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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, 2005
 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)Registrants telephone number, including area code
    
    (828) 496-2000
 None
 Title of each class
    
    Name of exchange on which registered
  Common Stock, $1.00 par value
 
  o þ
 o þ
 þ o
 þ
 o þ o
 o þ




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##### 



20062005
    
    ProxyForm 10-K
    
    StatementPage
    
    PagePART IItem 1
 Business
    
    
    3
    
    
    
    

    n/aItem 1A  Risk Factors
    
    
    8
    
    
    
    

    n/aItem 1B  Unresolved Staff Comments
    
    
    9
    
    
    
    
    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
Shareholder 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
    
    
    40Item 8
 Financial Statements and Supplementary
Data
    
    
    41
    
    
    
    
    n/aItem 9
 Changes in and Disagreements with
Accountants
on Accounting and Financial
Disclosure
    
    
    72
    
    
    
    
    n/aItem 9A  Controls and Procedures
    
    
    73
    
    
    
    
    n/aItem 9B  Other Information
    
    
    75
    
    
    
    
    n/aPART IIIItem 10
 Directors and Executive Officers of the
Registrant
    
    
    76
    
    
    6, 7, 9 and 22Item 11
 Executive Compensation
    
    
    76
    
    
    13 - 18 and 22Item 12
 Security Ownership of Certain Beneficial
Owners and
Management and Related
Shareholder Matters
    
    
    76
    
    
    3 , 16 and 17Item 13
 Certain Relationships and Related
Transactions
    
    
    76
    
    
    
    
    22Item 14
 Principal Accountant Fees and Services
    
    
    76
    
    
    
    
    23PART IVItem 15
 Exhibits and Financial Statement
Schedules*
    
    
    77
    
    
    
    
    n/aSignatures
    
    
    80
    
    
    
    
    n/aEx-10.9Ex-10.13Ex-11Ex-21Ex-23Ex-31.1Ex-31.2Ex-32.1Ex-32.2
  
 *
    
    Exhibits and Financial Statement Schedules included in or 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
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Unemployment Rates*Caldwell County
    
    
    7.20
    %
    
    
    8.30
    %
    
    
    8.90
    %
    
    
    8.30
    %
    
    
    8.50
    %Catawba County
    
    
    5.20
    %
    
    
    6.60
    %
    
    
    8.00
    %
    
    
    9.10
    %
    
    
    9.30
    %Burke County
    
    
    5.60
    %
    
    
    5.90
    %
    
    
    7.30
    %
    
    
    7.80
    %
    
    
    8.30
    %Watauga County
    
    
    3.00
    %
    
    
    2.00
    %
    
    
    2.20
    %
    
    
    2.70
    %
    
    
    2.20
    %Wilkes County
    
    
    5.00
    %
    
    
    6.00
    %
    
    
    6.70
    %
    
    
    7.80
    %
    
    
    7.40
    %Mecklenburg County
    
    
    4.10
    %
    
    
    4.80
    %
    
    
    5.20
    %
    
    
    5.60
    %
    
    
    4.90
    %Forsyth County
    
    
    4.10
    %
    
    
    4.10
    %
    
    
    5.00
    %
    
    
    5.20
    %
    
    
    4.60
    %North Carolina
    
    
    4.90
    %
    
    
    5.20
    %
    
    
    6.10
    %
    
    
    6.70
    %
    
    
    6.60
    %United States
    
    
    4.90
    %
    
    
    5.40
    %
    
    
    5.70
    %
    
    
    6.00
    %
    
    
    5.80
    %
 
 *
    
    Source: Employment Security Commission of North Carolina  July 2006
    
    July 2004
    
    April 2000Population Projections and Estimates*
    
    Projections
    
    Estimates
    
    CensusCaldwell County
    
    
    79,144
    
    
    
    78,548
    
    
    
    77,708Catawba County
    
    
    151,232
    
    
    
    147,789
    
    
    
    141,686Burke County
    
    
    89,528
    
    
    
    88,895
    
    
    
    89,145Watauga County
    
    
    43,117
    
    
    
    42,854
    
    
    
    42,695Wilkes County
    
    
    67,788
    
    
    
    66,982
    
    
    
    65,632Mecklenburg County
    
    
    805,291
    
    
    
    768,789
    
    
    
    695,471Forsyth County
    
    
    328,126
    
    
    
    320,764
    
    
    
    306,067North Carolina
    
    
    8,792,017
    
    
    
    8,541,263
    
    
    
    8,046,962
 
 *
    
    Source of projection, estimate and census data: North Carolina Office of State
Budget and Management 4




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June 30, 2005
    
    June 30, 2004Bank of Granite
    
    Market
    
    Bank of Granite
    
    MarketCounty
    
    Deposits
    
    Market Share
    
    Deposits
    
    No. of Banks
    
    Deposits
    
    Market Share
    
    Deposits
    
    No. of BanksCaldwell
    
    $
    303.6
    
    
    
    39.6
    %
    
    $
    767.5
    
    
    
    9
    
    
    $
    278.5
    
    
    
    37.1
    %
    
    $
    751.7
    
    
    
