##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2007
 Commission file number 0-15956
 Bank of Granite Corporation
  Delaware
    
    56-1550545(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)P.O. Box 128, Granite Falls, N.C.
    
    28630(Address of principal executive offices)
    
    (Zip Code)
 (828) 496-2000
  Common Stock, $1.00 par value
   o þ
 o þ
 þ o
 o
  Large Accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
 SM




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##### 



20082007
    
    
    ProxyForm 10-K
    
    
    StatementPage
    
    
    PagePART IItem 1  Business
    
    
    3
    
    
    
    n/aItem 1A  Risk Factors
    
    
    8
    
    
    
    n/aItem 1B  Unresolved Staff Comments
    
    
    10
    
    
    
    n/aItem 2  Properties
    
    
    10
    
    
    
    n/aItem 3  Legal Proceedings
    
    
    10
    
    
    
    n/aItem 4  Submission of Matters to a Vote of Security Holders
    
    
    10
    
    
    
    n/aPART IIItem 5  Market for the Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    11
    
    
    
    n/aItem 6  Selected Financial Data
    
    
    13
    
    
    
    n/aItem 7  Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    14
    
    
    
    n/aItem 7A  Quantitative and Qualitative Disclosures
about Market Risk
    
    
    36
    
    
    
    n/aItem 8  Financial Statements and Supplementary Data
    
    
    37
    
    
    
    n/aItem 9  Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
    
    
    71
    
    
    
    n/aItem 9A  Controls and Procedures
    
    
    72
    
    
    
    n/aItem 9B  Other Information
    
    
    75
    
    
    
    n/aPART IIIItem 10  Directors, Executive Officers and Corporate Governance
    
    
    76
    
    
    
    *Item 11  Executive Compensation
    
    
    76
    
    
    
    *Item 12  Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
    
    
    76
    
    
    
    *Item 13  Certain Relationships and Related Transactions and Director Independence
    
    
    76
    
    
    
    *Item 14  Principal Accountant Fees and Services
    
    
    76
    
    
    
    *PART IVItem 15  Exhibits and Financial Statement Schedules**
    
    
    77
    
    
    
    n/aSignatures
    
    
    80
    
    
    
    n/aExhibit 10.11Exhibit 21Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  
 *
    
    Incorporated by reference from the registrants definitive Proxy Statement for the
2008 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission on or before April 29, 2008.**
    
    Exhibits incorporated by reference into this filing were filed with the Securities and
Exchange Commission. Bank of Granite Corporation provides these documents through
its Internet site at www.bankofgranite.com or by mail upon request. 2




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3




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Month of December
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Unemployment Rates*Caldwell County
    
    
    6.4
    %
    
    
    8.3
    %
    
    
    7.4
    %
    
    
    7.1
    %
    
    
    7.4
    %Catawba County
    
    
    5.6
    %
    
    
    5.3
    %
    
    
    5.2
    %
    
    
    6.1
    %
    
    
    7.0
    %Burke County
    
    
    6.0
    %
    
    
    5.7
    %
    
    
    5.6
    %
    
    
    6.0
    %
    
    
    6.8
    %Watauga County
    
    
    3.4
    %
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    3.9
    %
    
    
    3.9
    %Wilkes County
    
    
    5.1
    %
    
    
    5.9
    %
    
    
    4.8
    %
    
    
    5.9
    %
    
    
    6.3
    %Mecklenburg County
    
    
    4.6
    %
    
    
    4.3
    %
    
    
    4.2
    %
    
    
    4.8
    %
    
    
    5.0
    %Forsyth County
    
    
    4.3
    %
    
    
    4.2
    %
    
    
    4.1
    %
    
    
    4.5
    %
    
    
    5.0
    %Iredell County
    
    
    4.7
    %
    
    
    4.3
    %
    
    
    4.3
    %
    
    
    5.2
    %
    
    
    5.8
    %Guilford County
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    4.5
    %
    
    
    5.1
    %
    
    
    5.4
    %North Carolina
    
    
    5.0
    %
    
    
    4.9
    %
    
    
    5.0
    %
    
    
    5.3
    %
    
    
    6.1
    %United States
    
    
    5.0
    %
    
    
    4.4
    %
    
    
    4.8
    %
    
    
    5.4
    %
    
    
    5.7
    %
 
 *
    
    Source: Employment Security Commission of North Carolina  July 2009
    
    July 2006
    
    April 2000Projections
    
    Estimates
    
    CensusPopulation Projections and Estimates*Caldwell County
    
    
    80,793
    
    
    
    79,298
    
    
    
    77,386Catawba County
    
    
    157,080
    
    
    
    151,128
    
    
    
    141,686Burke County
    
    
    89,806
    
    
    
    88,663
    
    
    
    89,145Watauga County
    
    
    44,253
    
    
    
    43,410
    
    
    
    42,693Wilkes County
    
    
    67,519
    
    
    
    66,925
    
    
    
    65,632Mecklenburg County
    
    
    909,258
    
    
    
    826,893
    
    
    
    695,370Forsyth County
    
    
    347,692
    
    
    
    331,859
    
    
    
    306,067Iredell County
    
    
    158,965
    
    
    
    145,234
    
    
    
    122,660Guilford County
    
    
    470,364
    
    
    
    449,078
    
    
    
    421,048North Carolina
    
    
    9,348,744
    
    
    
    8,860,341
    
    
    
    8,046,485
 
 *
    
    Source of projection, estimate and census data: North Carolina Office of State Budget and Management 4




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deposit dollars in millions
 June 30, 2007
    
    June 30, 2006Bank of Granite
    
    Market
    
    Bank of Granite
    
    MarketCounty
    
    Deposits
    
    Market Share
    
    Deposits
    
    No. of Banks
    
    Deposits
    
    Market Share
    
    Deposits
    
    No. of BanksCaldwell
    
    $
    318.5
    
    
    
    38.5
    %
    
    $
    828.2
    
    
    
    9
    
    
    $
    320.4
    
    
    
    39.2
    %
    
    $
    817.1
    
    
    
    9Catawba
    
    
    368.9
    
    
    
    14.7
    %
    
    
    2,517.9
    
    
    
    13
    
    
    
    386.0
    
    
    
    15.7
    %
    
    
    2,457.9
    
    
    
    13Burke
    
    
    59.0
    
    
    
    7.7
    %
    
    
    763.5
    
    
    
    9
    
    
    
    51.7
    
    
    
    7.3
    %
    
    
    706.1
    
    
    
    9Watauga
    
    
    61.4
    
    
    
    7.1
    %
    
    
    868.3
    
    
    
    13
    
    
    
    22.6
    
    
    
    2.8
    %
    
    
    805.8
    
    
    
    12Wilkes
    
    
    20.3
    
    
    
    2.6
    %
    
    
    788.4
    
    
    
    11
    
    
    
    14.3
    
    
    
    1.9
    %
    
    
    749.7
    
    
    
    11Mecklenburg
    
    
    173.9
    
    
    
    0.2
    %
    
    
    90,353.0
    
    
    
    25
    
    
    
    170.9
    
    
    
    0.2
    %
    
    
    86,748.9
    
    
    
    22Forsyth
    
    
    17.8
    
    
    
    0.1
    %
    
    
    14,299.9
    
    
    
    19
    
    
    
    15.9
    
    
    
    0.1
    %
    
    
    13,168.2
    
    
    
    16Iredell
    
    
    2.4
    
    
    
    0.1
    %
    
    
    2,123.0
    
    
    
    18
    
    
    none*
    
    none*
    
    
    1,916.7
    
    
    
    17
 
 *
    
    Bank of Granite did not operate in Iredell County as of June 30, 2006.        5




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6




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7




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Changes in interest rates could cause our earnings to decline.
  Strong competition within our market areas may limit our growth and profitability. Larger banks
and numerous other financial institutions with greater resources may be able to compete more
effectively than smaller community banks and mortgage banks.
   If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could
decrease.
  8




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Additional significant increases in our allowance for loan losses could result in a downgrade to
adequately-capitalized status.
  We operate in a highly regulated environment and may be adversely affected by changes in laws
and regulations.
  Economic declines in our markets could impair the ability of our customers, both individuals and
businesses, to repay their loans.
  We may have additional tax liabilities.
  If our goodwill or amortizable intangible assets become impaired, we may be required to record a
significant charge to earnings.
  9




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Changes in accounting may affect our reported earnings and operating income.
  A concentration of real estate development loans in our markets could result in additional increases
in our allowance for loan losses, and corresponding decreases in our earnings, if the economy continues
to experience a downward trend.
  Losing key personnel could negatively affect us.
  
   
   
   
   10




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SM ® The Wall Street
Journal ®
    2007
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Price RangeHigh
    
    $
    19.39
    
    
    $
    18.29
    
    
    $
    17.43
    
    
    $
    14.00Low
    
    
    16.19
    
    
    
    15.27
    
    
    
    12.43
    
    
    
    9.62Close
    
    
    17.92
    
    
    
    16.69
    
    
    
    13.54
    
    
    
    10.57Dividends
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.13
 2006
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Price RangeHigh*
    
    $
    16.60
    
    
    $
    16.66
    
    
    $
    18.10
    
    
    $
    19.69Low*
    
    
    14.62
    
    
    
    15.09
    
    
    
    15.21
    
    
    
    16.99Close*
    
    
    16.22
    
    
    
    16.66
    
    
    
    17.53
    
    
    
    18.97Dividends*
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.13
    
    
    
    0.13
 
 *
    
    Amounts for periods prior to September 25, 2006 have been adjusted to reflect the 5-for-4 stock split distributed September 25, 2006.   (a) Number of
    
    
    (b) Weighted-
    
    
    (c) Number of SecuritiesSecurities To Be
    
    
    Average Exercise
    
    
    Remaining Available forIssued Upon Exercise
    
    
    Price Of
    
    
    Future Issuance UnderOf Outstanding
    
    
    Outstanding
    
    
    Equity Compensation PlansOptions, Warrants and
    
    
    Options, Warrants
    
    
    (excluding securitiesRights
    
    
    and Rights
    
    
    reflected in column (a))Equity compensation plans Approved by security holders
    
    
    153,837
    
    
    $
    13.08
    
    
    
    743,500Not approved by security holders
    
    
    -0-
    
    
    
    n/a
    
    
    
    n/aTotal
    
    
    153,837
    
    
    $
    13.08
    
    
    
    743,500
 11




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##### Table of Contents



(c) Total
    
    (d) MaximumNumber of
    
    ApproximateShares
    
    Dollar ValuePurchased
    
    of Shares(a) Total
    
    (b) Average
    
    as Part of
    
    that May YetNumber of
    
    Price
    
    Publicly
    
    be PurchasedPeriod
    
    Shares
    
    Paid per
    
    Announced
    
    Under theBeginning
    
    Ending
    
    Purchased
    
    Share
    
    Programs (1)
    
    Programs (2)Oct 1, 2007
    
    Oct 31, 2007
    
    
    31,031
    
    
    $
    12.71
    
    
    
    31,031
    
    
    
    3,770,306
    (3)Nov 1, 2007
    
    Nov 30, 2007
    
    
    51,583
    
    
    
    12.06
    
    
    
    51,583
    
    
    
    3,148,198
    (3)Dec 1, 2007
    
    Dec 31, 2007
    
    
    0
    
    
    
    
    
    
    
    0
    
    
    
    3,148,198
    (3)Totals
    
    
    82,614
    
    
    $
    12.30
    
    
    
    82,614
 
 (1)
    
    For the three months ended December 31, 2007, 82,614 shares were purchased in open-market transactions.
We do not repurchase shares in connection with disqualifying dispositions of shares issued under our stock
option plans. Optionees execute these transactions through independent, third-party brokers.(2)
    
    We have not historically established expiration dates for our share repurchase programs.(3)
    
    The currently active repurchase program in the amount of $10,000,000 was announced May 21, 2007 and
commenced on May 25, 2007. 12




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For the Years Ended December 31,(in thousands except per share data)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Interest income
    
    $
    89,493
    
    
    $
    86,543
    
    
    $
    68,159
    
    
    $
    55,266
    
    
    $
    50,696Interest expense
    
    
    36,848
    
    
    
    31,777
    
    
    
    20,173
    
    
    
    13,108
    
    
    
    11,389Net interest income
    
    
    52,645
    
    
    
    54,766
    
    
    
    47,986
    
    
    
    42,158
    
    
    
    39,307Provision for loan losses
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194
    
    
    
    5,439
    
    
    
    4,764Net interest income (loss) after
provision for loan losses
    
    
    (2,486
    )
    
    
    48,352
    
    
    
    42,792
    
    
    
    36,719
    
    
    
    34,543Other income
    
    
    13,001
    
    
    
    12,508
    
    
    
    11,911
    
    
    
    11,257
    
    
    
    14,437Other expense
    
    
    37,001
    
    
    
    32,948
    
    
    
    31,815
    
    
    
    29,115
    
    
    
    25,862Income (loss) before income
tax expense (benefit)
    
    
    (26,486
    )
    
    
    27,912
    
    
    
    22,888
    
    
    
    18,861
    
    
    
    23,118Income tax expense (benefit)
    
    
    (11,183
    )
    
    
    9,880
    
    
    
    7,878
    
    
    
    6,143
    
    
    
    7,810Net income (loss)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010
    
    
    $
    12,718
    
    
    $
    15,308Per shareNet income (loss)Basic*
    
    $
    (0.97
    )
    
    $
    1.12
    
    
    $
    0.91
    
    
    $
    0.75
    
    
    $
    0.91Diluted*
    
    
    (0.97
    )
    
    
    1.12
    
    
    
    0.91
    
    
    
    0.75
    
    
    
    0.91Dividends*
    
    
    0.52
    
    
    
    0.48
    
    
    
    0.42
    
    
    
    0.39
    
    
    
    0.37Book value*
    
    
    7.47
    
    
    
    9.14
    
    
    
    8.66
    
    
    
    8.47
    
    
    
    8.34Share priceHigh*
    
    
    19.39
    
    
    
    19.69
    
    
    
    17.45
    
    
    
    18.34
    
    
    
    21.57Low*
    
    
    9.62
    
    
    
    14.62
    
    
    
    13.28
    
    
    
    14.14
    
    
    
    12.94Close*
    
    
    10.57
    
    
    
    18.97
    
    
    
    14.82
    
    
    
    16.72
    
    
    
    17.42Average shares outstandingBasic*
    
    
    15,775
    
    
    
    16,049
    
    
    
    16,414
    
    
    
    16,850
    
    
    
    16,797Diluted*
    
    
    15,775
    
    
    
    16,104
    
    
    
    16,469
    
    
    
    16,912
    
    
    
