    
    
    
    
    10,890
    
    
    
    (10,890
    )
    
    
    11.72
    
    
    
    (10,890
    )
    
    
    11.72At December 31, 2005
    
    
    1,943,817
    
    
    
    582,835
    
    
    
    1,360,982
    
    
    
    10.31
    
    
    
    1,348,774
    
    
    
    10.33Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    
    
    
    
    (166,500
    )
    
    
    166,500
    
    
    
    14.62
    
    
    
    9,031
    
    
    
    8.47Options exercised
    
    
    (13,897
    )
    
    
    
    
    
    
    (13,897
    )
    
    
    7.36
    
    
    
    (13,897
    )
    
    
    7.36Options forfeited
    
    
    
    
    
    
    3,888
    
    
    
    (3,888
    )
    
    
    9.39
    
    
    
    (3,888
    )
    
    
    9.39At December 31, 2006
    
    
    1,929,920
    
    
    
    420,223
    
    
    
    1,509,697
    
    
    
    10.82
    
    
    
    1,340,020
    
    
    
    10.35Options authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Options granted/vested
    
    
    
    
    
    
    (10,500
    )
    
    
    10,500
    
    
    
    14.06
    
    
    
    3,005
    
    
    
    14.06Options exercised
    
    
    (14,493
    )
    
    
    
    
    
    
    (14,493
    )
    
    
    7.72
    
    
    
    (14,493
    )
    
    
    7.72Options forfeited
    
    
    
    
    
    
    8,505
    
    
    
    (8,505
    )
    
    
    14.62
    
    
    
    (5
    )
    
    
    6.35Assumed in The Bank
Of Richmond acquisition
    
    
    601,237
    
    
    
    226,450
    
    
    
    374,787
    
    
    
    4.56
    
    
    
    374,787
    
    
    
    4.56At December 31, 2007
    
    
    2,516,664
    
    
    
    644,678
    
    
    
    1,871,986
    
    
    $
    9.59
    
    
    
    1,703,314
    
    
    $
    9.10
 Page 80




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE M  EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Stock Based Compensation (Continued)
     WeightedAverageGrant DateShares
    
    
    Fair ValueNon-vested outstanding at December 31, 2006
    
    
    13,750
    
    
    $
    15.26Granted
    
    
    62,500
    
    
    
    14.59Vested
    
    
    (13,750
    )
    
    
    15.26Forfeited
    
    
    (1,000
    )
    
    
    14.62Non-vested outstanding at December 31, 2007
    
    
    61,500
    
    
    $
    14.60
    Page 81




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE M  EMPLOYEE AND DIRECTOR BENEFIT PLANS (Continued)
 Stock Based Compensation (Continued)
 2005(Amounts in thousands,except per share data)Net income:As reported
    
    $
    3,939Deduct: Total stock-based employee compensation
expense determined under fair value method
for all awards, net of related tax effects
    
    
    1,748Pro forma
    
    $
    2,191Basic net income per share:As reported
    
    $
    0.48Pro forma
    
    
    0.27Diluted net income per share:As reported
    
    $
    0.46Pro forma
    
    
    0.26
  Employment Contracts
  Salary Continuation Agreements
   Page 82




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE N  ACQUISITIONS
 The Bank of Richmond Transaction
     Cash and cash equivalents
    
    $
    17,974Investment securities, available for sale
    
    
    2,998Loans, net
    
    
    165,879Premises and equipment, net
    
    
    8,749Goodwill
    
    
    36,699Core deposit intangible
    
    
    1,464Other assets
    
    
    1,927Deposits
    
    
    (177,572
    )Borrowings
    
    
    (50
    )Other liabilities
    
    
    (1,566
    )Stockholders Equity
    
    
    98Net assets acquired
    
    $
    56,600
  Page 83




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE N  ACQUISITIONS (Continued)
  2007
    
    
    2006
    
    
    2005(Dollars in thousands)Net interest income
    
    $
    51,739
    
    
    $
    42,951
    
    
    $
    27,781Non-interest income
    
    
    18,223
    
    
    
    9,872
    
    
    
    8,746Total revenue
    
    
    69,962
    
    
    
    52,823
    
    
    
    36,527Provision for loan losses
    
    
    5,416
    
    
    
    3,591
    
    
    
    2,502Acquisition related charges
    
    
    2,286
    
    
    
    
    
    
    
    Other non-interest expense
    
    
    47,356
    
    
    
    39,728
    
    
    
    27,468Income before taxes
    
    
    14,904
    
    
    
    9,504
    
    
    