    8Catawba
    
    
    331.2
    
    
    
    14.4
    %
    
    
    2,293.7
    
    
    
    13
    
    
    
    307.5
    
    
    
    13.2
    %
    
    
    2,321.9
    
    
    
    11Burke
    
    
    47.5
    
    
    
    7.1
    %
    
    
    670.5
    
    
    
    9
    
    
    
    42.4
    
    
    
    6.4
    %
    
    
    657.6
    
    
    
    8Watauga
    
    
    15.3
    
    
    
    2.2
    %
    
    
    683.2
    
    
    
    12
    
    
    
    7.8
    
    
    
    1.2
    %
    
    
    665.9
    
    
    
    11Wilkes
    
    
    8.1
    
    
    
    1.2
    %
    
    
    690.8
    
    
    
    11
    
    
    
    4.3
    
    
    
    0.7
    %
    
    
    660.4
    
    
    
    10Mecklenburg
    
    
    148.7
    
    
    
    0.2
    %
    
    
    83,121.7
    
    
    
    21
    
    
    
    132.7
    
    
    
    0.2
    %
    
    
    72,055.2
    
    
    
    17Forsyth
    
    
    8.7
    
    
    
    0.1
    %
    
    
    12,953.4
    
    
    
    16
    
    
    none
    
    
    0.0
    %
    
    
    9,925.5
    
    
    
    13
      5




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7




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Decreases 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.
   8




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If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could
decrease.
   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.
  
   9




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® ® The
Wall Street Journal®
    2005
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Price RangeHigh
    
    $
    21.02
    
    
    $
    19.63
    
    
    $
    21.81
    
    
    $
    21.03Low
    
    
    17.70
    
    
    
    16.60
    
    
    
    18.02
    
    
    
    17.51Close
    
    
    18.49
    
    
    
    19.14
    
    
    
    19.04
    
    
    
    18.53Dividend
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.13
    
    
    
    0.14
 2004
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Price RangeHigh
    
    $
    22.84
    
    
    $
    21.82
    
    
    $
    20.85
    
    
    $
    22.93Low
    
    
    19.16
    
    
    
    17.67
    
    
    
    17.95
    
    
    
    18.77Close
    
    
    20.67
    
    
    
    20.89
    
    
    
    19.41
    
    
    
    20.90Dividend
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.13
  11




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##### Table of Contents



(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 PlanOptions, Warrants and
    
    
    Options, Warrants
    
    
    (excluding securitiesRights
    
    
    and Rights
    
    
    reflected in column (a))Equity compensation plans 
Approved by security holders
    
    
    217,555
    
    
    $
    16.12
    
    
    
    237,159Not approved by security holders
    
    
    -0-
    
    
    
    n/a
    
    
    
    n/aTotal
    
    
    217,555
    
    
    $
    16.12
    
    
    
    237,159
  (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, 2005
    
    Oct 31, 2005
    
    
    27,051
    
    
    $
    19.71
    
    
    
    27,051
    
    
    $
    6,514,468
    (3)Nov 1, 2005
    
    Nov 30, 2005
    
    
    39,364
    
    
    
    20.45
    
    
    
    39,364
    
    
    
    5,709,303
    (3)Dec 1, 2005
    
    Dec 31, 2005
    
    
    40,402
    
    
    
    18.98
    
    
    
    40,402
    
    
    
    4,942,327
    (3)Totals
    
    
    106,817
    
    
    $
    19.71
    
    
    
    106,817
 (1)
    
    For the three months ended December 31, 2005, 106,817 shares were purchased in open-market
transactions. The Company does not repurchase shares in connection with disqualifying dispositions of shares
issued under its stock option plans. Optionees execute these transactions through independent, third-party
brokers.(2)
    
    The Company has not historically established expiration dates for its share repurchase
programs.(3)
    
    The currently active repurchase program in the amount of $10,000,000 was announced May 17, 2005
and commenced on May 27, 2005.
 12




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For the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Interest income
    
    $
    68,159,074
    
    
    $
    55,265,889
    
    
    $
    50,696,176
    
    
    $
    45,710,526
    
    
    $
    52,284,219Interest expense
    
    
    20,173,144
    
    
    
    13,107,985
    
    
    
    11,389,491
    
    
    
    10,802,422
    
    
    
    19,443,569Net interest income
    
    
    47,985,930
    
    
    
    42,157,904
    
    
    
    39,306,685
    
    
    
    34,908,104
    
    
    
    32,840,650Provision for loan losses
    
    
    5,193,902
    
    
    
    5,439,160
    
    
    
    4,764,010
    
    
    
    3,492,382
    
    
    
    4,216,772Net interest income after
provision for loan losses
    
    
    42,792,028
    
    
    
    36,718,744
    
    
    
    34,542,675
    
    
    
    31,415,722
    
    
    
    28,623,878Other income
    
    
    11,911,287
    
    
    
    11,256,723
    
    
    
    14,437,740
    
    
    
    11,397,705
    
    
    
    10,140,060Other expense
    
    
    31,815,235
    
    
    