    16,895Performance ratiosReturn on average assets
    
    
    -1.27
    %
    
    
    1.56
    %
    
    
    1.41
    %
    
    
    1.28
    %
    
    
    1.78
    %Return on average equity
    
    
    -10.95
    %
    
    
    12.57
    %
    
    
    10.70
    %
    
    
    9.02
    %
    
    
    11.40
    %Average equity to
average assets
    
    
    11.59
    %
    
    
    12.42
    %
    
    
    13.14
    %
    
    
    14.20
    %
    
    
    15.58
    %Dividend payout
    
    
    -53.38
    %
    
    
    43.04
    %
    
    
    46.50
    %
    
    
    52.06
    %
    
    
    40.56
    %Efficiency ratio
    
    
    55.64
    %
    
    
    48.26
    %
    
    
    52.12
    %
    
    
    53.17
    %
    
    
    46.81
    %Balances at year-endAssets
    
    $
    1,219,148
    
    
    $
    1,199,773
    
    
    $
    1,106,724
    
    
    $
    1,032,238
    
    
    $
    971,383Investment securities
    
    
    147,229
    
    
    
    169,567
    
    
    
    153,683
    
    
    
    158,560
    
    
    
    159,436Loans (gross)
    
    
    946,326
    
    
    
    912,492
    
    
    
    832,447
    
    
    
    778,137
    
    
    
    715,845Allowance for loan losses
    
    
    17,673
    
    
    
    15,787
    
    
    
    13,924
    
    
    
    13,665
    
    
    
    10,799Mortgage loans held for sale
    
    
    15,319
    
    
    
    11,797
    
    
    
    14,219
    
    
    
    21,554
    
    
    
    23,093Liabilities
    
    
    1,103,883
    
    
    
    1,053,340
    
    
    
    966,876
    
    
    
    891,222
    
    
    
    829,568Deposits
    
    
    971,989
    
    
    
    963,837
    
    
    
    879,111
    
    
    
    749,862
    
    
    
    735,099Stockholders equity
    
    
    115,265
    
    
    
    146,433
    
    
    
    139,848
    
    
    
    141,016
    
    
    
    141,815Asset quality ratiosNet charge-offs
to average loans
    
    
    5.70
    %
    
    
    0.52
    %
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %Nonperforming assets
to total assets
    
    
    3.21
    %
    
    
    1.29
    %
    
    
    1.04
    %
    
    
    1.18
    %
    
    
    1.35
    %Allowance coverage of
nonperforming loans
    
    
    48.27
    %
    
    
    109.91
    %
    
    
    130.96
    %
    
    
    125.82
    %
    
    
    95.29
    %
 
 *
    
    Amounts for periods prior to September 25, 2006 have been adjusted to reflect the 5-for-4 stock
split distributed September 25, 2006. 13




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    The Year 2007 in Review
  SM
  14




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Financial Highlights
    
    2007
    
    2006
    
    % change(dollars in thousands except per share data)EarningsNet interest income
    
    $
    52,645
    
    
    $
    54,766
    
    
    
    -3.9
    %Provision for loan losses
    
    
    55,131
    
    
    
    6,414
    
    
    
    759.5
    %Other income
    
    
    13,001
    
    
    
    12,508
    
    
    
    3.9
    %Other expense
    
    
    37,001
    
    
    
    32,948
    
    
    
    12.3
    %Net income (loss)
    
    
    (15,303
    )
    
    
    18,032
    
    
    
    -184.9
    %Per shareNet income (loss)- Basic
    
    $
    (0.97
    )
    
    $
    1.12
    
    
    
    -186.6
    %- Diluted
    
    
    (0.97
    )
    
    
    1.12
    
    
    
    -186.6
    %At year-endAssets
    
    $
    1,219,148
    
    
    $
    1,199,773
    
    
    
    1.6
    %Loans
    
    
    946,326
    
    
    
    912,492
    
    
    
    3.7
    %Deposits
    
    
    971,989
    
    
    
    963,837
    
    
    
    0.8
    %RatiosReturn on average assets
    
    
    -1.27
    %
    
    
    1.56
    %Return on average equity
    
    
    -10.95
    %
    
    
    12.57
    %Average equity to average assets
    
    
    11.59
    %
    
    
    12.42
    %Efficiency ratio
    
    
    55.64
    %
    
    
    48.26
    %
  15




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o
    
    During 2007, provisions for loan losses increased $48.7 million from the provisions in 2006, which
were established to provide for significant charge-offs in 2007, resulting from deterioration in our loan
portfolio as discussed above. Nonaccrual loans increased to $36.5 million as of December 31, 2007
compared to $9.3 million as of December 31, 2006.o
    
    Our 2007 operating loss resulted in income tax benefits of $11.2 million for 2007, compared to income
tax expense of $9.9 million in 2006.o
    
    Other expenses, or operating overhead, increased $4.1 million, or 12.3%. The increase in overhead
costs was from community banking operations, which was partially offset by a slight decrease in
overhead for our mortgage banking business. The increase in overhead costs for the community banking
business was driven primarily by higher costs for outside services, employee benefits, and salaries, which
increased $2.9 million. Outside services increased $1.2 million, employee benefits increased $1.0 million,
and salaries increased $0.6 million in 2007 compared to 2006. The increase in salaries was primarily a
result of hiring additional personnel.o
    
    Net interest income decreased $2.1 million, or 3.9%, primarily related to an increase of $5 million in
interest expense on deposits due to higher rates. The increase in interest expense was partially offset
by the $3 million increase in interest income, primarily from higher volumes of loans. Our net
interest margin decreased 40 basis points to 4.78% in 2007 compared to 5.18% in 2006.o
    
    Loans grew by $33.8 million, or 3.7%, net of charge-offs of $53.7 million, and deposits grew by
$8.1 million, or 0.8%.o
    
    Granite Mortgages loan volumes were $267 million in 2007 compared to $248 million in 2006, an
increase of 7.7%, but mortgage net income decreased in 2007 due to higher overhead.o
    
    During 2007, we repurchased 627,148 shares of our common stock for $9.2 million or an average
cost of $14.59 per share.
 Outlook for 2008
     16




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2007
    
    
    2006
    
    
    2005Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    Interest
    
    
    
    
    
    
    Average
    
    
    InterestAverage
    
    
    Yield/
    
    
    Income/
    
    
    Average
    
    
    Yield/
    
    
    Income/
    
    
    Average
    
    
    Yield/
    
    
    Income/(dollars in thousands)
    
    Balance
    
    
    Cost
    
    
    Expense
    
    
    Balance
    
    
    Cost
    
    
    Expense
    
    
    Balance
    
    
    Cost
    
    
    ExpenseAssetsLoans (1)
    
    $
    949,574
    
    
    
    8.63
    %
    
    $
    81,906
    
    
    $
    886,256
    
    
    
    8.81
    %
    
    $
    78,079
    
    
    $
    827,003
    
    
    
    7.41
    %
    
    $
    61,312Taxable securities
    
    
    132,048
    
    
    
    4.47
    %
    
    
    5,904
    
    
    
    134,759
    
    
    
    4.41
    %
    
    
    5,942
    
    
    
    114,306
    
    
    
    3.98
    %
    
    
    4,534Nontaxable securities (2)
    
    
    36,861
    
    
    
    6.64
    %
    
    
    2,449
    
    
    
    42,789
    
    
    
    6.65
    %
    
    
    2,847
    
    
    
    49,060
    
    
    
    6.70
    %
    
    
    3,287Federal funds sold
    
    
    1,748
    
    
    
    5.21
    %
    
    
    91
    
    
    
    13,285
    
    
    
    5.04
    %
    
    
    670
    
    
    
    4,671
    
    
    
    3.85
    %
    
    
    179Total interest-earning assets
    
    
    1,120,231
    
    
    
    8.07
    %
    
    
    90,350
    
    
    
    1,077,089
    
    
    
    8.13
    %
    
    
    87,538
    
    
    
    995,040
    
    
    
    6.97
    %
    
    
    69,312Cash and due from banks
    
    
    25,779
    
    
    
    
    
    
    
    
    
    
    
    28,271
    
    
    
    
    
    
    
    
    
    
    
    27,631All other assets
    
    
    59,901
    
    
    
    
    
    
    
    
    
    
    
    50,114
    
    
    
    
    
    
    
    
    
    
    
    44,536Total assets
    
    $
    1,205,911
    
    
    
    
    
    
    
    
    
    
    $
    1,155,474
    
    
    
    
    
    
    
    
    
    
    $
    1,067,207Liabilities and
stockholders equityNOW deposits
    
    $
    122,345
    
    
    
    1.28
    %
    
    
    1,572
    
    
    $
    125,594
    
    
    
    1.16
    %
    
    
    1,452
    
    
    $
    123,953
    
    
    
    0.91
    %
    
    
    1,133Money market deposits
    
    
    244,361
    
    
    
    4.25
    %
    
    
    10,381
    
    
    
    192,751
    
    
    
    4.02
    %
    
    
    7,744
    
    
    
    168,826
    
    
    
    2.54
    %
    
    
    4,289Savings deposits
    
    
    22,677
    
    
    
    0.39
    %
    
    
    89
    
    
    
    23,505
    
    
    
    0.36
    %
    
    
    85
    
    
    
    25,676
    
    
    
    0.19
    %
    
    
    50Time deposits of $100
or more
    
    
    204,249
    
    
    
    4.91
    %
    
    
    10,036
    
    
    
    206,782
    
    
    
    4.51
    %
    
    
    9,324
    
    
    
    174,464
    
    
    
    3.29
    %
    
    
    5,741Other time deposits
    
    
    229,716
    
    
    
    4.67
    %
    
    
    10,734
    
    
    
    229,740
    
    
    
    4.16
    %
    
    
    9,559
    
    
    
    193,204
    
    
    
    3.02
    %
    
    
    5,836Interest-bearing deposits
    
    
    823,348
    
    
    
    3.99
    %
    
    
    32,812
    
    
    
    778,372
    
    
    
    3.62
    %
    
    
    28,164
    
    
    
    686,123
    
    
    
    2.48
    %
    
    
    17,049Overnight borrowings
    
    
    36,357
    
    
    
    3.87
    %
    
    
    1,407
    
    
    
    29,806
    
    
    
    3.21
    %
    
    
    956
    
    
    
    39,006
    
    
    
    1.84
    %
    
    
    719Other borrowings
    
    
    48,503
    
    
    
    5.42
    %
    
    
    2,629
    
    
    
    48,168
    
    
    
    5.52
    %
    
    
    2,658
    
    
    
    57,066
    
    
    
    4.21
    %
    
    
    2,405Total interest-bearing liabilities
    
    
    908,208
    
    
    
    4.06
    %
    
    
    36,848
    
    
    
    856,346
    
    
    
    3.71
    %
    
    
    31,778
    
    
    
    782,195
    
    
    
    2.58
    %
    
    
    20,173Noninterest-bearing deposits
    
    
    146,563
    
    
    
    
    
    
    
    
    
    
    
    145,530
    
    
    
    
    
    
    
    
    
    
    
    137,130Other liabilities
    
    
    11,376
    
    
    
    
    
    
    
    
    
    
    
    10,103
    
    
    
    
    
    
    
    
    
    
    
    7,662Stockholders equity
    
    
    139,764
    
    
    
    
    
    
    
    
    
    
    
    143,495
    
    
    
    
    
    
    
    
    
    
    
    140,220Total liabilities and
stockholders equity
    
    $
    1,205,911
    
    
    
    
    
    
    
    
    
    
    $
    1,155,474
    
    
    
    
    
    
    
    
    
    
    $
    1,067,207Net yield on earning assets and
net interest income (2)(3)
    
    
    
    
    
    
    4.78
    %
    
    $
    53,502
    
    
    
    
    
    
    
    5.18
    %
    
    $
    55,760
    
    
    
    
    
    
    
    4.94
    %
    
    $
    49,139Interest rate spread (4)
    
    
    
    
    
    
    4.01
    %
    
    
    
    
    
    
    
    
    
    
    4.42
    %
    
    
    
    
    
    
    
    
    
    
    4.39
    %
 
 (1)
    
    Non-accrual loans have been included.(2)
    
    Yields and interest income on tax-exempt investments have been adjusted to tax equivalent basis
using a 35% tax rate for 2007, 2006 and 2005.
The taxable equivalent adjustments were approximately $857,000, $997,000 and $1,151,000 for 2007,
2006 and 2005, respectively.(3)
    
    Net yield on earning assets is computed by dividing net interest earned by average earning
assets.(4)
    
    The interest rate spread is the interest earning assets rate less the interest bearing
liabilities rate  
 2007 compared to 2006
    
    
    2006 compared to 2005Change
    
    
    
    
    
    
    ChangeAttributable to
    
    
    
    
    
    
    Attributable to(in thousands)
    
    Volume(1)
    
    
    Rate(1)
    
    
    Total
    
    
    Volume(1)
    
    
    Rate(1)
    
    
    TotalLoans
    
    $
    5,520
    
    
    $
    (1,693
    )
    
    $
    3,827
    
    
    $
    4,807
    
    
    $
    11,960
    
    
    $
    16,767Taxable securities
    
    
    (120
    )
    
    
    82
    
    
    
    (38
    )
    
    
    857
    
    
    
    551
    
    
    
    1,408Nontaxable securities
    
    
    (394
    )
    
    
    (4
    )
    
    
    (398
    )
    
    
    (419
    )
    
    
    (21
    )
    
    
    (440
    )Federal funds sold
    
    
    (591
    )
    
    
    12
    
    
    
    (579
    )
    
    
    382
    
    
    
    109
    
    
    
    491Interest-earning assets
    
    $
    4,415
    
    
    $
    (1,603
    )
    
    $
    2,812
    
    
    $
    5,627
    
    
    $
    12,599
    
    
    $
    18,226NOW deposits
    
    $
    (40
    )
    
    $
    160
    
    
    $
    120
    
    
    $
    17
    
    
    $
    302
    
    
    $
    319Money market deposits
    
    
    2,133
    
    
    
    504
    
    
    
    2,637
    
    
    
    785
    
    
    
    2,670
    
    
    
    3,455Savings deposits
    
    
    (3
    )
    
    
    7
    
    
    
    4
    
    
    
    (6
    )
    
    
    41
    
    
    
    35Time deposits of $100
or more
    
    
    (119
    )
    
    
    831
    
    
    
    712
    
    
    
    1,260
    
    
    
    2,323
    
    
    
    3,583Other time deposits
    
    
    (1
    )
    
    
    1,176
    
    
    
    1,175
    
    
    
    1,312
    
    
    
    2,412
    
    
    
    3,724Interest-bearing deposits
    
    
    1,970
    
    
    
    2,678
    
    
    
    4,648
    
    
    
    3,368
    
    
    
    7,748
    
    
    
    11,116Overnight borrowings
    
    
    232
    
    
    
    219
    
    
    