    6,557Net income
    
    
    9,439
    
    
    
    6,368
    
    
    
    4,441Net income per common share:Basic
    
    $
    0.74
    
    
    $
    0.50
    
    
    $
    0.44Diluted
    
    $
    0.72
    
    
    $
    0.49
    
    
    $
    0.42
  Other Acquisitions
  (Dollars inThousands)Purchase price:Portion paid in cash
    
    $
    445Issuance of common stock
    
    
    425Total purchase price
    
    $
    870Assets acquired:Property and equipment
    
    $
    15Goodwill
    
    
    855Total assets acquired
    
    $
    870
  Page 84




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GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE N  ACQUISITIONS (Continued)
  (Dollars in Thousands)Purchase price:Issuance of common stock
    
    $
    588Total purchase price
    
    $
    588Assets acquired:Other intangibles
    
    $
    588Goodwill
    
    
    226Total assets acquired
    
    $
    814Liabilities Assumed:Deferred taxes
    
    $
    226Total liabilities assumed
    
    $
    226
  (Dollars in Thousands)Purchase price:Issuance of common stock
    
    $
    1,500Total purchase price
    
    $
    1,500Assets acquired:Property and equipment
    
    $
    36Accounts receivable
    
    
    75Goodwill
    
    
    770Other intangibles
    
    
    1,045Total assets acquired
    
    $
    1,926Liabilities Assumed:Accounts payable
    
    $
    34Deferred taxes
    
    
    392Total liabilities assumed
    
    $
    426
   Page 85




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE O  STOCKHOLDERS EQUITY
 Preferred Stock
    Common Stock
   Total Number
    
    
    Maximumof Shares
    
    
    Number ofPurchased as
    
    
    Shares ThatPart of Publicly
    
    
    May Yet BeTotal Number of
    
    
    Average Price
    
    
    Announced
    
    
    Purchased UnderPeriod
    
    Shares Purchased
    
    
    Paid Per Share
    
    
    Program
    
    
    the Program (1)April 1, 2007 to June 30, 2007
    
    
    92,564
    
    
    $
    14.71
    
    
    
    92,564
    
    
    
    407,436July 1, 2007 to September 30, 2007
    
    
    207,436
    
    
    
    14.47
    
    
    
    300,000
    
    
    
    200,000October 1, 2007 to December 31, 2007
    
    
    100,637
    
    
    
    12.33
    
    
    
    400,637
    
    
    
    99,363Total
    
    
    400,637
    
    
    $
    13.98
    
    
    
    400,637
    
    
    
    99,363
 Page 86




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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007, 2006 and 2005
 NOTE P  PARENT COMPANY FINANCIAL DATA
  Condensed Balance Sheets
December 31, 2007 and 2006
 2007
    
    
    2006Asset:Cash on deposit in subsidiary
    
    $
    4,357
    
    
    $
    1,679Investment in securities available for sale
    
    
    4,916
    
    
    
    7,266Investment in subsidiaries
    
    
    215,652
    
    
    
    131,653Other assets
    
    
    991
    
    
    
    192Total assets
    
    $
    225,916
    
    
    $
    140,790Liabilities:Long term borrowings
    
    $
    60,102
    
    
    $
    30,929Other liabilities
    
    
    1,407
    
    
    
    221Total liabilities
    
    
    61,509
    
    
    
    31,150Stockholders equity:Preferred stock
    
    
    23,182
    
    
    
    Common stock
    
    
    127,258
    
    
    
    101,669Retained earnings
    
    
    14,991
    
    
    
    8,708Accumulated other comprehensive loss
    
    
    (1,024
    )
    
    
    (737
    )Total stockholders equity
    
    
    164,407
    
    
    
    109,640Total liabilities and stockholders equity
    
    $
    225,916
    
    
    $
    140,790
 Condensed Statements of Operations
Years Ended December 31, 2007, 2006 and 2005
 2007
    
    
    2006
    
    
    2005Equity in income of subsidiary
    
    $
    13,453
    
    
    $
    6,499
    
    
    $
    4,716Interest and dividend income
    
    
    82
    
    
    
    34
    
    
    
    18Other Income
    
    
    960
    
    
    
    
    
    
    
    Gain on sale of securities
    
    
    
    
    
    
    653
    
    
    
    199Interest expense
    
    
    (3,474
    )
    
    
    (1,831
    )
    
    
    (939
    )Other expense
    
    
    (2
    )
    
    
    (86
    )
    