    29,114,940
    
    
    
    25,862,457
    
    
    
    20,316,234
    
    
    
    18,342,279Income before income taxes
    
    
    22,888,080
    
    
    
    18,860,527
    
    
    
    23,117,958
    
    
    
    22,497,193
    
    
    
    20,421,659Income taxes
    
    
    7,878,536
    
    
    
    6,142,307
    
    
    
    7,810,065
    
    
    
    7,394,893
    
    
    
    6,613,104Net income
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893
    
    
    $
    15,102,300
    
    
    $
    13,808,555Per shareNet incomeBasic*
    
    $
    1.14
    
    
    $
    0.94
    
    
    $
    1.14
    
    
    $
    1.11
    
    
    $
    0.99Diluted*
    
    
    1.14
    
    
    
    0.94
    
    
    
    1.13
    
    
    
    1.11
    
    
    
    0.99Cash dividends*
    
    
    0.53
    
    
    
    0.49
    
    
    
    0.46
    
    
    
    0.41
    
    
    
    0.37Book value*
    
    
    10.83
    
    
    
    10.59
    
    
    
    10.43
    
    
    
    9.56
    
    
    
    9.09Share priceHigh*
    
    
    21.81
    
    
    
    22.93
    
    
    
    26.96
    
    
    
    21.59
    
    
    
    19.12Low*
    
    
    16.60
    
    
    
    17.67
    
    
    
    16.17
    
    
    
    15.56
    
    
    
    15.09Close*
    
    
    18.53
    
    
    
    20.90
    
    
    
    21.77
    
    
    
    17.50
    
    
    
    15.82Average shares outstandingBasic*
    
    
    13,131,530
    
    
    
    13,481,397
    
    
    
    13,438,007
    
    
    
    13,547,299
    
    
    
    13,897,764Diluted*
    
    
    13,175,774
    
    
    
    13,531,224
    
    
    
    13,516,700
    
    
    
    13,552,569
    
    
    
    13,900,127Performance ratiosReturn on average assets
    
    
    1.41
    %
    
    
    1.28
    %
    
    
    1.78
    %
    
    
    2.13
    %
    
    
    2.00
    %Return on average equity
    
    
    10.70
    %
    
    
    9.02
    %
    
    
    11.40
    %
    
    
    11.98
    %
    
    
    11.29
    %Average equity to
average assets
    
    
    13.14
    %
    
    
    14.20
    %
    
    
    15.58
    %
    
    
    17.80
    %
    
    
    17.70
    %Dividend payout
    
    
    46.50
    %
    
    
    52.06
    %
    
    
    40.56
    %
    
    
    37.05
    %
    
    
    37.01
    %Efficiency ratio
    
    
    52.12
    %
    
    
    53.17
    %
    
    
    46.81
    %
    
    
    42.29
    %
    
    
    40.96
    %Balances at year endAssets
    
    $
    1,106,724,022
    
    
    $
    1,032,238,449
    
    
    $
    971,382,727
    
    
    $
    742,014,674
    
    
    $
    715,389,907Investment securities
    
    
    153,682,706
    
    
    
    158,560,042
    
    
    
    159,436,361
    
    
    
    124,924,296
    
    
    
    159,185,159Loans (gross)
    
    
    832,447,148
    
    
    
    778,137,430
    
    
    
    715,844,632
    
    
    
    532,921,937
    
    
    
    488,035,108Allowance for loan losses
    
    
    13,923,884
    
    
    
    13,665,013
    
    
    
    10,798,897
    
    
    
    8,834,611
    
    
    
    6,426,477Mortgage loans held for sale
    
    
    14,219,444
    
    
    
    21,553,548
    
    
    
    23,092,846
    
    
    
    32,452,162
    
    
    
    22,375,840Liabilities
    
    
    966,876,031
    
    
    
    891,222,228
    
    
    
    829,567,628
    
    
    
    614,571,832
    
    
    
    590,608,591Deposits
    
    
    879,111,425
    
    
    
    749,861,552
    
    
    
    735,099,355
    
    
    
    547,249,315
    
    
    
    522,782,719Shareholders equity
    
    
    139,847,991
    
    
    
    141,016,221
    
    
    
    141,815,099
    
    
    
    127,442,842
    
    
    
    124,781,316Asset quality ratiosNet charge-offs
to average loans
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %
    
    
    0.21
    %
    
    
    0.86
    %Nonperforming assets
to total assets
    
    
    1.04
    %
    
    
    1.18
    %
    
    
    1.35
    %
    
    
    0.76
    %
    
    
    0.70
    %Allowance coverage of
nonperforming loans
    
    
    130.96
    %
    
    
    125.82
    %
    
    
    95.29
    %
    
    
    199.98
    %
    
    
    136.35
    %
  13




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      Financial Highlights($ in thousands, except per share data)
    
    2005
    
    
    2004
    
    
    % changeEarningsNet interest income
    
    $
    47,986
    
    
    $
    42,158
    
    
    
    13.8
    %Provision for loan losses
    
    
    5,194
    
    
    
    5,439
    
    
    