    451
    
    
    
    (232
    )
    
    
    469
    
    
    
    237Other borrowings
    
    
    18
    
    
    
    (47
    )
    
    
    (29
    )
    
    
    (433
    )
    
    
    686
    
    
    
    253Interest-bearing liabilities
    
    $
    2,220
    
    
    $
    2,850
    
    
    $
    5,070
    
    
    $
    2,703
    
    
    $
    8,903
    
    
    $
    11,606
 
 (1)
    
    The rate/volume variance for each category has been allocated equally on a consistent basis
between rate and volume variances 22




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SM
    23




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24




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Non-sensitiveInterest Sensitive Within
    
    Total
    
    or Sensitive1 to
    
    91 to
    
    181 to
    
    Within
    
    Beyond(dollars in thousands)
    
    90 Days
    
    180 Days
    
    365 Days
    
    1 Year
    
    1 Year
    
    TotalInterest-earning AssetsInterest-bearing due from banks
    
    $
    3,419
    
    
    
    
    
    
    
    
    
    
    $
    3,419
    
    
    
    
    
    
    $
    3,419Securities (at amortized cost) (1):U.S. Treasury
    
    
    
    
    
    
    
    
    
    $
    5,056
    
    
    
    5,056
    
    
    $
    
    
    
    
    5,056U.S. Government agencies
    
    
    1,000
    
    
    $
    10,333
    
    
    
    17,380
    
    
    
    28,713
    
    
    
    64,849
    
    
    
    93,562States and political subdivisions
    
    
    2,411
    
    
    
    3,372
    
    
    
    
    
    
    
    5,783
    
    
    
    29,390
    
    
    
    35,173Other (including equity securities)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,601
    
    
    
    13,601Loans (gross):Real estate  Construction
    
    
    134,371
    
    
    
    2,715
    
    
    
    7,054
    
    
    
    144,140
    
    
    
    38,317
    
    
    
    182,457Real estate  Mortgage
    
    
    334,186
    
    
    
    7,699
    
    
    
    17,024
    
    
    
    358,909
    
    
    
    154,231
    
    
    
    513,140Commercial, financial and agricultural
    
    
    184,976
    
    
    
    1,820
    
    
    
    4,972
    
    
    
    191,768
    
    
    
    46,701
    
    
    
    238,469Consumer
    
    
    3,657
    
    
    
    531
    
    
    
    738
    
    
    
    4,926
    
    
    
    8,555
    
    
    
    13,481All other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    567
    
    
    
    567Mortgages held for sale
    
    
    15,319
    
    
    
    
    
    
    
    
    
    
    
    15,319
    
    
    
    
    
    
    
    15,319Total interest-earning assets
    
    $
    679,339
    
    
    $
    26,470
    
    
    $
    52,224
    
    
    $
    758,033
    
    
    $
    356,211
    
    
    $
    1,114,244Interest-bearing LiabilitiesInterest-bearing deposits:Savings and NOW accounts
    
    $
    151,523
    
    
    
    
    
    
    
    
    
    
    $
    151,523
    
    
    
    
    
    
    $
    151,523Money market accounts
    
    
    242,872
    
    
    
    
    
    
    
    
    
    
    
    242,872
    
    
    
    
    
    
    
    242,872Time deposits of $100 or more
    
    
    69,284
    
    
    $
    70,703
    
    
    $
    50,121
    
    
    
    190,108
    
    
    $
    18,163
    
    
    
    208,271Other time deposits
    
    
    69,093
    
    
    
    73,526
    
    
    
    55,960
    
    
    
    198,579
    
    
    
    26,799
    
    
    
    225,378Overnight and short-term borrowings
    
    
    93,190
    
    
    
    1,000
    
    
    
    6,000
    
    
    
    100,190
    
    
    
    
    
    
    
    100,190Long-term borrowings
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    2,500
    
    
    
    15,107
    
    
    
    17,607Total interest-bearing liabilities
    
    $
    628,462
    
    
    $
    145,229
    
    
    $
    112,081
    
    
    $
    885,772
    
    
    $
    60,069
    
    
    $
    945,841Interest sensitivity gap
    
    $
    50,877
    
    
    $
    (118,759
    )
    
    $
    (59,857
    )
    
    $
    (127,739
    )Cumulative interest sensitivity gap
    
    
    50,877
    
    
    
    (67,882
    )
    
    
    (127,739
    )
    
    
    (127,739
    )Interest earning-assets as a percentage
of interest-bearing liabilities
    
    
    108
    %
    
    
    18
    %
    
    
    47
    %
    
    
    86
    %
 
 (1)
    
    Interest sensitivity periods for debt securities are based on contractual maturities. 25




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##### Table of Contents



Estimated Resulting Theoretical Tax Equivalent Net Interest IncomeFor the Twelve-month Periods FollowingDecember 31, 2007
    
    December 31, 2006(dollars in thousands)
    
    Amount
    
    % Change
    
    Amount
    
    % Change3% interest rate changes prorated over
a twelve-month period+3
    %
    
    $
    50,368
    
    
    
    -2.0
    %
    
    $
    58,848
    
    
    
    5.1
    %0
    %
    
    
    51,411
    
    
    
    0.0
    %
    
    
    55,982
    
    
    
    0.0
    %-3
    %
    
    
    49,824
    
    
    
    -3.1
    %*
    
    
    47,625
    *
    
    
    -14.9
    %Hypothetical immediate and sustained rate
changes of 1%, 2%, 3% and 4%+4
    %
    
    $
    47,885
    
    
    
    -4.5
    %
    
    $
    58,275
    
    
    
    7.0
    %+3
    %
    
    
    48,475
    
    
    
    -3.3
    %
    
    
    57,348
    
    
    
    5.3
    %+2
    %
    
    
    49,041
    
    
    
    -2.2
    %
    
    
    56,416
    
    
    
    3.5
    %+1
    %
    
    
    49,602
    
    
    
    -1.1
    %
    
    
    55,468
    
    
    
    1.8
    %0
    %
    
    
    50,141
    
    
    
    0.0
    %
    
    
    54,486
    
    
    
    0.0
    %-1
    %
    
    
    50,510
    
    
    
    0.7
    %
    
    
    50,433
    
    
    
    -7.4
    %-2
    %
    
    
    49,753
    
    
    
    -0.8
    %
    
    
    45,620
    
    
    
    -16.3
    %-3
    %
    
    
    48,949
    
    
    
    -2.4
    %*
    
    
    40,998
    *
    
    
    -24.8
    %-4
    %
    
    
    46,252
    
    
    
    -7.8
    %*
    
    
    36,524
    *
    
    
    -33.0
    %
 
 *
    
    The Federal Reserves overnight federal funds rate target was 4.25% at December 31, 2007
and 5.25% at December 31, 2006. As the overnight federal funds target rate approaches 0%,
there is significantly greater compression in the spreads between yields earned on assets
and rates paid on interest-bearing liabilities which effectively reduces net interest
income.  
 Within
    
    
    One to
    
    
    FiveOne
    
    
    Five
    
    
    Years or(in thousands)
    
    Year
    
    
    Years
    
    
    More
    
    
    TotalReal estate  Construction
    
    $
    116,503
    
    
    $
    55,008
    
    
    $
    10,946
    
    
    $
    182,457Real estate  Mortgage
    
    
    124,793
    
    
    
    237,903
    
    
    
    150,444
    
    
    
    513,140Commercial, financial and agricultural
    
    
    120,698
    
    
    
    85,375
    
    
    
    32,396
    
    
    
    238,469Consumer
    
    
    4,141
    
    
    
    9,008
    
    
    
    332
    
    
    
    13,481All other
    
    
    567
    
    
    
    
    
    
    
    
    
    
    
    567Total
    
    $
    366,702
    
    
    $
    387,294
    
    
    $
    194,118
    
    
    $
    948,114Predetermined rate, maturity
greater than one year
    
    
    
    
    
    $
    141,308
    
    
    $
    71,273
    
    
    $
    212,581Variable rate or maturing within
one year
    
    $
    366,702
    
    
    
    245,986
    
    
    
    122,845
    
    
    
    735,533Total
    
    $
    366,702
    
    
    $
    387,294
    
    
    $
    194,118
    
    
    $
    948,114
 26




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##### Table of Contents



(in thousands)
    
    2007
    
    
    2006
    
    
    2005Non-interest-bearing demand deposits
    
    $
    146,563
    
    
    $
    145,530
    
    
    $
    137,130Interest-bearing demand deposits
    
    
    366,706
    
    
    
    318,345
    
    
    
    292,779Savings deposits
    
    
    22,677
    
    
    
    23,505
    
    
    
    25,676Time deposits
    
    
    433,965
    
    
    
    436,522
    
    
    
    367,668Total
    
    $
    969,911
    
    
    $
    923,902
    
    
    $
    823,253
  
 Within
    
    Three to
    
    Six to
    
    Within
    
    One toThree
    
    Six
    
    Twelve
    
    One
    
    Five(in thousands)
    
    Months
    
    Months
    
    Months
    
    Year
    
    Years
    
    TotalTime deposits of $100,000 or more
    
    $
    69,283
    
    
    $
    70,703
    
    
    $
    50,122
    
    
    $
    190,108
    
    
    $
    18,163
    
    
    $
    208,271
   27




---



##### Table of Contents



2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total(in thousands)
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansLoansReal estate -Construction
    
    $
    182,457
    
    
    
    19.2
    %
    
    $
    161,072
    
    
    
    17.6
    %
    
    $
    125,555
    
    
    
    15.1
    %
    
    $
    105,111
    
    
    
    13.5
    %
    
    $
    90,176
    
    
    
    12.6
    %Mortgage
    
    
    513,140
    
    
    
    54.1
    %
    
    
    488,347
    
    
    
    53.4
    %
    
    
    455,322
    
    
    
    54.6
    %
    
    
    420,860
    
    
    
    54.0
    %
    
    
    377,956
    
    
    
    52.7
    %Commercial,
financial and
agricultural
    
    
    238,469
    
    
    
    25.2
    %
    
    
    248,691
    
    
    
    27.2
    %
    
    
    231,229
    
    
    
    27.7
    %
    
    
    223,605
    
    
    
    28.7
    %
    
    
    211,477
    
    
    
    29.5
    %Consumer
    
    
    13,481
    
    
    
    1.4
    %
    
    
    15,317
    
    
    
    1.7
    %
    
    
    20,911
    
    
    
    2.5
    %
    
    
    29,015
    
    
    
    3.7
    %
    
    
    35,981
    
    
    
    5.0
    %All other
    
    
    567
    
    
    
    0.1
    %
    
    
    742
    
    
    
    0.1
    %
    
    
    915
    
    
    
    0.1
    %
    
    
    704
    
    
    
    0.1
    %
    
    
    1,206
    
    
    
    0.2
    %Total loans
    
    
    948,114
    
    
    
    100.0
    %
    
    
    914,169
    
    
    
    100.0
    %
    
    
    833,932
    
    
    
    100.0
    %
    
    
    779,295
    
    
    
    100.0
    %
    
    
    716,796
    
    
    
    100.0
    %Deferred origination
fees, net
    
    
    (1,788
    )
    
    
    
    
    
    
    (1,677
    )
    
    
    
    
    
    
    (1,485
    )
    
    
    
    
    
    
    (1,158
    )
    
    
    
    
    
    
    (951
    )Total loans, net of
deferred fees
    
    $
    946,326
    
    
    
    
    
    
    $
    912,492
    
    
    
    
    
    
    $
    832,447
    
    
    
    
    
    
    $
    778,137
    
    
    
    
    
    
    $
    715,845
  
 (dollars in thousands)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Nonperforming assetsNonaccrual loans
    
    $
    36,450
    
    
    $
    9,289
    
    
    $
    6,424
    
    
    $
    6,634
    
    
    $
    8,115Loans past due 90 days or more
and still accruing interest
    
    
    162
    
    
    
    5,074
    
    
    
    4,208
    
    
    
    4,227
    
    
    
    3,218Foreclosed properties
    
    
    2,491
    
    
    
    1,162
    
    
    
    926
    
    
    
    1,280
    
    
    
    1,775Total
    
    $
    39,103
    
    
    $
    15,525
    
    
    $
    11,558
    
    
    $
    12,141
    
    
    $
    13,108Nonperforming loans to total loans
    
    
    3.87
    %
    
    
    1.57
    %
    
    
    1.28
    %
    
    
    1.40
    %
    
    
    1.58
    %Allowance for loan losses to nonperforming loans
    
    
    48.27
    %
    
    
    109.91
    %
    
    
    130.96
    %
    
    
    125.82
    %
    
    
    95.29
    %Nonperforming loans to total assets
    
    
    3.00
    %
    
    
    1.20
    %
    
    
    0.96
    %
    
    
    1.05
    %
    
    
    1.17
    %Nonperforming assets to total assets
    
    
    3.21
    %
    
    
    1.29
    %
    
    
    1.04
    %
    
    
    1.18
    %
    
    
    1.35
    %
 28




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##### Table of Contents



(in thousands)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Total investment in impaired loans
    
    $
    27,017
    
    
    $
    15,516
    
    
    $
    11,046
    
    
    $
    12,138
    
    
    $
    11,535Loan loss allowance related to impaired loans
    
    $
    3,029
    
    
    $
    3,926
    
    
    $
    3,249
    
    
    $
    4,325
    
    
    $
    2,412
   29




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30




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31




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##### Table of Contents



(dollars in thousands)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Balance at beginning of year
    
    $
    15,787
    
    
    $
    13,924
    
    
    $
    13,665
    
    
    $
    10,799
    
    
    $
    8,835Loans charged off:Real estate
    
    
    14,850
    
    
    
    1,708
    
    
    
    919
    
    
    
    930
    
    
    
    1,616Commercial, financial and agricultural
    
    
    30,955
    
    
    
    2,808
    
    
    
    3,484
    
    
    
    1,040
    
    
    
    2,275Credit cards and related plans
    
    
    15
    
    
    
    26
    
    
    
    45
    
    
    
    88
    
    
    
    41Installment loans to individuals
    
    
    177
    
    
    
    410
    
    
    
    540
    
    
    
    683
    
    
    
    767Demand deposit overdraft program
    
    
    233
    
    
    
    251
    
    
    
    262
    
    
    
    297
    
    
    
    389Asset-based lending
    
    
    7,433
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    53,663
    
    
    
    5,203
    
    
    
    5,250
    
    
    
    3,038
    
    
    
    5,088Recoveries of loans previously charged off:Real estate
    
    
    233
    
    
    
    84
    
    
    
    63
    
    
    
    24
    
    
    
    3Commercial, financial and agricultural
    
    
    19
    
    
    
    282
    
    
    
    29
    
    
    
    70
    
    
    
    176Credit cards and related plans
    
    
    4
    
    
    