    
    (55
    )$
    11,019
    
    
    $
    5,269
    
    
    $
    3,939
 Page 87




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GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007, 2006 and 2005
 NOTE P  PARENT COMPANY FINANCIAL DATA (Continued)
 Condensed Statements of Cash Flows
Years Ended December 31, 2007, 2006 and 2005
 2007
    
    
    2006
    
    
    2005Operating activities:Net income
    
    $
    11,019
    
    
    $
    5,269
    
    
    $
    3,939Equity in income of subsidiary
    
    
    (13,453
    )
    
    
    (6,499
    )
    
    
    (4,716
    )Amortization of debt issuance costs
    
    
    
    
    
    
    55
    
    
    
    55Realized gain on sale of available-for-sale securities
    
    
    
    
    
    
    (653
    )
    
    
    (199
    )Realized gain on fair value on junior subordinated debt
    
    
    (960
    )
    
    
    
    
    
    
    Deferred and stock based compensation
    
    
    380
    
    
    
    222
    
    
    
    90(Increase) decrease in other assets
    
    
    (54
    )
    
    
    392
    
    
    
    (482
    )Increase in other liabilities
    
    
    1,341
    
    
    
    25
    
    
    
    6(1,727
    )
    
    
    (1,189
    )
    
    
    (1,307
    )Investing activities:Purchases of available-for-sale securities
    
    
    (244
    )
    
    
    (6,619
    )
    
    
    (5,102
    )Investment in subsidiaries
    
    
    (46,260
    )
    
    
    (23,464
    )
    
    
    (30,000
    )Proceeds from the sale of securities
    
    
    
    
    
    
    5,459
    
    
    
    766Upstream dividend received from the Bank
    
    
    6,500
    
    
    
    4,500
    
    
    
    (40,004
    )
    
    
    (20,124
    )
    
    
    (34,336
    )Financing activities:Proceeds from issuance of junior subordinated
debentures
    
    
    25,774
    
    
    
    15,464
    
    
    
    Proceeds from long term borrowings
    
    
    4,000
    
    
    
    
    
    
    
    Proceeds from issuance of preferred stock
    
    
    23,182
    
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    
    
    
    
    4,383
    
    
    
    29,855Proceeds from options exercise
    
    
    116
    
    
    
    102
    
    
    
    1,237Proceeds from dividend reinvestment
    
    
    433
    
    
    
    515
    
    
    
    147Common shares repurchased
    
    
    (5,600
    )
    
    
    
    
    
    
    Cash dividends paid
    
    
    (3,539
    )
    
    
    (1,674
    )
    
    
    (631
    )Tax benefit from exercise of stock options
    
    
    43
    
    
    
    293
    
    
    
    Cash paid for fractional shares
    
    
    
    
    
    
    
    
    
    
    (8
    )44,409
    
    
    
    19,083
    
    
    
    30,600Net increase (decrease) in cash
    
    
    2,678
    
    
    
    (2,230
    )
    
    
    (5,043
    )Cash, beginning of year
    
    
    1,679
    
    
    
    3,909
    
    
    
    8,952Cash, end of year
    
    $
    4,357
    
    
    $
    1,679
    
    
    $
    3,909
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##### Table of Contents



GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007, 2006 and 2005
 NOTE Q  BUSINESS SEGMENT REPORTING
  At or for the Year Ended December 31, 2007Consolidated
    
    
    Adjustments
    
    
    Banking
    
    
    Brokerage
    
    
    Insurance
    
    
    MortgageTotal interest income
    
    $
    109,559
    
    
    $
    
    
    
    $
    109,041
    
    
    $
    
    
    
    $
    18
    
    
    $
    500Total interest expense
    
    
    60,474
    
    
    
    (447
    )
    
    
    60,474
    
    
    
    
    
    
    
    
    
    
    
    447Net interest income
    
    
    49,085
    
    
    
    447
    
    
    
    48,567
    
    
    
    
    
    
    
    18
    
    
    
    53Provision for loan losses
    
    
    4,900
    
    
    
    
    
    
    
    4,900
    
    
    
    
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    44,185
    
    
    
    447
    
    
    
    43,667
    
    
    
    
    
    
    
    18
    
    
    
    53Non-interest income
    
    
    17,765
    
    
    
    (1,780
    )
    
    
    10,477
    
    
    
    794
    
    
    
    5,245
    
    
    
    3,029Non-interest expense
    
    
    44,941
    
    
    
    
    
    
    
    37,166
    
    
    
    558
    
    
    
    4,456
    
    
    
    2,761Income before income taxes
    
    
    17,009
    
    
    
    (1,333
    )
    
    
    16,978
    
    
    
    236
    
    
    
    807
    
    
    