    -4.5
    %Other income
    
    
    11,911
    
    
    
    11,257
    
    
    
    5.8
    %Other expense
    
    
    31,815
    
    
    
    29,115
    
    
    
    9.3
    %Net income
    
    
    15,010
    
    
    
    12,718
    
    
    
    18.0
    %Per shareNet income- Basic
    
    $
    1.14
    
    
    $
    0.94
    
    
    
    21.3
    %- Diluted
    
    
    1.14
    
    
    
    0.94
    
    
    
    21.3
    %At year-endAssets
    
    $
    1,106,724
    
    
    $
    1,032,238
    
    
    
    7.2
    %Loans
    
    
    832,447
    
    
    
    778,137
    
    
    
    7.0
    %Deposits
    
    
    879,111
    
    
    
    749,862
    
    
    
    17.2
    %RatiosReturn on average assets
    
    
    1.41
    %
    
    
    1.28
    %Return on average equity
    
    
    10.70
    %
    
    
    9.02
    %Average capital to average assets
    
    
    13.14
    %
    
    
    14.20
    %Efficiency ratio
    
    
    52.12
    %
    
    
    53.17
    %
 14




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o
    
    Net interest income increased $5,828,026, or 13.8%, primarily resulting from increased
interest
income from higher rates on loans and, to a lesser extent, higher volumes of loans, which were
partially offset by increased interest expense from higher rates on deposits and, to a lesser
extent,
higher volumes of deposits. As a result, the Companys net interest margin increased 25 basis
points to 4.95% in 2005 compared to 4.70% in 2004.o
    
    Loans grew by $54,309,718 or 7%, while deposits grew by $129,249,873, or 17.2%.o
    
    Other expenses, or operating overhead, increased $2,700,295, or 9.3%, of which $2,745,541 was
related to the overhead costs of community banking operations, partially offset by a slight
decrease
in mortgage banking other expenses. The increase in overhead costs were primarily driven by
higher
personnel costs, which increased $2,584,069. Personnel costs in 2005 included $1,265,000 for a
one-time charge for a retirement bonus and other benefits granted by the Board of Directors in
December to the Companys retiring chairman, while personnel costs in 2004 included $490,272
in
one-time charges. The Banks profit sharing contribution increased $757,703 for 2005.o
    
    Other income increased $654,564, or 5.81%, primarily due to deposit fees and gains from the
sale of
the government guaranteed portions of loans.o
    
    Granite Mortgage, the Companys mortgage banking subsidiary, posted 2005 net income of only
$321,463, a decrease of 39.9% from the $534,630 earned in 2004, primarily due to weaker
mortgage activity throughout 2005, which management attributes mainly to increases in mortgage
interest rates. Mortgage volumes were $265,697,000 in 2005 compared to $280,898,000 in 2004,
a decline of 5.4%.o
    
    During 2005, loan loss provisions decreased $245,258, or 4.5%, from the increased provisions
in 2004, which were established to provide for possible charge-offs due to continued weak
local
economies. Total nonperforming loans improved slightly to $10,632,029 as of December 31, 2005
compared to $10,861,104 as of December 31, 2004.o
    
    During 2005, the Company repurchased 421,746 shares of its common stock for $8,092,457 or an
average cost of $19.19 per share.
    15




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Disclosures about Segments of an Enterprise and
Related Information
 16




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Accounting for
Creditors for
Impairment for a Loan.
  17




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24




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2005
    
    2004
    
    2003Average
    
    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)
    
    $
    827,003
    
    
    
    7.41
    %
    
    $
    61,312
    
    
    $
    762,995
    
    
    
    6.36
    %
    
    $
    48,524
    
    
    $
    654,289
    
    
    
    6.79
    %
    
    $
    44,456Taxable securities
    
    
    111,677
    
    
    
    4.06
    %
    
    
    4,533
    
    
    
    104,334
    
    
    
    4.06
    %
    
    
    4,232
    
    
    
    81,384
    
    
    
    4.11
    %
    
    
    3,342Nontaxable securities (2)
    
    
    49,060
    
    
    
    6.70
    %
    
    
    3,287
    
    
    
    56,849
    
    
    
    6.77
    %
    
    
    3,851
    
    
    
    62,565
    
    
    
    6.89
    %
    
    
    4,310Federal funds sold
    
    
    4,671
    
    
    
    3.81
    %
    
    
    178
    
    
    
    555
    
    
    
    1.26
    %
    
    
    7
    
    
    
    9,093
    
    
    
    1.07
    %
    
    
    97Total interest-earning assets
    
    
    992,411
    
    
    
    6.98
    %
    
    
    69,310
    
    
    
    924,733
    
    
    
    6.12
    %
    
    
    56,614
    
    
    
    807,331
    
    
    
    6.47
    %
    
    
    52,205Cash and due from banks
    
    
    30,260
    
    
    
    
    
    
    
    
    
    
    
    26,103
    
    
    
    
    
    
    
    
    
    
    
    24,487All other assets
    
    
    44,536
    
    
    
    
    
    
    
    
    
    
    
    42,185
    
    
    
    
    
    
    
    
    