    10
    
    
    
    3
    
    
    
    4
    
    
    
    5Installment loans to individuals
    
    
    47
    
    
    
    138
    
    
    
    42
    
    
    
    220
    
    
    
    71Demand deposit overdraft program
    
    
    115
    
    
    
    138
    
    
    
    178
    
    
    
    147
    
    
    
    170Total recoveries
    
    
    418
    
    
    
    652
    
    
    
    315
    
    
    
    465
    
    
    
    425Net charge-offs
    
    
    53,245
    
    
    
    4,551
    
    
    
    4,935
    
    
    
    2,573
    
    
    
    4,663Provision for loan losses
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194
    
    
    
    5,439
    
    
    
    4,764Allowance of loans acquired in purchase transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,863
    (1)Balance at end of year
    
    $
    17,673
    
    
    $
    15,787
    
    
    $
    13,924
    
    
    $
    13,665
    
    
    $
    10,799Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    5.70
    %
    
    
    0.52
    %
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %Allowance coverage of net charge-offs
    
    
    33.19
    %
    
    
    346.95
    %
    
    
    282.14
    %
    
    
    531.08
    %
    
    
    231.62
    %Allowance as a percentage of gross loans
    
    
    1.87
    %
    
    
    1.73
    %
    
    
    1.67
    %
    
    
    1.76
    %
    
    
    1.51
    %
 
 (1)
    
    The allowance for loan losses acquired in the purchase transaction represents general loan
loss reserves. Any specific reserves were evaluated and recorded in the fair value adjustment
for the applicable loan.  
 2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total(dollars in thousands)
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansReal estate
    
    $
    12,421
    
    
    
    73.3
    %
    
    $
    5,091
    
    
    
    71.0
    %
    
    $
    4,448
    
    
    
    69.7
    %
    
    $
    5,782
    
    
    
    67.5
    %
    
    $
    4,602
    
    
    
    65.3
    %Commercial,
financial,
and agricultural
    
    
    3,899
    
    
    
    25.2
    %
    
    
    9,891
    
    
    
    27.2
    %
    
    
    8,401
    
    
    
    27.7
    %
    
    
    6,759
    
    
    
    28.7
    %
    
    
    5,226
    
    
    
    29.5
    %Consumer
    
    
    281
    
    
    
    1.4
    %
    
    
    443
    
    
    
    1.7
    %
    
    
    577
    
    
    
    2.5
    %
    
    
    617
    
    
    
    3.7
    %
    
    
    684
    
    
    
    5.0
    %All other loans
    
    
    310
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.2
    %Unallocated
    
    
    762
    
    
    
    n/a
    
    
    
    362
    
    
    
    n/a
    
    
    
    498
    
    
    
    n/a
    
    
    
    507
    
    
    
    n/a
    
    
    
    287
    
    
    
    n/aTotal loans
    
    $
    17,673
    
    
    
    100.0
    %
    
    $
    15,787
    
    
    
    100.0
    %
    
    $
    13,924
    
    
    
    100.0
    %
    
    $
    13,665
    
    
    
    100.0
    %
    
    $
    10,799
    
    
    
    100.0
    %
   32




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After One Year but
    
    
    After Five Years butWithin One Year
    
    
    Within Five Years
    
    
    Within Ten Years
    
    
    After Ten Years(dollars in thousands)
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldAvailable for sale: (1)U.S. Treasury
    
    $
    5,056
    
    
    
    3.33
    %
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    U.S. government agency
    
    
    28,713
    
    
    
    3.67
    %
    
    
    62,850
    
    
    
    4.51
    %
    
    
    1,999
    
    
    
    5.13
    %
    
    
    
    
    
    
    State and political subdivisions (2)
    
    
    
    
    
    
    
    
    
    
    981
    
    
    
    4.94
    %
    
    
    1,733
    
    
    
    5.38
    %
    
    
    2,803
    
    
    
    5.93
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,145
    
    
    
    5.43
    %Total
    
    $
    33,769
    
    
    
    3.62
    %
    
    $
    63,831
    
    
    
    4.52
    %
    
    $
    3,732
    
    
    
    5.25
    %
    
    $
    5,948
    
    
    
    5.67
    %Held to maturity:State and political subdivisions (2)
    
    $
    5,783
    
    
    
    6.38
    %
    
    $
    18,225
    
    
    
    6.62
    %
    
    $
    3,604
    
    
    
    7.19
    %
    
    $
    2,044
    
    
    
    7.43
    %Total
    
    $
    5,783
    
    
    
    6.38
    %
    
    $
    18,225
    
    
    
    6.62
    %
    
    $
    3,604
    
    
    
    7.19
    %
    
    $
    2,044
    
    
    
    7.43
    %
 
 (1)
    
    Securities available for sale are stated at amortized cost.(2)
    
    Yields on tax-exempt investments have been adjusted to tax equivalent basis using 35% for 2007. 33




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##### Table of Contents



(in thousands)
    
    2007
    
    
    2006
    
    
    2005Available for sale (at estimated fair value):U.S. Treasury
    
    $
    5,055
    
    
    $
    4,994
    
    
    $
    5,048U.S. government agency
    
    
    93,763
    
    
    
    111,740
    
    
    
    89,815State and political subdivisions
    
    
    5,520
    
    
    
    5,533
    
    
    
    5,527Other
    
    
    13,235
    
    
    
    12,046
    
    
    
    11,928Total
    
    $
    117,573
    
    
    $
    134,313
    
    
    $
    112,318Held to maturity (at amortized cost):State and political subdivisions
    
    $
    29,656
    
    
    $
    35,254
    
    
    $
    41,363Total
    
    $
    29,656
    
    
    $
    35,254
    
    
    $
    41,363
   
 Within
    
    
    One to
    
    
    Three to
    
    
    FiveOne
    
    
    Three
    
    
    Five
    
    
    Years or(in thousands)
    
    Year
    
    
    Years
    
    
    Years
    
    
    More
    
    
    TotalContractual Cash ObligationsOvernight borrowings
    
    $
    64,699
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    64,699Short-term borrowings
    
    
    35,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,491Long-term borrowings
    
    
    
    
    
    
    14,500
    
    
    
    3,107
    
    
    
    
    
    
    
    17,607Capitalized lease obligations
    
    
    314
    
    
    
    628
    
    
    
    628
    
    
    
    2,083
    
    
    
    3,653Operating lease obligations
    
    
    572
    
    
    
    761
    
    
    
    370
    
    
    
    
    
    
    
    1,703Purchase obligations
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522Total
    
    $
    101,598
    
    
    $
    15,889
    
    
    $
    4,105
    
    
    $
    2,083
    
    
    $
    123,675Other CommitmentsCommitments to extend credit
    
    $
    98,709
    
    
    $
    36,166
    
    
    $
    5,546
    
    
    $
    62,030
    
    
    $
    202,451Standby letters of credit
    
    
    7,407
    
    
    
    432
    
    
    
    
    
    
    
    
    
    
    
    7,839Total
    
    $
    106,116
    
    
    $
    36,598
    
    
    $
    5,546
    
    
    $
    62,030
    
    
    $
    210,290
     34




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Community Banking
       Mortgage Banking
       Other
  35




---



##### Table of Contents



36




---



##### Table of Contents



Begins onPageReport Of Independent Registered Public Accounting Firm
    
    
    38 & 39Financial Statements:Consolidated Balance Sheets December 31, 2007 and 2006
    
    
    40Consolidated Statements Of Income Years Ended December
31, 2007, 2006 and 2005
    
    
    41Consolidated Statements Of Comprehensive Income Years
Ended December 31, 2007, 2006 and 2005
    
    
    42Consolidated Statements Of Changes In Stockholders Equity
Years Ended December 31, 2007, 2006 and 2005
    
    
    43Consolidated Statements Of Cash Flows Years Ended
December 31, 2007, 2006 and 2005
    
    
    44Notes To Consolidated Financial Statements Years Ended
December 31, 2007, 2006 and 2005
    
    
    46Supplementary Financial Data:Selected Quarterly Financial Data (Unaudited) Years
Ended December 31, 2007 and 2006
    
    
    71
 37




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal Control  Integrated Framework
 /s/ Dixon Hughes PLLCDIXON HUGHES PLLCCharlotte, North CarolinaMarch 17, 2008 38




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ Deloitte & Touche LLPDELOITTE & TOUCHE LLPCharlotte, North CarolinaMarch 2, 2006 39




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2007 AND 2006
 (in thousands except per share data)
    
    2007
    
    2006ASSETS:Cash and cash equivalentsCash and due from banks
    
    $
    29,905
    
    
    $
    29,566Interest-bearing deposits
    
    
    3,419
    
    
    
    4,715Federal funds sold
    
    
    
    
    
    
    15,700Total cash and cash equivalents
    
    
    33,324
    
    
    
    49,981Investment securitiesAvailable for sale, at fair value (amortized cost of $117,736
and
$135,832 at December 31, 2007 and 2006, respectively)
    
    
    117,573
    
    
    
    134,313Held to maturity, at amortized cost (fair value of $30,395 and
$36,020 at December 31, 2007 and 2006, respectively)
    
    
    29,656
    
    
    
    35,254Loans
    
    
    946,326
    
    
    
    912,492Allowance for loan losses
    
    
    (17,673
    )
    
    
    (15,787
    )Net loans
    
    
    928,653
    
    
    
    896,705Mortgage loans held for sale
    
    
    15,319
    
    
    
    11,797Premises and equipment, net
    
    
    15,462
    
    
    
    13,426Accrued interest receivable
    
    
    6,949
    
    
    
    8,621Investment in bank owned life insurance
    
    
    30,090
    
    
    
    26,925Intangible assets
    
    
    10,969
    
    
    
    11,044Other assets
    
    
    31,153
    
    
    
    11,707Total assets
    
    $
    1,219,148
    
    
    $
    1,199,773LIABILITIES
AND STOCKHOLDERS EQUITY:DepositsDemand
    
    $
    143,945
    
    
    $
    144,637NOW accounts
    
    
    130,354
    
    
    
    130,971Money market accounts
    
    
    242,872
    
    
    
    216,574Savings
    
    
    21,169
    
    
    
    21,917Time deposits of $100 or more
    
    
    208,271
    
    
    
    208,911Other time deposits
    
    
    225,378
    
    
    
    240,827Total deposits
    
    
    971,989
    
    
    
    963,837Overnight and short-term borrowings
    
    
    100,190
    
    
    
    59,698Long-term borrowings
    
    
    17,607
    
    
    
    15,141Accrued interest payable
    
    
    3,212
    
    
    
    3,327Other liabilities
    
    
    10,885
    
    
    
    11,337Total liabilities
    
    
    1,103,883
    
    
    
    1,053,340STOCKHOLDERS
EQUITY:Common stock, $1.00 par value, authorized  25,000 shares;
issued  18,965 shares in 2007 and 18,922 shares in 2006;
outstanding  15,438 shares in 2007 and 16,023 shares in 2006
    
    
    18,965
    
    
    
    18,922Additional paid-in capital
    
    
    30,053
    
    
    
    29,524Retained earnings
    
    
    118,196
    
    
    
    141,662Accumulated other comprehensive loss, net of
deferred income taxes of $64 and $645 at
December 31, 2007 and 2006, respectively
    
    
    (97
    )
    
    
    (974
    )Less: Cost of common stock in treasury;
3,527 shares in 2007 and 2,899 shares in 2006
    
    
    (51,852
    )
    
    
    (42,701
    )Total stockholders equity
    
    
    115,265
    
    
    
    146,433Total liabilities and stockholders equity
    
    $
    1,219,148
    
    
    $
    1,199,773
  40




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 (in thousands except per share data)
    
    2007
    
    
    2006
    
    
    2005INTEREST INCOME:Interest and fees from loans
    
    $
    77,066
    
    
    $
    73,682
    
    
    $
    57,083Interest and fees from mortgage banking
    
    
    4,840
    
    
    
    4,398
    
    
    
    4,228Federal funds sold
    
    
    91
    
    
    
    670
    
    
    
    178Interest-bearing deposits
    
    
    252
    
    
    
    755
    
    
    
    232Investments:U.S. Treasury
    
    
    173
    
    
    
    173
    
    
    
    173U.S. Government agencies
    
    
    4,718
    
    
    
    4,309
    
    
    
    3,446States and political subdivisions
    
    
    1,592
    
    
    
    1,851
    
    
    
    2,137Other
    
    
    761
    
    
    
    705
    
    
    
    682Total interest income
    
    
    89,493
    
    
    
    86,543
    
    
    
    68,159INTEREST EXPENSE:Time deposits of $100 or more
    
    
    10,036
    
    
    
    9,324
    
    
    
    5,741Other time and savings deposits
    
    
    22,776
    
    
    
    18,839
    
    
    
    11,307Overnight and short-term borrowings
    
    
    3,348
    
    
    
    2,694
    
    
    
    2,215Long-term borrowings
    
    
    688
    
    
    
    920
    
    
    
    910Total interest expense
    
    
    36,848
    
    
    
    31,777
    
    
    
    20,173NET INTEREST INCOME
    
    
    52,645
    
    
    
    54,766
    
    
    
    47,986PROVISION FOR LOAN LOSSES
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR LOAN LOSSES
    
    
    (2,486
    )
    
    
    48,352
    
    
    
    42,792OTHER INCOME:Service charges on deposit accounts
    
    
    5,876
    
    
    
    5,755
    
    
    
    5,631Other service charges, fees and commissions
    
    
    919
    
    
    
    863
    
    
    
    775Mortgage banking income
    
    
    3,916
    
    
    
    3,975
    
    
    
    3,991Securities gains
    
    
    1
    
    
    
    92
    
    
    
    68Other
    
    
    2,289
    
    
    
    1,823
    
    
    
    1,446Total other income
    
    
    13,001
    
    
    
    12,508
    
    
    
    11,911OTHER EXPENSES:Salaries and wages
    
    
    16,775
    
    
    
    16,170
    
    
    
    16,545Employee benefits
    
    
    5,521
    
    
    
    4,476
    
    
    
    3,938Occupancy expense, net
    
    
    2,456
    
    
    
    2,291
    
    
    
    2,020Equipment rentals, depreciation and
maintenance
    
    
    2,293
    
    
    
    2,488
    
    
    
    2,175Other
    
    
    9,956
    
    
    
    7,523
    
    
    
    7,137Total other expenses
    
    
    37,001
    
    
    
    32,948
    
    
    
    31,815INCOME (LOSS) BEFORE INCOME
TAX EXPENSE (BENEFIT)
    
    
    (26,486
    )
    
    
    27,912
    
    
    
    22,888INCOME TAX EXPENSE (BENEFIT)
    
    
    (11,183
    )
    
    
    9,880
    
    
    