    321Provision for income taxes
    
    
    5,990
    
    
    
    
    
    
    
    5,990
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    11,019
    
    
    $
    (1,333
    )
    
    $
    10,988
    
    
    $
    236
    
    
    $
    807
    
    
    $
    321Period end total assets
    
    $
    1,868,185
    
    
    $
    (15,665
    )
    
    $
    1,868,185
    
    
    $
    865
    
    
    $
    9,022
    
    
    $
    5,778
 At or for the Year Ended December 31, 2006Consolidated
    
    
    Adjustments
    
    
    Banking
    
    
    Brokerage
    
    
    Insurance
    
    
    MortgageTotal interest income
    
    $
    73,097
    
    
    $
    
    
    
    $
    72,940
    
    
    $
    
    
    
    $
    21
    
    
    $
    136Total interest expense
    
    
    36,099
    
    
    
    (149
    )
    
    
    36,099
    
    
    
    
    
    
    
    
    
    
    
    149Net interest income
    
    
    36,998
    
    
    
    149
    
    
    
    36,841
    
    
    
    
    
    
    
    21
    
    
    
    (13
    )Provision for loan losses
    
    
    3,400
    
    
    
    
    
    
    
    3,400
    
    
    
    
    
    
    
    
    
    
    
    Net interest income after
provision for loan losses
    
    
    33,598
    
    
    
    149
    
    
    
    33,441
    
    
    
    
    
    
    
    21
    
    
    
    (13
    )Non-interest income
    
    
    9,280
    
    
    
    (676
    )
    
    
    5,135
    
    
    
    744
    
    
    
    2,883
    
    
    
    1,194Non-interest expense
    
    
    34,984
    
    
    
    
    
    
    
    30,682
    
    
    
    590
    
    
    
    2,205
    
    
    
    1,507Income before income taxes
    
    
    7,894
    
    
    
    (527
    )
    
    
    7,894
    
    
    
    154
    
    
    
    699
    
    
    
    (326
    )Provision for income taxes
    
    
    2,625
    
    
    
    
    
    
    
    2,625
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    5,269
    
    
    $
    (527
    )
    
    $
    5,269
    
    
    $
    154
    
    
    $
    699
    
    
    $
    (326
    )Period end total assets
    
    $
    1,207,477
    
    
    $
    (22,548
    )
    
    $
    1,207,477
    
    
    $
    645
    
    
    $
    6,132
    
    
    $
    15,771
 At or for the Year Ended December 31, 2005Consolidated
    
    
    Adjustments
    
    
    Banking
    
    
    Brokerage
    
    
    Insurance
    
    
    MortgageTotal interest income
    
    $
    39,679
    
    
    $
    
    
    
    $
    39,646
    
    
    $
    
    
    
    $
    33
    
    
    $
    Total 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
    
    
    
    
    
    
    
    33
    
    
    
    Non-interest income
    
    
    8,067
    
    
    
    (713
    )
    
    
    5,736
    
    
    
    656
    
    
    
    2,388
    
    
    
    Non-interest expense
    
    
    23,266
    
    
    
    
    
    
    
    20,902
    
    
    
    464
    
    
    
    1,900
    
    
    
    Income before income taxes
    
    
    5,904
    
    
    
    (713
    )
    
    
    5,904
    
    
    
    192
    
    
    
    521
    
    
    
    Provision for income taxes
    
    
    1,965
    
    
    
    
    
    
    
    1,965
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    3,939
    
    
    $
    (713
    )
    
    $
    3,939
    
    
    $
    192
    
    
    $
    521
    
    
    $
    Period end total assets
    
    $
    883,373
    
    
    $
    (3,837
    )
    
    $
    884,198
    
    
    $
    488
    
    
    $
    2,524
    
    
    $
 Page 89




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GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007, 2006 and 2005
 NOTE R  INTANGIBLE ASSETS AND GOODWILL
  2007
    
    
    2006
    
    
    2005(In thousands)Intangibles assets subject to future amortization:Core intangibles  gross
    
    $
    4,961
    
    
    $
    3,497
    
    
    $
    3,497Less accumulated amortization
    
    
    (1,462
    )
    
    
    (1,027
    )
    
    
    (707
    )Core intangible Net
    
    
    3,499
    
    
    
    2,470
    
    
    
    2,790Intangibles  book of business
    
    
    1,821
    
    
    
    1,821
    
    
    
    188Less accumulated amortization
    
    
    (251
    )
    
    
    (128
    )
    
    
    (87
    )1,570
    
    
    
    1,693
    
    
    