    
    
    30,052Total assets
    
    $
    1,067,207
    
    
    
    
    
    
    
    
    
    
    $
    993,021
    
    
    
    
    
    
    
    
    
    
    $
    861,870Liabilities and
shareholders equityNOW deposits
    
    $
    123,953
    
    
    
    0.91
    %
    
    
    1,133
    
    
    $
    117,154
    
    
    
    0.82
    %
    
    
    958
    
    
    $
    94,337
    
    
    
    0.65
    %
    
    
    615Money market deposits
    
    
    168,826
    
    
    
    2.54
    %
    
    
    4,289
    
    
    
    152,453
    
    
    
    1.70
    %
    
    
    2,587
    
    
    
    115,634
    
    
    
    1.79
    %
    
    
    2,066Savings deposits
    
    
    25,676
    
    
    
    0.19
    %
    
    
    50
    
    
    
    26,904
    
    
    
    0.16
    %
    
    
    42
    
    
    
    26,302
    
    
    
    0.14
    %
    
    
    38Time deposits of $100,000
or more
    
    
    192,569
    
    
    
    2.98
    %
    
    
    5,741
    
    
    
    142,261
    
    
    
    2.55
    %
    
    
    3,622
    
    
    
    160,781
    
    
    
    2.16
    %
    
    
    3,471Other time deposits
    
    
    175,099
    
    
    
    3.33
    %
    
    
    5,833
    
    
    
    178,766
    
    
    
    1.96
    %
    
    
    3,503
    
    
    
    133,383
    
    
    
    2.64
    %
    
    
    3,524Interest-bearing deposits
    
    
    686,123
    
    
    
    2.48
    %
    
    
    17,047
    
    
    
    617,538
    
    
    
    1.73
    %
    
    
    10,712
    
    
    
    530,437
    
    
    
    1.83
    %
    
    
    9,714Overnight borrowings
    
    
    39,006
    
    
    
    1.85
    %
    
    
    721
    
    
    
    35,575
    
    
    
    1.39
    %
    
    
    493
    
    
    
    17,762
    
    
    
    1.26
    %
    
    
    224Other borrowings
    
    
    57,066
    
    
    
    4.21
    %
    
    
    2,405
    
    
    
    63,845
    
    
    
    2.98
    %
    
    
    1,903
    
    
    
    61,922
    
    
    
    2.34
    %
    
    
    1,451Total interest-bearing liabilities
    
    
    782,195
    
    
    
    2.58
    %
    
    
    20,173
    
    
    
    716,958
    
    
    
    1.83
    %
    
    
    13,108
    
    
    
    610,121
    
    
    
    1.87
    %
    
    
    11,389Noninterest-bearing deposits
    
    
    137,130
    
    
    
    
    
    
    
    
    
    
    
    128,942
    
    
    
    
    
    
    
    
    
    
    
    109,834Other liabilities
    
    
    7,662
    
    
    
    
    
    
    
    
    
    
    
    6,098
    
    
    
    
    
    
    
    
    
    
    
    7,612Shareholders equity
    
    
    140,220
    
    
    
    
    
    
    
    
    
    
    
    141,023
    
    
    
    
    
    
    
    
    
    
    
    134,303Total liabilities and
shareholders equity
    
    $
    1,067,207
    
    
    
    
    
    
    
    
    
    
    $
    993,021
    
    
    
    
    
    
    
    
    
    
    $
    861,870Net yield on earning assets and
net interest income (2)(3)
    
    
    
    
    
    
    4.95
    %
    
    $
    49,137
    
    
    
    
    
    
    
    4.70
    %
    
    $
    43,506
    
    
    
    
    
    
    
    5.06
    %
    
    $
    40,816Interest rate spread (4)
    
    
    
    
    
    
    4.40
    %
    
    
    
    
    
    
    
    
    
    
    4.29
    %
    
    
    
    
    
    
    
    
    
    
    4.60
    %
 
 (1)
    
    Non-accrual loans have been included.(2)
    
    Yields and interest income on tax-exempt investments have been adjusted to tax equivalent
basis using 35% for 2005, 2004 and 2003.(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 earning
liabilities rate. 25




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2005 compared to 2004
    
    2004 compared to 2003Change
    
    
    
    
    
    ChangeAttributable to
    
    
    
    
    
    Attributable todollars in thousands
    
    Volume(1)
    
    Rate(1)
    

    Total
    
    Volume(1)
    
    Rate(1)
    
    TotalLoans
    
    $
    4,408
    
    
    $
    8,380
    
    
    $
    12,788
    
    
    $
    7,150
    
    
    $
    (3,082
    )
    
    $
    4,068Taxable securities
    
    
    298
    
    
    
    3
    
    
    
    301
    
    
    
    937
    
    
    
    (47
    )
    
    
    890Nontaxable securities
    
    
    (525
    )
    
    
    (39
    )
    
    
    (564
    )
    
    
    (390
    )
    
    
    (69
    )
    
    
    (459
    )Federal funds sold
    
    
    104
    
    
    
    67
    
    
    
    171
    
    
    
    (99
    )
    