    7,878NET INCOME (LOSS)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010PER SHARE AMOUNTSNet income (loss)  Basic
    
    $
    (0.97
    )
    
    $
    1.12
    
    
    $
    0.91Net income (loss)  Diluted
    
    
    (0.97
    )
    
    
    1.12
    
    
    
    0.91Dividends
    
    
    0.52
    
    
    
    0.48
    
    
    
    0.42Book value
    
    
    7.47
    
    
    
    9.14
    
    
    
    8.66
  41




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 (in thousands)
    
    2007
    
    
    2006
    
    
    2005NET INCOME (LOSS)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010ITEMS OF OTHER COMPREHENSIVE INCOME:Items of other comprehensive income,
before tax:Unrealized gains (losses) on securities
available for sale
    
    
    1,357
    
    
    
    126
    
    
    
    (2,179
    )Reclassification adjustment for
gains included in net income
    
    
    1
    
    
    
    90
    
    
    
    (60
    )Unrealized gains (losses) on mortgage
derivative instruments
    
    
    100
    
    
    
    (41
    )
    
    
    36Other comprehensive income (loss),
before tax
    
    
    1,458
    
    
    
    175
    
    
    
    (2,203
    )Change in deferred income taxes
related to change in unrealized gains
or losses on securities available for sale
    
    
    (541
    )
    
    
    (86
    )
    
    
    893Changes in deferred income taxes
related to change in unrealized gains
or losses on mortgage derivative instruments
    
    
    (40
    )
    
    
    16
    
    
    
    (15
    )Items of other comprehensive income (loss),
net of tax
    
    
    877
    
    
    
    105
    
    
    
    (1,325
    )COMPREHENSIVE INCOME (LOSS)
    
    $
    (14,426
    )
    
    $
    18,137
    
    
    $
    13,685
  42




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 (in thousands except per share data)
    
    2007
    
    
    2006
    
    
    2005COMMON STOCK, $1.00 par valueAt beginning of year
    
    $
    18,922
    
    
    $
    15,097
    
    
    $
    15,079Par value of shares issued under stock option plan
    
    
    43
    
    
    
    41
    
    
    
    18Transfer from surplus due to stock splits
    
    
    
    
    
    
    3,784
    
    
    
    At end of year
    
    
    18,965
    
    
    
    18,922
    
    
    
    15,097ADDITIONAL PAID-IN CAPITALAt beginning of year
    
    
    29,524
    
    
    
    32,679
    
    
    
    32,478Surplus of shares issued under stock option plan
    
    
    456
    
    
    
    574
    
    
    
    147Tax benefit from nonqualifying dispositions
of stock options
    
    
    58
    
    
    
    34
    
    
    
    54Stock-based compensation expense
    
    
    15
    
    
    
    21
    
    
    
    Transfer to common stock due to stock splits
    
    
    
    
    
    
    (3,784
    )
    
    
    At end of year
    
    
    30,053
    
    
    
    29,524
    
    
    
    32,679RETAINED EARNINGSAt beginning of year
    
    
    141,662
    
    
    
    133,209
    
    
    
    125,179Cumulative effect of adoption of SAB 108
    
    
    
    
    
    
    (1,807
    )
    
    
    Net income (loss)
    
    
    (15,303
    )
    
    
    18,032
    
    
    
    15,010Dividends
    
    
    (8,163
    )
    
    
    (7,761
    )
    
    
    (6,980
    )Cash paid for fractional shares
    
    
    
    
    
    
    (11
    )
    
    
    At end of year
    
    
    118,196
    
    
    
    141,662
    
    
    
    133,209ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXESAt beginning of year
    
    
    (974
    )
    
    
    (1,079
    )
    
    
    245Net change in unrealized gains or losses on securities
available for sale, net of deferred income taxes
    
    
    817
    
    
    
    130
    
    
    
    (1,346
    )Net change in unrealized gains or losses on mortgage
derivative instruments, net of deferred income taxes
    
    
    60
    
    
    
    (25
    )
    
    
    22At end of year
    
    
    (97
    )
    
    
    (974
    )
    
    
    (1,079
    )COST OF COMMON STOCK
IN TREASURYAt beginning of year
    
    
    (42,701
    )
    
    
    (40,058
    )
    
    
    (31,965
    )Cost of common stock repurchased
    
    
    (9,151
    )
    
    
    (2,643
    )
    
    
    (8,093
    )At end of year
    
    
    (51,852
    )
    
    
    (42,701
    )
    
    
    (40,058
    )Total stockholders equity
    
    $
    115,265
    
    
    $
    146,433
    
    
    $
    139,848Shares issuedAt beginning of year
    
    
    18,922
    
    
    
    15,097
    
    
    
    15,079Shares issued under incentive stock option plans
    
    
    43
    
    
    
    41
    
    
    
    18Shares issued due to stock splits
    
    
    
    
    
    
    3,784
    
    
    
    At end of year
    
    
    18,965
    
    
    
    18,922
    
    
    
    15,097Common shares in treasuryAt beginning of year
    
    
    (2,899
    )
    
    
    (2,185
    )
    
    
    (1,763
    )Common shares repurchased
    
    
    (628
    )
    
    
    (134
    )
    
    
    (422
    )Shares issued due to stock splits
    
    
    
    
    
    
    (580
    )
    
    
    At end of year
    
    
    (3,527
    )
    
    
    (2,899
    )
    
    
    (2,185
    )Total shares outstanding
    
    
    15,438
    
    
    
    16,023
    
    
    
    12,912
  43




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 (in thousands)
    
    2007
    
    
    2006
    
    
    2005INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation
    
    
    1,671
    
    
    
    1,795
    
    
    
    1,563Provision for loan losses
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194Stock-based compensation expense
    
    
    15
    
    
    
    21
    
    
    
    Investment security premium amortization, net
    
    
    203
    
    
    
    239
    
    
    
    423Acquisition premium amortization, net
    
    
    79
    
    
    
    212
    
    
    
    246Deferred income taxes
    
    
    (1,603
    )
    
    
    (1,636
    )
    
    
    (483
    )Gains on sales or calls of securities
available for sale
    
    
    (1
    )
    
    
    (90
    )
    
    
    (60
    )Gains on calls of securities
held to maturity
    
    
    
    
    
    
    (2
    )
    
    
    (8
    )Originations of loans held for sale
    
    
    (267,163
    )
    
    
    (248,945
    )
    
    
    (265,698
    )Proceeds from loans held for sale
    
    
    266,073
    
    
    
    250,896
    
    
    
    273,163Losses (gains) on loans held for sale
    
    
    (2,432
    )
    
    
    335
    
    
    
    (12
    )Losses on hedged mortgage loan commitments
    
    
    100
    
    
    
    
    
    
    
    Loss on disposal or sale of premises
    
    
    2
    
    
    
    103
    
    
    
    Losses (gains) on disposal or sale of equipment
    
    
    (1
    )
    
    
    (13
    )
    
    
    6Loss (gain) on sale of other real estate
    
    
    728
    
    
    
    (25
    )
    
    
    (169
    )Increase (decrease) in taxes payable
    
    
    (583
    )
    
    
    (195
    )
    
    
    349Decrease (increase) in accrued interest receivable
    
    
    1,672
    
    
    
    (1,234
    )
    
    
    (1,706
    )Increase (decrease) in accrued interest payable
    
    
    (115
    )
    
    
    826
    
    
    
    1,112Increase in cash surrender value of bank
owned life insurance
    
    
    (1,164
    )
    
    
    (863
    )
    
    
    (569
    )Increase in other assets
    
    
    (19,807
    )
    
    
    (1,031
    )
    
    
    (531
    )Increase in other liabilities
    
    
    207
    
    
    
    1,696
    
    
    
    2,781Net cash provided by
operating activities
    
    
    17,709
    
    
    
    26,536
    
    
    
    30,611CASH
FLOWS FROM INVESTING ACTIVITIES:Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    20,361
    
    
    
    15,898
    
    
    
    219Proceeds from maturities, calls and paydowns of
securities held to maturity
    
    
    5,565
    
    
    
    6,071
    
    
    
    9,799Proceeds from sales of securities available for sale
    
    
    4,326
    
    
    
    760
    
    
    
    14,639Purchases of securities available for sale
    
    
    (6,758
    )
    
    
    (38,545
    )
    
    
    (22,373
    )Net increase in loans
    
    
    (87,117
    )
    
    
    (84,685
    )
    
    
    (59,436
    )Investment in bank owned life insurance
    
    
    (2,001
    )
    
    
    (6,369
    )
    
    
    (1,422
    )Capital expenditures
    
    
    (3,719
    )
    
    
    (2,465
    )
    
    
    (3,314
    )Proceeds from sales of fixed assets
    
    
    11
    
    
    
    1,959
    
    
    
    14Proceeds from sales of other real estate
    
    
    655
    
    
    
    748
    
    
    
    710Net cash used by investing activities
    
    
    (68,677
    )
    
    
    (106,629
    )
    
    
    (61,164
    )
   44




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
  (in thousands)
    
    2007
    
    
    2006
    
    
    2005CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in demand deposits, NOW and
savings deposits
    
    $
    24,241
    
    
    $
    38,466
    
    
    $
    39,447Net increase (decrease) in time deposits
    
    
    (16,089
    )
    
    
    46,260
    
    
    
    89,844Net increase (decrease) in overnight and
short-term borrowings
    
    
    40,492
    
    
    
    (608
    )
    
    
    (43,059
    )Net increase (decrease) in long-term borrowings
    
    
    2,500
    
    
    
    (2,000
    )
    
    
    (14,861
    )Proceeds from shares issued under stock option plan
    
    
    499
    
    
    
    581
    
    
    
    111Tax benefit on shares issued under stock option plan
    
    
    58
    
    
    
    34
    
    
    
    54Dividends paid
    
    
    (8,239
    )
    
    
    (7,485
    )
    
    
    (6,980
    )Purchases of common stock for treasury
    
    
    (9,151
    )
    
    
    (2,643
    )
    
    
    (8,092
    )Cash paid for fractional shares
    
    
    
    
    
    
    (11
    )
    
    
    Net cash provided by financing activities
    
    
    34,311
    
    
    
    72,594
    
    
    
    56,464NET INCREASE (DECREASE) IN
CASH EQUIVALENTS
    
    
    (16,657
    )
    
    
    (7,501
    )
    
    
    25,911CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
    
    
    49,981
    
    
    
    57,482
    
    
    
    31,571CASH AND CASH EQUIVALENTS
AT END OF YEAR
    
    $
    33,324
    
    
    $
    49,981
    
    
    $
    57,482SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year for:Interest
    
    $
    36,963
    
    
    $
    30,951
    
    
    $
    19,061Income taxes
    
    
    (10,600
    )
    
    
    10,075
    
    
    
    7,529Noncash investing and financing activities:Transfer from surplus to common
stock due to stock split
    
    
    
    
    
    
    3,784
    
    
    
    Transfer from loans to other real
estate owned
    
    
    3,277
    
    
    
    1,281
    
    
    
    945
  45




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        46




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47




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2007
    
    2006
    
    2005Risk-free rate
    
    
    4.57
    %
    
    
    5.00
    %
    
    
    4.03
    %Average expected term (years)
    
    5.5 years
    
    5.6 years
    
    5.6 yearsExpected volatility
    
    
    33.42
    %
    
    
    34.24
    %
    
    
    37.53
    %Expected dividend yield
    
    
    3.09
    %
    
    
    2.85
    %
    
    
    2.96
    %Expected turnover
    
    
    8.79
    %
    
    
    8.66
    %
    
    
    8.76
    %
  48




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49




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50




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2.
INVESTMENT SECURITIES
  (in thousands)
 Amortized
    
    Gross Unrealized
    
    FairType and Contractual Maturity
    
    Cost
    
    Gains
    
    Losses
    
    ValueAVAILABLE FOR SALEAt December 31, 2007:U. S. Treasury due:Within 1 year
    
    $
    5,056
    
    
    $
    
    
    
    $
    1
    
    
    $
    5,055Total U.S. Treasury
    
    
    5,056
    
    
    
    
    
    
    
    1
    
    
    
    5,055U. S. Government agencies due:Within 1 year
    
    
    28,713
    
    
    
    
    
    
    
    81
    
    
    
    28,632After 1 year but within 5 years
    
    
    62,850
    
    
    
    309
    
    
    
    28
    
    
    
    63,131After 5 years but within 10 years
    
    
    1,999
    
    
    
    1
    
    
    
    
    
    
    
    2,000Total U.S. Government agencies
    
    
    93,562
    
    
    
    310
    
    
    
    109
    
    
    
    93,763State and local due:After 1 year but within 5 years
    
    
    981
    
    
    
    1
    
    
    
    
    
    
    
    982After 5 years but within 10 years
    
    
    1,733
    
    
    
    14
    
    
    
    
    
    
    
    1,747After 10 years
    
    
    2,803
    
    
    
    2
    
    
    
    14
    
    
    
    2,791Total state and local
    
    
    5,517
    
    
    
    17
    
    
    
    14
    
    
    
    5,520Others due:After 10 years
    
    
    3,145
    
    
    
    207
    
    
    
    28
    
    
    
    3,324Equity securities
    
    
    10,456
    
    
    
    229
    
    
    
    774
    
    
    
    9,911Total others
    
    
    13,601
    
    
    
    436
    
    
    
    802
    
    
    
    13,235Total available for sale
    
    $
    117,736
    
    
    $
    763
    
    
    $
    926
    
    
    $
    117,573HELD TO MATURITYAt December 31, 2007:State and local due:Within 1 year
    
    $
    5,783
    
    
    $
    20
    
    
    $
    
    
    
    $
    5,803After 1 year but within 5 years
    
    
    18,225
    
    
    
    418
    
    
    
    
    
    
    
    18,643After 5 years but within 10 years
    
    
    3,604
    
    
    
    165
    
    
    
    
    
    
    
    3,769After 10 years
    
    
    2,044
    
    
    
    136
    
    
    
    
    
    
    
    2,180Total state and local
    
    
    29,656
    
    
    
    739
    
    
    
    
    
    
    
    30,395Total held to maturity
    
    $
    29,656
    
    
    $
    739
    
    
    $
    
    
    
    $
    30,395
  51




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##### Table of Contents



(in thousands)
 Amortized
    
    Gross Unrealized
    
    FairType and Contractual Maturity
    
    Cost
    
    Gains
    
    Losses
    
    ValueAVAILABLE FOR SALEAt December 31, 2006:U. S. Treasury due:After 1 year but within 5 years
    
    $
    5,121
    
    
    $
    
    
    
    $
    127
    
    
    $
    4,994Total U.S. Treasury
    
    
    5,121
    
    
    
    
    
    
    
    127
    
    
    
    4,994U. S. Government agencies due:Within 1 year
    
    
    7,962
    
    
    