    101Intangibles  net
    
    $
    5,069
    
    
    $
    4,163
    
    
    $
    2,891Intangible assets not subject to future amortization:Goodwill  banking segment
    
    $
    43,153
    
    
    $
    6,454
    
    
    $
    6,454Goodwill  insurance segment
    
    
    2,853
    
    
    
    1,998
    
    
    
    1,002$
    46,006
    
    
    $
    8,452
    
    
    $
    7,456
  2008
    
    $
    6182009
    
    
    6182010
    
    
    5772011
    
    
    5602012
    
    
    553Thereafter
    
    
    2,143$
    5,069
 NOTE S  DERIVATIVES
  Page 90




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GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2007, 2006 and 2005
 NOTE S  DERIVATIVES (Continued)
     Page 91




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##### Table of Contents



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 92




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
ControlIntegrated Framework
    Internal ControlIntegrated Framework
 Page 93




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##### Table of Contents



Greenville, North Carolina  March 10, 2008
 Page 94




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##### Table of Contents



ITEM 9B  OTHER INFORMATION
  
 PART III
 
 ITEM 10  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11  EXECUTIVE COMPENSATION
  
 ITEM 12  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
   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
    
    
    1,721,954
    
    
    $
    9.89
    
    
    
    644,678Equity compensation plans not approved
by security holders
    
    
    150,032
    
    
    $
    6.14
    
    
    
    Total
    
    
    1,871,986
    
    
    $
    9.59
    
    
    
    644,678
   Page 95




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##### Table of Contents



ITEM 13  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
  
 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:
    
    Articles of Amendment to the Articles of IncorporationExhibit 3.3:
    
    Amended BylawsExhibit 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
    
    Amended Employment Agreement with D. Ben BerryExhibit 10.5
    
    Amended Employment Agreement with David R. TwiddyExhibit 10.6
    
    2005 Omnibus Stock Ownership And Long Term Incentive Plan (incorporated by
reference to Exhibit 10.6 to the Annual Report on Form 10K for the year ended
December 31, 2005)Exhibit 10.7
    
    Amended Employment Agreement with Theodore L. SalterExhibit 10.8
    
    Salary Continuation Agreement with D. Ben BerryExhibit 10.9
    
    Salary Continuation Agreement with David R. TwiddyExhibit 10.10
    
    Amended Change in Control Agreement with Matthew D. WhiteExhibit 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 96




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##### Table of Contents



SIGNATURES
  GATEWAY FINANCIAL HOLDINGS, INC.Date: March 14, 2008
    By:
    /s/ D. Ben BerryD. Ben BerryChairman, President and Chief Executive Officer  NAME
    
    TITLE
    
    DATE/s/ D. Ben Berry

D. Ben Berry
    
    Chairman,
President and CEO
    
    March 14, 2008/s/ Theodore L. Salter

     Theodore L. Salter
    
    Chief
Financial Officer
    
    March 14, 2008/s/ H. Spencer Barrow

     H. Spencer Barrow
    
    Director
    
    March 14, 2008/s/ William Brumsey III

     William Brumsey III
    
    Director
    
    March 14, 2008/s/ Jimmie Dixon, Jr.

     Jimmie Dixon, Jr.
    
    Director
    
    March 14, 2008/s/ James H. Ferebee, Jr.

     James H. Ferebee, Jr.
    
    Director
    
    March 14, 2008/s/ Charles R. Franklin, Jr.

     Charles R. Franklin, Jr.
    
    Director
    
    March 14, 2008/s/ Robert Y. Green, Jr.

     Robert Y. Green, Jr.
    
    Director
    
    March 14, 2008/s/ W. Taylor Johnson, Jr.

     W. Taylor Johnson, Jr.
    
    Director
    
    March 14, 2008/s/ Robert Willard Luther, III

     Robert Willard Luther, III
    
    Director
    
    March 14, 2008/s/ Frances Morrisette Norrell

     Frances Morrisette Norrell
    
    Director
    
    March 14, 2008/s/ W. C. Owens, Jr.

     W. C. Owens, Jr.
    
    Director
    
    March 14, 2008William A. Paulette

     William A. Paulette
    
    Director
    
    March 14, 2008/s/ Billy G. Roughton

     Billy G. Roughton
    
    Director
    
    March 14, 2008/s/ Ollin B. Sykes

     Ollin B. Sykes
    
    Director
    
    March 14, 2008/s/ Frank T. Williams

     Frank T. Williams
    
    Director
    
    March 14, 2008Jerry T. Womack

     Jerry T. Womack
    
    Director
    
    March 14, 2008
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