    
    9
    
    
    
    (90
    )Interest-earning assets
    
    $
    4,285
    
    
    $
    8,411
    
    
    $
    12,696
    
    
    $
    7,598
    
    
    $
    (3,189
    )
    
    $
    4,409NOW deposits
    
    $
    59
    
    
    $
    116
    
    
    $
    175
    
    
    $
    168
    
    
    $
    175
    
    
    $
    343Money market deposits
    
    
    347
    
    
    
    1,355
    
    
    
    1,702
    
    
    
    641
    
    
    
    (120
    )
    
    
    521Savings deposits
    
    
    (2
    )
    
    
    10
    
    
    
    8
    
    
    
    1
    
    
    
    3
    
    
    
    4Time deposits of $100,000
or more
    
    
    1,390
    
    
    
    729
    
    
    
    2,119
    
    
    
    (436
    )
    
    
    587
    
    
    
    151Other time deposits
    
    
    (97
    )
    
    
    2,427
    
    
    
    2,330
    
    
    
    1,044
    
    
    
    (1,065
    )
    
    
    (21
    )Interest-bearing deposits
    
    
    1,697
    
    
    
    4,637
    
    
    
    6,334
    
    
    
    1,418
    
    
    
    (420
    )
    
    
    998Overnight borrowings
    
    
    55
    
    
    
    173
    
    
    
    228
    
    
    
    236
    
    
    
    33
    
    
    
    269Other borrowings
    
    
    (244
    )
    
    
    746
    
    
    
    502
    
    
    
    51
    
    
    
    401
    
    
    
    452Interest-bearing liabilities
    
    $
    1,508
    
    
    $
    5,556
    
    
    $
    7,064
    
    
    $
    1,705
    
    
    $
    14
    
    
    $
    1,719
 
 (1)
    
    The rate/volume variance for each category has been allocated equally on a consistent basis
between rate and volume variances. 
  ®
  26




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27




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Interest Sensitive Within
    
    
    
    
    
    Non-sensitiveTotal
    
    or Sensitive1 to
    
    91 to
    
    181 to
    
    Within
    
    Beyonddollars in thousands
    
    90 Days
    
    180 Days
    
    365 Days
    
    1 Year
    
    1 Year
    
    TotalInterest-earning AssetsInterest-bearing due from banks
    
    $
    3,906
    
    
    
    
    
    
    
    
    
    
    $
    3,906
    
    
    
    
    
    
    $
    3,906Federal funds sold
    
    
    18,600
    
    
    
    
    
    
    
    
    
    
    
    18,600
    
    
    
    
    
    
    
    18,600Securities (at amortized cost) (1):U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,185
    
    
    
    5,185U.S. Government agencies
    
    
    7,525
    
    
    
    
    
    
    $
    1,996
    
    
    
    9,521
    
    
    
    82,272
    
    
    
    91,793States and political subdivisions
    
    
    1,245
    
    
    $
    4,527
    
    
    
    100
    
    
    
    5,872
    
    
    
    41,076
    
    
    
    46,948Other (including equity securities)
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    200
    
    
    
    11,292
    
    
    
    11,492Loans (gross):Real estate  Construction
    
    
    121,781
    
    
    
    125
    
    
    
    496
    
    
    
    122,402
    
    
    
    3,153
    
    
    
    125,555Real estate  Mortgage
    
    
    386,381
    
    
    
    1,400
    
    
    
    9,152
    
    
    
    396,933
    
    
    
    58,389
    
    
    
    455,322Commercial, financial and agricultural
    
    
    212,163
    
    
    
    1,647
    
    
    
    1,863
    
    
    
    215,673
    
    
    
    15,556
    
    
    
    231,229Consumer
    
    
    4,081
    
    
    
    272
    
    
    
    1,450
    
    
    
    5,803
    
    
    
    15,108
    
    
    
    20,911All other
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    130
    
    
    
    785
    
    
    
    915Mortgages held for sale
    
    
    14,219
    
    
    
    
    
    
    
    
    
    
    
    14,219
    
    
    
    
    
    
    
    14,219Total interest-earning assets
    
    $
    770,101
    
    
    $
    7,971
    
    
    $
    15,187
    
    
    $
    793,259
    
    
    $
    232,816
    
    
    $
    1,026,075Interest-bearing LiabilitiesInterest-bearing deposits:Savings and NOW accounts
    
    $
    153,190
    
    
    
    
    
    
    
    
    
    
    $
    153,190
    
    
    
    
    
    
    $
    153,190Money market accounts
    
    
    174,866
    
    
    
    
    
    
    
    
    
    
    
    174,866
    
    
    
    
    
    
    
    174,866Time deposits of $100,000 or more
    
    
    53,305
    
    
    $
    63,868
    
    
    $
    37,829
    
    
    
    155,002
    
    
    $
    37,567
    
    
    
    192,569Other time deposits
    
    
    47,036
    
    
    
    45,014
    
    
    
    62,327
    
    
    
    154,377
    
    
    
    56,532
    
    
    
    210,909Overnight borrowings
    
    
    27,738
    
    
    