    
    
    
    
    127
    
    
    
    7,835After 1 year but within 5 years
    
    
    103,624
    
    
    
    23
    
    
    
    1,702
    
    
    
    101,945After 5 years but within 10 years
    
    
    1,999
    
    
    
    
    
    
    
    39
    
    
    
    1,960Total U.S. Government agencies
    
    
    113,585
    
    
    
    23
    
    
    
    1,868
    
    
    
    111,740State and local due:After 1 year but within 5 years
    
    
    718
    
    
    
    
    
    
    
    10
    
    
    
    708After 5 years but within 10 years
    
    
    2,014
    
    
    
    5
    
    
    
    4
    
    
    
    2,015After 10 years
    
    
    2,817
    
    
    
    9
    
    
    
    16
    
    
    
    2,810Total state and local
    
    
    5,549
    
    
    
    14
    
    
    
    30
    
    
    
    5,533Others due:After 10 years
    
    
    3,546
    
    
    
    218
    
    
    
    25
    
    
    
    3,739Equity securities
    
    
    8,031
    
    
    
    437
    
    
    
    161
    
    
    
    8,307Total others
    
    
    11,577
    
    
    
    655
    
    
    
    186
    
    
    
    12,046Total available for sale
    
    $
    135,832
    
    
    $
    692
    
    
    $
    2,211
    
    
    $
    134,313HELD TO MATURITYAt December 31, 2006:State and local due:Within 1 year
    
    $
    5,568
    
    
    $
    12
    
    
    $
    
    
    
    $
    5,580After 1 year but within 5 years
    
    
    22,204
    
    
    
    376
    
    
    
    
    
    
    
    22,580After 5 years but within 10 years
    
    
    4,973
    
    
    
    208
    
    
    
    
    
    
    
    5,181After 10 years
    
    
    2,509
    
    
    
    170
    
    
    
    
    
    
    
    2,679Total state and local
    
    
    35,254
    
    
    
    766
    
    
    
    
    
    
    
    36,020Total held to maturity
    
    $
    35,254
    
    
    $
    766
    
    
    $
    
    
    
    $
    36,020
    52




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##### Table of Contents



(in thousands)
    
    Less than 12 months
    
    12 months or more
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedValue
    
    Loss
    
    Value
    
    Loss
    
    Value
    
    Loss2007U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    5,055
    
    
    $
    (1
    )
    
    $
    5,055
    
    
    $
    (1
    )U.S. Government agencies
    
    
    
    
    
    
    
    
    
    
    47,596
    
    
    
    (109
    )
    
    
    47,596
    
    
    
    (109
    )State and local
    
    
    1,223
    
    
    
    (9
    )
    
    
    1,405
    
    
    
    (5
    )
    
    
    2,628
    
    
    
    (14
    )Others
    
    
    2,483
    
    
    
    (370
    )
    
    
    4,303
    
    
    
    (432
    )
    
    
    6,786
    
    
    
    (802
    )Total temporarily impaired
    
    $
    3,706
    
    
    $
    (379
    )
    
    $
    58,359
    
    
    $
    (547
    )
    
    $
    62,065
    
    
    $
    (926
    )2006U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    4,994
    
    
    $
    (127
    )
    
    $
    4,994
    
    
    $
    (127
    )U.S. Government agencies
    
    
    25,371
    
    
    
    (90
    )
    
    
    77,374
    
    
    
    (1,778
    )
    
    
    102,745
    
    
    
    (1,868
    )State and local
    
    
    560
    
    
    
    
    
    
    
    3,976
    
    
    
    (31
    )
    
    
    4,536
    
    
    
    (31
    )Others
    
    
    
    
    
    
    
    
    
    
    4,680
    
    
    
    (186
    )
    
    
    4,680
    
    
    
    (186
    )Total temporarily impaired
    
    $
    25,931
    
    
    $
    (90
    )
    
    $
    91,024
    
    
    $
    (2,122
    )
    
    $
    116,955
    
    
    $
    (2,212
    )
       53




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##### Table of Contents



3.
LOANS
  (in thousands)
    
    2007
    
    2006Real estate:Construction
    
    $
    182,457
    
    
    $
    161,072Mortgage
    
    
    513,140
    
    
    
    488,347Commercial, financial and agricultural
    
    
    238,469
    
    
    
    248,691Consumer
    
    
    13,481
    
    
    
    15,317All other loans
    
    
    567
    
    
    
    742948,114
    
    
    
    914,169Deferred origination fees, net
    
    
    (1,788
    )
    
    
    (1,677
    )Total
    
    $
    946,326
    
    
    $
    912,492
  (in thousands)
    
    2007
    
    2006Nonaccrual loans
    
    $
    36,450
    
    
    $
    9,289Loans 90 days or more and still
accruing interest
    
    
    162
    
    
    
    5,074Foreclosed properties
    
    
    2,491
    
    
    
    1,162Total
    
    $
    39,103
    
    
    $
    15,525Impaired loans with related loan loss allowance
    
    $
    3,529
    
    
    $
    3,926Impaired loans without related loan loss allowance
    
    
    23,488
    
    
    
    11,590Total investment in impaired loans
    
    $
    27,017
    
    
    $
    15,516Loan loss allowance related to impaired loans
    
    $
    3,029
    
    
    $
    3,926
    54




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##### Table of Contents



4.
ALLOWANCE FOR LOAN LOSSES
  (in thousands)
    
    2007
    
    2006
    
    2005Balance at beginning of year
    
    $
    15,787
    
    
    $
    13,924
    
    
    $
    13,665Loans charged off:Real estate
    
    
    14,850
    
    
    
    1,708
    
    
    
    919Commercial, financial and agricultural
    
    
    30,955
    
    
    
    2,808
    
    
    
    3,484Credit cards and related plans
    
    
    15
    
    
    
    26
    
    
    
    45Installment loans to individuals
    
    
    177
    
    
    
    410
    
    
    
    540Demand deposit overdraft program
    
    
    233
    
    
    
    251
    
    
    
    262Asset-based lending
    
    
    7,433
    
    
    
    
    
    
    
    Total charge-offs
    
    
    53,663
    
    
    
    5,203
    
    
    
    5,250Recoveries of loans previously charged off:Real estate
    
    
    233
    
    
    
    84
    
    
    
    63Commercial, financial and agricultural
    
    
    19
    
    
    
    282
    
    
    
    29Credit cards and related plans
    
    
    4
    
    
    
    10
    
    
    
    3Installment loans to individuals
    
    
    47
    
    
    
    138
    
    
    
    42Demand deposit overdraft program
    
    
    115
    
    
    
    138
    
    
    
    178Total recoveries
    
    
    418
    
    
    
    652
    
    
    
    315Net charge-offs
    
    
    53,245
    
    
    
    4,551
    
    
    
    4,935Provision for loan losses
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194Balance at end of year
    
    $
    17,673
    
    
    $
    15,787
    
    
    $
    13,924Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    5.70
    %
    
    
    0.52
    %
    
    
    0.61
    %
 5.
PREMISES AND EQUIPMENT
  Premises andAccumulated
    
    Equipment,(in thousands)
    
    Cost
    
    Depreciation
    
    NetAt December 31, 2007:Land
    
    $
    2,814
    
    
    $
    
    
    
    $
    2,814Buildings
    
    
    11,295
    
    
    
    4,271
    
    
    
    7,024Leasehold improvements
    
    
    770
    
    
    
    281
    
    
    
    489Furniture, equipment and vehicles
    
    
    15,650
    
    
    
    11,882
    
    
    
    3,768Capitalized leases
    
    
    1,460
    
    
    
    155
    
    
    
    1,305Construction in progress
    
    
    62
    
    
    
    
    
    
    
    62Total
    
    $
    32,051
    
    
    $
    16,589
    
    
    $
    15,462
 55




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##### Table of Contents



Premises andAccumulated
    
    
    Equipment,(in thousands)
    
    Cost
    
    
    Depreciation
    
    
    NetAt December 31, 2006:Land
    
    $
    2,814
    
    
    $
    
    
    
    $
    2,814Buildings
    
    
    9,837
    
    
    
    3,996
    
    
    
    5,841Leasehold improvements
    
    
    568
    
    
    
    214
    
    
    
    354Furniture, equipment and vehicles
    
    
    13,839
    
    
    
    10,695
    
    
    
    3,144Capitalized leases
    
    
    1,213
    
    
    
    50
    
    
    
    1,163Construction in progress
    
    
    110
    
    
    
    
    
    
    
    110Total
    
    $
    28,381
    
    
    $
    14,955
    
    
    $
    13,426
 6. OTHER INCOME AND EXPENSES
  (in thousands)
    
    2007
    
    2006
    
    2005Items included in service charges on deposit accountsFees from demand deposit overdrafts
    
    $
    4,157
    
    
    $
    4,085
    
    
    $
    3,975Increase in cash value of BOLI
    
    $
    1,164
    
    
    $
    863
    
    
    $
    569Items included in other expensesMarketing
    
    
    875
    
    
    
    924
    
    
    
    807Legal fees (other than collection)
    
    
    1,127
    
    
    
    284
    
    
    
    139
 7. INCOME TAXES
   (in thousands)
    
    2007
    
    
    2006
    
    
    2005Income tax expense (benefit)Current
    
    $
    (9,581
    )
    
    $
    11,515
    
    
    $
    8,361Deferred
    
    
    (1,602
    )
    
    
    (1,635
    )
    
    
    (483
    )Total
    
    $
    (11,183
    )
    
    $
    9,880
    
    
    $
    7,878
  56




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##### Table of Contents



(dollars in thousands)
    
    2007
    
    
    2006
    
    
    2005Statutory federal income tax rate
    
    
    35
    %
    
    
    35
    %
    
    
    35
    %Tax expense (benefit) at statutory rate
    
    $
    (9,270
    )
    
    $
    9,769
    
    
    $
    8,010Increase (decrease) in income taxes
resulting from:Tax-exempt interest income
    
    
    (572
    )
    
    
    (668
    )
    
    
    (765
    )State income taxes net of federal tax benefit
    
    
    (1,128
    )
    
    
    1,012
    
    
    
    791Other
    
    
    (213
    )
    
    
    (233
    )
    
    
    (158
    )Income tax expense (benefit)
    
    $
    (11,183
    )
    
    $
    9,880
    
    
    $
    7,878
  December 31, 2007(in thousands)
    
    Assets
    
    
    Liabilities
    
    
    TotalExcess book over tax bad debt expense
    
    $
    6,990
    
    
    $
    
    
    
    $
    6,990Excess tax over book depreciation
    
    
    
    
    
    
    (455
    )
    
    
    (455
    )Unrealized losses on securities
available for sale
    
    
    64
    
    
    
    
    
    
    
    64Deferred compensation
    
    
    1,746
    
    
    
    
    
    
    
    1,746Deferrals under FAS No. 91
    
    
    706
    
    
    
    
    
    
    
    706OID loan fee deferrals
    
    
    
    
    
    
    (563
    )
    
    
    (563
    )Other, net
    
    
    935
    
    
    
    (506
    )
    
    
    429Total
    
    $
    10,441
    
    
    $
    (1,524
    )
    
    $
    8,917
 December 31, 2006Assets
    
    
    Liabilities
    
    
    TotalExcess book over tax bad debt expense
    
    $
    6,233
    
    
    $
    
    
    
    $
    6,233Excess tax over book depreciation
    
    
    
    
    
    
    (362
    )
    
    
    (362
    )Unrealized losses on securities
available for sale
    
    
    605
    
    
    
    
    
    
    
    605Unrealized losses on mortgage
derivative instruments
    
    
    40
    
    
    
    
    
    
    
    40Deferred compensation
    
    
    1,154
    
    
    
    
    
    
    
    1,154Deferrals under FAS No. 91
    
    
    662
    
    
    
    
    
    
    
    662OID loan fee deferrals
    
    
    
    
    
    
    (531
    )
    
    
    (531
    )Other, net
    
    
    487
    
    
    
    (393
    )
    
    
    94Total
    
    $
    9,181
    
    
    $
    (1,286
    )
    
    $
    7,895
   57




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##### Table of Contents



8. STOCK OPTIONS
   2007
    
    
    2006
    
    
    2005Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    207,210
    
    
    $
    12.86
    
    
    
    271,890
    
    
    $
    12.90
    
    
    
    297,298
    
    
    $
    12.54Granted
    
    
    6,500
    
    
    
    14.29
    
    
    
    2,500
    
    
    
    15.36
    
    
    
    3,125
    
    
    
    14.28Exercised
    
    
    43,723
    
    
    
    11.41
    
    
    
    51,401
    
    
    
    11.97
    
    
    
    21,954
    
    
    
    7.49Expired, forfeited or canceled
    
    
    16,150
    
    
    
    15.29
    
    
    
    15,779
    
    
    
    16.81
    
    
    
    6,579
    
    
    
    15.38Outstanding at end of year
    
    
    153,837
    
    
    $
    13.08
    
    
    
    207,210
    
    
    $
    12.86
    
    
    
    271,890
    
    
    $
    12.90Options exercisable at end of year
    
    
    140,212
    
    
    $
    12.94
    
    
    
    194,210
    
    
    $
    12.74
    
    
    
    253,515
    
    
    $
    12.78
  Outstanding Options
    
    Exercisable OptionsWeightedShares
    
    Average
    
    Weighted
    
    Shares
    
    WeightedOutstanding at
    
    Remaining
    
    Average
    
    Exercisable at
    
    AverageRange of
    
    December 31,
    
    Contractual
    
    Exercise
    
    December 31,
    
    ExerciseExercise Prices
    
    2007
    
    Life (years)
    
    Price
    
    2007
    
    Price$  0.00      8.25
    
    
    24,296
    
    
    
    2.5
    
    
    $
    6.25
    
    
    
    24,296
    
    
    $
    6.258.26    10.25
   
    
    38,519
    
    
    
    1.7
    
    
    
    8.94
    
    
    
    38,519
    
    
    
    8.9410.26    14.25
    
    
    12,250
    
    
    
    2.5
    
    
    
    13.90
    
    
    
    6,000
    
    
    
    13.9014.26    15.25
    
    
    26,388
    
    
    
    2.5
    
    
    
    14.47
    
    
    
    24,513
    
    
    
    14.4715.26    18.25
    
    
    9,718
    
    
    
    2.7
    
    
    
    15.65
    
    
    
    4,218
    
    
    
    15.6518.26    20.25
    
    
    41,885
    
    
    
    0.4
    
    
    
    18.97
    
    
    
    41,885
    
    
    
    18.9720.26    26.50
    
    
    781
    
    
    
    0.4
    
    
    
    20.96
    
    
    
    781
    
    
    
    20.965.74    20.96
    
    
    153,837
    
    
    
    1.7
    
    
    $
    13.08
    
    
    