    
    
    
    
    
    
    
    
    27,738
    
    
    
    
    
    
    
    27,738Other borrowings
    
    
    23,570
    
    
    
    8,000
    
    
    
    6,000
    
    
    
    37,570
    
    
    
    12,105
    
    
    
    49,675Total interest-bearing liabilities
    
    $
    479,705
    
    
    $
    116,882
    
    
    $
    106,156
    
    
    $
    702,743
    
    
    $
    106,204
    
    
    $
    808,947Interest sensitivity gap
    
    $
    290,396
    
    
    $
    (108,911
    )
    
    $
    (90,969
    )
    
    $
    90,516Cumulative interest sensitivity gap
    
    
    290,396
    
    
    
    181,485
    
    
    
    90,516
    
    
    
    90,516Interest
earning-assets as a percentage of interest-bearing liabilities

    
    
    161
    %
    
    
    7
    %
    
    
    14
    %
    
    
    113
    %
 
 (1)
    
    Interest sensitivity periods for debt securities are based on contractual maturities. 28




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##### Table of Contents



Estimated Resulting Theoretical Tax Equivalent Net Interest IncomeFor the Twelve-month Periods FollowingDecember 31, 2005
    
    December 31, 2004dollars in thousands
    
    Amount
    
    % Change
    
    Amount
    
    % Change3% interest rate changes prorated over a twelve-month period+3%
    
    $
    56,229
    
    
    
    5.5
    %
    
    $
    47,196
    
    
    
    4.2
    %0%
    
    
    53,295
    
    
    
    0.0
    %
    
    
    45,279
    
    
    
    0.0
    %-3%
    
    
    45,337
    
    
    
    -14.9
    % *
    
    
    40,176
    
    
    
    -11.3
    % *Hypothetical immediate and sustained rate changes of 1%, 2%, 3% and 4%+4%
    
    $
    58,943
    
    
    
    14.0
    %
    
    $
    48,110
    
    
    
    10.5
    %+3%
    
    
    57,161
    
    
    
    10.6
    %
    
    
    47,032
    
    
    
    8.1
    %+2%
    
    
    55,371
    
    
    
    7.1
    %
    
    
    45,909
    
    
    
    5.5
    %+1%
    
    
    53,547
    
    
    
    3.6
    %
    
    
    44,703
    
    
    
    2.7
    %0%
    
    
    51,703
    
    
    
    0.0
    %
    
    
    43,520
    
    
    
    0.0
    %-1%
    
    
    46,480
    
    
    
    -10.1
    %
    
    
    39,492
    
    
    
    -9.3
    %-2%
    
    
    41,187
    
    
    
    -20.3
    %
    
    
    36,386
    
    
    
    -16.4
    % *-3%
    
    
    36,000
    
    
    
    -30.4
    % *
    
    
    33,592
    
    
    
    -22.8
    % *-4%
    
    
    31,463
    
    
    
    -39.1
    % *
    
    
    30,438
    
    
    
    -30.1
    % *
 
 *
    
    The Federal Reserves overnight federal funds rate target was 2.25% at December
31, 2005 and 1.00% at
December 31, 2004. Since it is unlikely that the Federal Reserve would reduce its overnight
federal funds
target rate to 0%, it is difficult to draw meaningful conclusions from theoretical rate
reductions equal to
or exceeding the overnight federal funds target rate.  
 Within
    
    
    One to
    
    
    FiveOne
    
    
    Five
    
    
    Years ordollars in thousands
    
    Year
    
    
    Years
    
    
    More
    
    
    TotalReal estate  Construction
    
    $
    55,188
    
    
    $
    50,057
    
    
    $
    20,310
    
    
    $
    125,555Real estate  Mortgage
    
    
    93,969
    
    
    
    238,664
    
    
    
    122,689
    
    
    
    455,322Commercial,
financial and agricultural
    
    
    135,435
    
    
    
    86,624
    
    
    
    9,170
    
    
    
    231,229Consumer
    
    
    4,518
    
    
    
    16,018
    
    
    
    375
    
    
    
    20,911All other
    
    
    780
    
    
    
    135
    
    
    
    
    
    
    
    915Total
    
    $
    289,890
    
    
    $
    391,498
    
    
    $
    152,544
    
    
    $
    833,932Predetermined rate, maturity
greater than one year
    
    $
    
    
    
    $
    73,448
    
    
    $
    13,069
    
    
    $
    86,517Variable rate or maturing within
one year
    
    
    289,890
    
    
    
    318,050
    
    
    
    139,475
    
    
    
    747,415Total
    
    $
    289,890
    
    
    $
    391,498
    
    
    $
    152,544
    
    
    $
    833,932
 29




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##### Table of Contents



dollars in thousands
    
    2005
    
    
    2004
    
    
    2003Non-interest-bearing demand deposits
    
    $
    137,130
    
    
    $
    128,942
    
    
    $
    109,834Interest-bearing demand deposits
    
    
    292,779
    
    
    
    269,607
    
    
    
    209,971Savings deposits
    
    
    25,676
    
    
    
    26,904
    
    
    