    140,212
    
    
    $
    12.94
  58




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##### Table of Contents



9. EMPLOYEE BENEFIT PLANS
       59




---



##### Table of Contents



10. LEASES
   (in thousands)Year
    
    Payments2008
    
    $
    3142009
    
    
    3142010
    
    
    3142011
    
    
    3142012
    
    
    3142013 and thereafter
    
    
    2,083Total minimum lease payments
    
    
    3,653Less amount representing interest
    
    
    (2,250
    )Present value of net minimum lease payments
    
    $
    1,403
  (in thousands)Year
    
    Payments2008
    
    $
    5722009
    
    
    4122010
    
    
    3492011
    
    
    3562012 and thereafter
    
    
    14Total
    
    $
    1,703
   60




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##### Table of Contents



11. OVERNIGHT AND SHORT-TERM BORROWED FUNDS
  December 31,(in thousands)
    
    2007
    
    
    2006Overnight borrowingsBank of Granite Corporation:Commercial deposits swept into commercial paper
    
    $
    22,629
    
    
    $
    29,662Bank of Granite:Federal funds purchased
    
    
    9,900
    
    
    
    Securities sold under agreements to repurchase
    
    
    1,470
    
    
    
    1,490Overnight borrowings from the Federal Home Loan Bank
    
    
    30,700
    
    
    
    Total overnight borrowings
    
    
    64,699
    
    
    
    31,152Short-term borrowingsBank of Granite:Short-term borrowings from the Federal Home Loan Bank
    
    
    8,000
    
    
    
    8,000Granite Mortgage:Warehouse line of credit
    
    
    27,491
    
    
    
    20,546Total short-term borrowings
    
    
    35,491
    
    
    
    28,546Total overnight and short-term borrowings
    
    $
    100,190
    
    
    $
    59,698
   December 31,(dollars in thousands)
    
    2007
    
    2006
    
    2005Balance outstanding at end of year
    
    $
    64,699
    
    
    $
    31,152
    
    
    $
    27,738Maximum outstanding at any month-end during the year
    
    
    75,567
    
    
    
    35,786
    
    
    
    67,618Average daily balance outstanding during the year
    
    
    36,357
    
    
    
    29,805
    
    
    
    39,006Average interest rate during the year
    
    
    3.87
    %
    
    
    3.20
    %
    
    
    1.85
    %Average interest rate at end of year
    
    
    3.93
    %
    
    
    3.70
    %
    
    
    1.33
    %
  December 31,(dollars in thousands)
    
    2007
    
    2006Balance outstanding at end of year
    
    $
    35,491
    
    
    $
    28,546Maximum outstanding at any month-end during the year
    
    
    40,556
    
    
    
    40,502Average daily balance outstanding during the year
    
    
    29,740
    
    
    
    35,130Average interest rate during the year
    
    
    5.33
    %
    
    
    5.80
    %Average interest rate at end of year
    
    
    5.90
    %
    
    
    6.18
    %
 
 *
    
    Included in other borrowings for prior years 61




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##### Table of Contents



12. LONG-TERM BORROWINGS
  December 31,(in thousands)
    
    2007
    
    2006Bank of Granite Corporation:Unsecured
line of credit at 30-day LIBOR plus 1.20% due June 30, 2009
    
    $
    2,500
    
    
    $
    5,000Bank of Granite:Federal Home
Loan Bank convertible advance at 5.22% due March 9, 2011
callable on or after March 9, 2006
    
    
    3,107
    
    
    
    3,141Federal Home
Loan Bank convertible advance at 3.24% due September 20, 2012
was callable on September 20, 2007 (1)
    
    
    
    
    
    
    7,000Federal Home
Loan Bank convertible advance at 4.99% due February 9, 2009
    
    
    5,000
    
    
    
    Federal Home
Loan Bank convertible advance at 4.70% due September 21, 2009
    
    
    2,000
    
    
    
    Federal Home
Loan Bank convertible advance at 4.67% due September 20, 2010
    
    
    5,000
    
    
    
    
 
 (1)
    
    The Company called this debt on September 20, 2007.  62




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13. MATURITIES OF TIME DEPOSITS
  MaturitiesYear
    
    (in thousands)2008
    
    $
    388,5092009
    
    
    24,4722010
    
    
    13,9452011
    
    
    6,723Total
    
    $
    433,649
 14. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
  (in thousands except per share data)
    
    2007
    
    2006
    
    2005BASIC EARNINGS (LOSS) PER SHARENet income (loss)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010Divide by: Weighted average shares outstanding
    
    
    15,775
    
    
    
    16,049
    
    
    
    16,414Basic earnings (loss) per share
    
    $
    (0.97
    )
    
    $
    1.12
    
    
    $
    0.91DILUTED EARNINGS (LOSS) PER SHARENet income (loss)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010Divide by: Weighted average shares outstanding
    
    
    15,775
    
    
    
    16,049
    
    
    
    16,414Potentially dilutive effect of
stock options
    
    
    
    
    
    
    55
    
    
    
    55Weighted average shares outstanding,
including potentially dilutive effect
of stock options
    
    
    15,775
    
    
    
    16,104
    
    
    
    16,469Diluted earnings (loss) per share
    
    $
    (0.97
    )
    
    $
    1.12
    
    
    $
    0.91
 63




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15. REGULATION AND REGULATORY RESTRICTIONS
       Adequately
    
    Well-Actual
    
    Capitalized
    
    Capitalized(dollars in thousands)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAs of December 31, 2007Total capital to risk weighted assets
    
    $
    117,174
    
    
    
    11.22
    %
    
    $
    83,518
    
    
    
    8.00
    %
    
    $
    104,398
    
    
    
    10.00
    %Tier I capital to risk weighted assets
    
    
    104,067
    
    
    
    9.97
    %
    
    
    41,759
    
    
    
    4.00
    %
    
    
    62,639
    
    
    
    6.00
    %Tier I capital to average assets
    
    
    104,067
    
    
    
    8.76
    %
    
    
    47,524
    
    
    
    4.00
    %
    
    
    59,405
    
    
    
    5.00
    %As of December 31, 2006Total capital to risk weighted assets
    
    $
    148,898
    
    
    
    15.05
    %
    
    $
    79,154
    
    
    
    8.00
    %
    
    $
    98,943
    
    
    
    10.00
    %Tier I capital to risk weighted assets
    
    
    136,363
    
    
    
    13.78
    %
    
    
    39,577
    
    
    
    4.00
    %
    
    
    59,366
    
    
    
    6.00
    %Tier I capital to average assets
    
    
    136,363
    
    
    
    11.56
    %
    
    
    47,173
    
    
    
    4.00
    %
    
    
    58,966
    
    
    
    5.00
    %
   64




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16. ADOPTION OF STAFF ACCOUNTING BULLETIN NUMBER 108
     17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
  December 31,Condensed Balance Sheets(in thousands)
    
    2007
    
    2006Assets:Cash and cash equivalents
    
    $
    27,345
    
    
    $
    34,437Investment in subsidiary bank at equity
    
    
    104,406
    
    
    
    137,241Investment in subsidiary mortgage bank at equity
    
    
    6,661
    
    
    
    6,395Other investments
    
    
    3,872
    
    
    
    4,859Other assets
    
    
    122
    
    
    
    255Total
    
    $
    142,406
    
    
    $
    183,187Liabilities and Stockholders Equity:Overnight and short-term borrowings
    
    $
    22,629
    
    
    $
    29,662Long-term borrowings
    
    
    2,500
    
    
    
    5,000Other liabilities
    
    
    2,012
    
    
    
    2,092Stockholders equity
    
    
    115,265
    
    
    
    146,433Total
    
    $
    142,406
    
    
    $
    183,187
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For the Years Ended December 31,Condensed Results of Operations
    
    2007
    
    2006
    
    2005(in thousands)Equity in earnings of subsidiary bank:Dividends
    
    $
    19,734
    
    
    $
    11,211
    
    
    $
    15,577Earnings retained
    
    
    (34,129
    )
    
    
    7,755
    
    
    
    (272
    )Equity in earnings of subsidiary mortgage bank:Dividends
    
    
    168
    
    
    
    
    
    
    
    203Earnings retained
    
    
    213
    
    
    
    401
    
    
    
    118Income (expenses), net
    
    
    (1,289
    )
    
    
    (1,335
    )
    
    
    (616
    )Net income (loss)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010Condensed Cash FlowCash flows from operating activities:Net income (loss)
    
    $
    (15,303
    )
    
    $
    18,032
    
    
    $
    15,010Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Equity in undistributed earnings of subsidiaries
    
    
    33,917
    
    
    
    (8,156
    )
    
    
    154Stock-based compensation expense
    
    
    15
    
    
    
    21
    
    
    
    Premium amortization and discount
accretion, net
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )Gains on sales or calls of
securities available for sale
    
    
    
    
    
    
    (118
    )
    
    
    (148
    )Decrease in accrued interest receivable
    
    
    11
    
    
    
    4
    
    
    
    Increase in accrued interest payable
    
    
    
    
    
    
    1
    
    
    
    Decrease (increase) in other assets
    
    
    434
    
    
    
    (4
    )
    
    
    70Increase (decrease) in other liabilities
    
    
    (4
    )
    
    
    (299
    )
    
    
    119Net cash provided by operating activities
    
    
    19,068
    
    
    
    9,479
    
    
    
    15,203Cash flows from investing activities:Proceeds from maturities of securities
available for sale
    
    
    406
    
    
    
    398
    
    
    
    4Proceeds from sales of securities
available for sale
    
    
    
    
    
    
    485
    
    
    
    280Purchases of securities available for sale
    
    
    (200
    )
    
    
    (895
    )
    
    
    (100
    )Net cash provided (used) by investing activities
    
    
    206
    
    
    
    (12
    )
    
    
    184Cash flows from financing activities:Net increase (decrease) in overnight and
short-term borrowings
    
    
    (7,033
    )
    
    
    2,872
    
    
    
    2,963Net decrease in long-term borrowings
    
    
    (2,500
    )
    
    
    
    
    
    
    Net proceeds from issuance of common stock
    
    
    557
    
    
    
    615
    
    
    
    164Net dividends paid
    
    
    (8,239
    )
    
    
    (7,485
    )
    
    
    (6,979
    )Purchases of common stock for treasury
    
    
    (9,151
    )
    
    
    (2,643
    )
    
    
    (8,092
    )Cash paid for fractional shares
    
    
    
    
    
    
    (11
    )
    
    
    Net cash used by financing activities
    
    
    (26,366
    )
    
    
    (6,652
    )
    
    
    (11,944
    )Net increase (decrease) in cash
    
    
    (7,092
    )
    
    
    2,815
    
    
    
    3,443Cash at beginning of year
    
    
    34,437
    
    
    
    31,622
    
    
    
    28,179Cash at end of year
    
    $
    27,345
    
    
    $
    34,437
    
    
    $
    31,622Supplemental disclosure of non-cash transactions:Cash paid during the year for:Interest paid
    
    $
    1,199
    
    
    $
    1,328
    
    
    $
    671Transfer from surplus to common
stock due to stock split
    
    
    
    
    
    
    3,784
    
    
    
    
 66




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18. COMMITMENTS AND CONTINGENCIES
  December 31,(in thousands)
    
    2007
    
    2006Financial instruments whose contract amounts represent credit riskCommitments to extend credit
    
    $
    202,451
    
    
    $
    175,875Standby letters of credit
    
    
    7,839
    
    
    
    5,911Financial instruments whose notional or contract amounts are
intended to hedge against interest rate riskForward commitments and options to sell mortgage-backed
securities
    
    $
    7,330
    
    
    $
    9,031
      67




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19. FAIR VALUE OF FINANCIAL INSTRUMENTS
  December 31, 2007
    
    December 31, 2006Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    Fair(in thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueAssets:Cash and cash equivalents
    
    $
    33,324
    
    
    $
    33,324
    
    
    $
    49,981
    
    
    $
    49,981Marketable securities
    
    
    147,229
    
    
    
    147,968
    
    
    
    169,567
    
    
    
    170,333Loans
    
    
    928,653
    
    
    
    930,015
    
    
    
    896,705
    
    
    
    892,835Mortgage loans held for sale
    
    
    15,319
    
    
    
    15,515
    
    
    
    11,797
    
    
    
    12,020Liabilities:Demand deposits
    
    
    538,340
    
    
    
    538,340
    
    
    
    514,099
    
    
    
    514,099Time deposits
    
    
    433,649
    
    
    
    436,915
    
    
    
    449,738
    
    
    
    449,259Overnight
and short-term borrowings
    
    
    100,190
    
    
    
    100,190
    
    
    
    59,698
    
    
    
    59,698Long-term borrowings
    
    
    17,607
    
    
    
    18,224
    
    
    
    15,141
    
    
    
    14,722
     68




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20. DERIVATIVE FINANCIAL INSTRUMENTS
  Derivative Financial Instruments
 December 31, 2007
    
    December 31, 2006Estimated
    
    
    
    
    
    EstimatedNotional
    
    Fair
    
    Notional
    
    Fair(in thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueMortgage interest rate lock
commitments
    
    $
    11,053
    
    
    $
    (18
    )
    
    $
    5,836
    
    
    $
    (112
    )Forward commitments and options
to sell mortgage-backed securities
    
    
    7,330
    
    
    
    (61
    )
    
    
    9,031
    
    
    
    12Total
    
    $
    18,383
    
    
    $
    (79
    )
    
    $
    14,867
    
    
    $
    (100
    )
  21. OPERATING SEGMENTS
    69




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COMMUNITY
BANKING
  MORTGAGE
BANKING
  OTHER
   (in thousands)
    
    2007
    
    2006
    
    2005COMMUNITY BANKINGNet interest income
    
    $
    50,271
    
    
    $
    52,563
    
    
    $
    45,156Provision for loan losses
    
    
    55,083
    
    
    
    6,366
    
    
    
    5,158Noninterest income
    
    
    9,085
    
    
    
    8,415
    
    
    
    7,773Noninterest expense
    
    
    30,105
    
    
    
    26,033
    
    
    
    24,803Income (loss) before income tax expense (benefit)
    
    
    (25,832
    )
    
    
    28,579
    
    
    
    22,968Net income (loss)
    
    
    (14,395
    )
    
    
    18,966
    
    
    
    15,304Identifiable segment assets
    
    
    1,179,466
    
    
    
    1,166,171
    
    
    
    1,074,552MORTGAGE BANKINGNet interest income
    
    
    3,249
    
    
    
    3,226
    
    
    
    3,186Provision for loan losses
    
    
    48
    
    
    
    48
    
    
    
    36Noninterest income
    
    
    3,916
    
    
    
    3,975
    
    
    
    3,991Noninterest expense
    
    
    6,482
    
    
    
    6,485
    
    
    
    6,605Income before income taxes
    
    
    635
    
    
    
    668
    
    
    
    536Net income
    
    
    381
    
    
    
    401
    
    
    
    322Identifiable segment assets
    
    
    35,167
    
    
    
    28,557
    
    
    
    27,522ALL OTHERNet interest expense
    
    
    (875
    )
    
    
    (1,023
    )
    
    
    (356
    )Noninterest income
    
    
    
    
    
    
    118
    
    
    
    147Noninterest expense
    
    
    414
    
    
    
    430
    
    
    
    407Loss before income taxes
    
    
    (1,289
    )
    
    
    (1,335
    )
    
    
    (616
    )Net loss
    
    
    (1,289
    )
    
    
    (1,335
    )
    
    
    (616
    )Identifiable segment assets
    
    
    4,515
    
    
    
    5,045
    
    
    
    4,651TOTAL SEGMENTSNet interest income
    
    
    52,645
    
    
    
    54,766
    
    
    
    47,986Provision for loan losses
    
    
    55,131
    
    
    
    6,414
    
    
    
    5,194Noninterest income
    
    
    13,001
    
    
    
    12,508
    
    
    
    11,911Noninterest expense
    
    
    37,001
    
    
    
    32,948
    
    
    
    31,815Income (loss) before income tax expense (benefit)
    
    
    (26,486
    )
    
    
    27,912
    
    
    
    22,888Net income (loss)
    
    
    (15,303
    )
    
    
    18,032
    
    
    
    15,010Identifiable segment assets
    
    
    1,219,148
    
    
    
    1,199,773
    
    
    
    1,106,725
 70




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22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEARS ENDED DECEMBER 31, 2007 AND 2006  (in thousands except per share data)
 2007
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Interest income
    
    $
    22,403
    
    
    $
    23,030
    
    
    $
    21,947
    
    
    $
    22,113Interest expense
    
    
    8,960
    
    
    
    9,192
    
    
    
    9,387
    
    
    
    9,309Net interest income
    
    
    13,443
    
    
    
    13,838
    
    
    
    12,560
    
    
    
    12,804Provision for loan losses
    
    
    1,917
    
    
    
    7,471
    
    
    
    42,737
    
    
    
    3,006Net interest income (loss) after
provision for loan losses
    
    
    11,526
    
    
    
    6,367
    
    
    
    (30,177
    )
    
    
    9,798Other income
    
    
    3,151
    
    
    
    3,210
    
    
    
    3,150
    
    
    
    3,490Other expense
    
    
    8,336
    
    
    
    8,789
    
    
    
    9,380
    
    
    
    10,496Income (loss) before income
tax expense (benefit)
    
    
    6,341
    
    
    
    788
    
    
    
    (36,407
    )
    
    
    2,792Income tax expense (benefit)
    
    
    2,297
    
    
    
    51
    
    
    
    (14,391
    )
    
    
    860Net income (loss)
    
    $
    4,044
    
    
    $
    737
    
    
    $
    (22,016
    )
    
    $
    1,932Net income (loss) per shareBasic
    
    $
    0.25
    
    
    $
    0.05
    
    
    $
    (1.40
    )
    
    $
    0.12Diluted
    
    
    0.25
    
    
    
    0.05
    
    
    
    (1.40
    )
    
    
    0.12Average shares outstandingBasic
    
    
    16,018
    
    
    
    15,928
    
    
    
    15,694
    
    
    
    15,468Diluted
    
    
    16,074
    
    
    
    15,970
    
    
    
    15,694
    
    
    
    15,490
 2006
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Interest income
    
    $
    19,738
    
    
    $
    21,486
    
    
    $
    22,445
    
    
    $
    22,874Interest expense
    
    
    6,622
    
    
    
    7,516
    
    
    
    8,654
    
    
    
    8,985Net interest income
    
    
    13,116
    
    
    
    13,970
    
    
    
    13,791
    
    
    
    13,889Provision for loan losses
    
    
    1,235
    
    
    
    1,915
    
    
    
    1,387
    
    
    
    1,877Net interest income after
provision for loan losses
    
    
    11,881
    
    
    
    12,055
    
    
    
    12,404
    
    
    
    12,012Other income
    
    
    3,001
    
    
    
    3,295
    
    
    
    3,183
    
    
    
    3,029Other expense
    
    
    8,040
    
    
    
    8,388
    
    
    
    8,484
    
    
    
    8,036Income before income
tax expense
    
    
    6,842
    
    
    
    6,962
    
    
    
    7,103
    
    
    
    7,005Income tax expense
    
    
    2,395
    
    
    
    2,501
    
    
    
    2,519
    
    
    
    2,465Net income
    
    $
    4,447
    
    
    $
    4,461
    
    
    $
    4,584
    
    
    $
    4,540Net income per shareBasic*
    
    $
    0.28
    
    
    $
    0.28
    
    
    $
    0.29
    
    
    $
    0.28Diluted*
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.29
    
    
    
    0.28Average shares outstandingBasic*
    
    
    16,098
    
    
    
    16,058
    
    
    
    16,018
    
    
    
    16,022Diluted*
    
    
    16,153
    
    
    
    16,108
    
    
    
    16,072
    
    
    
    16,082
 
  *
    
    Amounts reflect the 5-for-4 stock split distributed September 25, 2006. 
   71




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Evaluation of Disclosure Controls and Procedures
  MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 Internal ControlIntegrated Framework
     72




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Remediation Plan
  
    
    We have restructured our lending staff, reassigned portfolio responsibilities, and revised
loan officer lending authorities.
    
    We have added additional resources to our Credit Administration staff. These additions
have resulted in improving our loan risk grading effectiveness. With the help of the new
Chief Credit Officer we hired at the end of the second quarter, we have also implemented
other monitoring procedures that have improved the loan underwriting processes and Credit
Administration effectiveness.
    
    We have developed a more effective process for estimating the allowance for loan loss.
    
    We continue to evaluate our personnel resources. If adequate staff is not secured in a
timely manner, we plan to use independent third parties to provide assistance in our credit
administration and internal control improvement initiatives.
    
    We continue to assess current lending and credit administration policies and procedures,
and are revising them as necessary to develop and implement policies and procedures that
will promote a culture of compliance and accountability.
  Changes in Internal Control over Financial Reporting
  73




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal
ControlIntegrated Framework
     74




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Internal Control Integrated Framework
   /s/ Dixon Hughes PLLCDIXON HUGHES PLLCCharlotte, North CarolinaMarch 17, 2008
 
   75




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(a)1.
    
    Financial StatementsThe information required by this item is set forth under Item 8.2.
    
    Financial Statement SchedulesThe information required by this item is set forth in the Notes to Consolidated Financial
Statements under Item 8.3.
    
    Exhibits3.1
    
    Certificate of Incorporation, as amendedBank of Granite Corporations Restated Certificate of Incorporation, filed as Exhibit 3.1
to our Quarterly Report on Form 10-Q dated May 9, 2006, is incorporated herein by
reference.3.2
    
    Bylaws of the Registrant, as amendedBank of Granite Corporations Amended Bylaws, filed as Exhibit 3.1 to the Registrants
Current Report on Form 8-K dated October 18, 2007, is incorporated herein by reference.4.
    
    Instruments defining the rights of holders4.1
    
    Form of stock certificate for Bank of Granite Corporations common stock, filed as Exhibit
    4.1 to our Registration Statement on Form S-4 (Registration Statement No. 333-104233)
on April 1, 2003, is incorporated herein by reference.4.2
    
    Articles 5, 6, 7, 10 and 13 of the Restated Certificate of Incorporation of Bank of Granite
Corporation (included in Exhibit 3.1 hereto).10.
    
    Material Contracts10.1
    
    Bank of Granite Employees Profit Sharing Plan and Trust, as amended, filed as
Exhibit 4.1 to the Registrants Registration Statement on Form S-8 (Registration Statement
No. 333-102383) on January 7, 2003, is incorporated herein by reference.10.2
    
    Amended and Restated Bank of Granite Supplemental Executive Retirement Plan, filed as
Exhibit 10.1 to our Current Report on Form 8-K dated
April 16, 2007 is incorporated
herein by reference.**10.3.
    
    Amended and Restated Employment and Noncompetition Agreement, dated May 1, 2003,
between GLL & Associates, Inc and Gary L Lackey filed as Exhibit 10.4 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31, 2003 is incorporated
herein by reference.**
 77




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10.4
    
    Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and Charles M. Snipes filed as Exhibit 10.7 to our Annual Report on Form
10-K for the fiscal year ended December 31, 2001 is incorporated herein by reference.**10.5
    
    Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and Kirby A. Tyndall filed as Exhibit 10.8 to our Annual Report on Form
10-K for the fiscal year ended December 31, 2001 is incorporated herein by reference.**10.6
    
    Executive Supplemental Retirement Plan Executive Agreement, dated March 30, 2005
between the Bank and R. Scott Anderson filed as Exhibit 10.9 to our Annual Report on Form
10-K for the fiscal year ended December 31, 2005 is incorporated herein by reference.**10.7
    
    Change of Control Agreement, dated January 1, 2002, between the Company and Charles
M. Snipes filed as Exhibit 10.10 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 is incorporated herein by reference.**10.8
    
    Change of Control Agreement, dated January 1, 2002, between the Company and Kirby
A. Tyndall filed as Exhibit 10.11 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2001 is incorporated herein by reference.**10.9
    
    Change of Control Agreement, dated June 22, 2004, between the Company and R. Scott
Anderson filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 is incorporated herein by reference.**10.10
    
    Written Description of Director Compensation pursuant to Item 601(b)(10)(iii)(A) of
Regulation S-K, of our Current Report on Form 8-K, dated April 17, 2006, is incorporated
herein by reference.**10.11
    
    Written Description of Executive Officer Compensation pursuant to Item 601(b)(10)(iii)(A)
of Regulation S-K, dated December 17, 2007.**10.12
    
    Consulting Agreement, dated December 19, 2005, between the Bank and John A. Forlines,
Jr. filed as Exhibit 10.1 to our Current Report on Form 8-K dated December 19, 2005, is
incorporated herein by reference.10.13
    
    Change of Control Agreement, dated January 1, 2002, between the Company and D. Mark
Stephens filed as Exhibit 10.16 to our Annual Report on Form 10-K for the fiscal year
ended December 31, 2006 is incorporated herein by reference.**10.14
    
    Executive Supplemental Retirement Plan Executive Agreement, dated January 26, 2002,
Amended December 29, 2005, between the Bank and D. Mark Stephens filed as Exhibit
10.17 to our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 is
incorporated herein by reference.**10.15
    
    Bank of Granite Corporations 2007 Stock Incentive Plan, filed as Exhibit 10.2 to our
Quarterly Report on Form 10-Q dated August 9, 2007, is incorporated herein by reference.**14.
    
    Ethics Policy, dated March 8, 2004, filed as Exhibit 14 to our Annual Report on Form
10-K for the fiscal year ended December 31, 2004 is incorporated herein by reference.21.
    
    Subsidiaries of the RegistrantThe information required by this item is also set forth under Item 8, Note 1, Summary
of Significant Accounting Policies.
 78




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##### Table of Contents



23.1
    
    Consent of Dixon Hughes PLLC23.2
    
    Consent of Deloitte & Touche LLP31.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200231.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200232.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    Management Compensatory plan or arrangement 79




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##### Table of Contents



BANK OF GRANITE CORPORATIONBy:
    /s/ R. Scott AndersonR. Scott AndersonChief Executive Officer March 17, 2008  Signature
    
    Title
    
    Date/s/ R. Scott Anderson

R. Scott Anderson
    
    Chief Executive Officer
    
    March 17, 2008/s/ Kirby A. Tyndall

Kirby A. Tyndall
    
    Secretary, Treasurer, 
Chief Financial 
Officer and Principal 
Accounting Officer
    
    March 17, 2008/s/ Charles M. Snipes

Charles M. Snipes
    
    Chairman and Director
    
    March 17, 2008/s/ John N. Bray

John N. Bray
    
    Director
    
    March 17, 2008/s/ Joseph D. Crocker

Joseph D. Crocker
    
    Director
    
    March 17, 2008/s/ Leila N. Erwin

Leila N. Erwin
    
    Director
    
    March 17, 2008/s/ Paul M. Fleetwood, III

Paul M. Fleetwood, III
    
    Director
    
    March 17, 2008/s/ Hugh R. Gaither

Hugh R. Gaither
    
    Director
    
    March 17, 2008/s/ James Y. Preston

James Y. Preston
    
    Director
    
    March 17, 2008/s/ Boyd C. Wilson, Jr.

Boyd C. Wilson, Jr.
    
    Director
    
    March 17, 2008
 80




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##### Table of Contents



BeginsExhibit
    
    
    
    on Page3.1
    
    Bank of Granite Corporations Certificate of Incorporation
    
    *3.2
    
    Bank of Granite Corporations Bylaws
    
    *4.1
    
    Form of stock certificate
    
    *4.2
    
    Articles 5, 6, 7, 10 and 13 of the Restated Certificate of
Incorporation
    
    *10.1
    
    Bank of Granite Employees Profit Sharing Plan and Trust
    
    *10.2
    
    Bank of Granite Supplemental Executive Retirement Plan**
    
    *10.3
    
    Amended and Restated Employment and Noncompetition
Agreement between GLL & Associates, Inc. and
Gary L. Lackey**
    
    *10.4
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and Charles M. Snipes**
    
    *10.5
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and Kirby A. Tyndall**
    
    *10.6
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and R. Scott Anderson**
    
    *10.7
    
    Change of Control Agreement between the Company and
Charles M. Snipes**
    
    *10.8
    
    Change of Control Agreement between the Company and
Kirby A. Tyndall**
    
    *10.9
    
    Change of Control Agreement between the Company and
R. Scott Anderson**
    
    *10.10
    
    Written Description of Director Compensation**
    
    *10.11
    
    Written Description of Executive Officer Compensation**
    
    Filed herewith10.12
    
    Consulting Agreement between the Company and
John A. Forlines, Jr.
    
    *10.13
    
    Change of Control Agreement between the Company and
D. Mark Stephens**
    
    *10.14
    
    Amended Executive Supplemental Retirement Plan Executive
Agreement between the Bank and D. Mark Stephens**
    
    *10.15
    
    Bank of Granite Corporations 2007 Stock Incentive Plan**
    
    *14
    
    Ethics Policy
    
    *21
    
    Subsidiaries of the Registrant
    
    Filed herewith23.1
    
    Consent of Independent Auditors
    
    Filed herewith23.2
    
    Consent of Independent Auditors
    
    Filed herewith31.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith31.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith32.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith32.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith
 
 *
    
    Incorporated herein by reference**
    
    Management compensatory plan or arrangement 81