    26,302Time deposits
    
    
    367,668
    
    
    
    321,027
    
    
    
    294,164Total
    
    $
    823,253
    
    
    $
    746,480
    
    
    $
    640,271
  
 Within
    
    Three to
    
    Six to
    
    Within
    
    One toThree
    
    Six
    
    Twelve
    
    One
    
    Fivedollars in thousands
    
    Months
    
    Months
    
    Months
    
    Year
    
    Years
    
    TotalTime deposits of $100,000 or more
    
    $
    53,305
    
    
    $
    63,868
    
    
    $
    37,829
    
    
    $
    155,002
    
    
    $
    37,567
    
    
    $
    192,569
   30




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##### Table of Contents



2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Totaldollars in thousands
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansLoansReal estate
Construction
    
    $
    125,555
    
    
    
    15.1
    %
    
    $
    105,111
    
    
    
    13.5
    %
    
    $
    90,176
    
    
    
    12.6
    %
    
    $
    75,383
    
    
    
    14.1
    %
    
    $
    72,418
    
    
    
    14.2
    %Mortgage
    
    
    455,322
    
    
    
    54.6
    %
    
    
    420,860
    
    
    
    54.0
    %
    
    
    377,956
    
    
    
    52.7
    %
    
    
    245,496
    
    
    
    46.0
    %
    
    
    243,067
    
    
    
    47.4
    %Commercial,
financial and
agricultural
    
    
    231,229
    
    
    
    27.7
    %
    
    
    223,605
    
    
    
    28.7
    %
    
    
    211,477
    
    
    
    29.5
    %
    
    
    175,409
    
    
    
    32.9
    %
    
    
    166,980
    
    
    
    32.7
    %Consumer
    
    
    20,911
    
    
    
    2.5
    %
    
    
    29,015
    
    
    
    3.7
    %
    
    
    35,981
    
    
    
    5.0
    %
    
    
    37,046
    
    
    
    6.9
    %
    
    
    28,441
    
    
    
    5.6
    %All other
    
    
    915
    
    
    
    0.1
    %
    
    
    704
    
    
    
    0.1
    %
    
    
    1,206
    
    
    
    0.2
    %
    
    
    449
    
    
    
    0.1
    %
    
    
    282
    
    
    
    0.1
    %Total loans
    
    
    833,932
    
    
    
    100.0
    %
    
    
    779,295
    
    
    
    100.0
    %
    
    
    716,796
    
    
    
    100.0
    %
    
    
    533,783
    
    
    
    100.0
    %
    
    
    511,188
    
    
    
    100.0
    %Deferred origination
fees, net
    
    
    (1,485
    )
    
    
    
    
    
    
    (1,158
    )
    
    
    
    
    
    
    (951
    )
    
    
    
    
    
    
    (860
    )
    
    
    
    
    
    
    (777
    )Total loans, net of
deferred fees
    
    $
    832,447
    
    
    
    
    
    
    $
    778,137
    
    
    
    
    
    
    $
    715,845
    
    
    
    
    
    
    $
    532,923
    
    
    
    
    
    
    $
    510,411
    dollars in thousands
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Nonperforming assetsNonaccrual loans
    
    $
    6,424
    
    
    $
    6,634
    
    
    $
    8,115
    
    
    $
    3,265
    
    
    $
    2,944Loans past due 90 days or more
and still accruing interest
    
    
    4,208
    
    
    
    4,227
    
    
    
    3,218
    
    
    
    1,153
    
    
    
    1,769Foreclosed properties
    
    
    926
    
    
    
    1,280
    
    
    
    1,775
    
    
    
    1,203
    
    
    
    323Total
    
    $
    11,558
    
    
    $
    12,141
    
    
    $
    13,108
    
    
    $
    5,621
    
    
    $
    5,036Nonperforming loans to total loans
    
    
    1.28
    %
    
    
    1.40
    %
    
    
    1.58
    %
    
    
    0.83
    %
    
    
    0.97
    %Allowance for loan losses to nonperforming loans
    
    
    130.96
    %
    
    
    125.82
    %
    
    
    95.29
    %
    
    
    199.98
    %
    
    
    136.35
    %Nonperforming loans to total assets
    
    
    0.96
    %
    
    
    1.05
    %
    
    
    1.17
    %
    
    
    0.60
    %
    
    
    0.66
    %Nonperforming assets to total assets
    
    
    1.04
    %
    
    
    1.18
    %
    
    
    1.35
    %
    
    
    0.76
    %
    
    
    0.70
    %
 31




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##### Table of Contents



dollars in thousands
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Investment in impaired loans:Impaired loans still accruing interest
    
    $
    4,297
    
    
    $
    5,237
    
    
    $
    3,114
    
    
    $
    1,890
    
    
    $
    1,274Accrued interest on accruing impaired loans
    
    
    129
    
    
    
    116
    
    
    
    90
    
    
    
    56
    
    
    
    38Impaired loans not accruing interest
    
    
    6,424
    
    
    
    6,634
    
    
    
    8,115
    
    
    
    3,265
    
    
    
    2,944Accrued interest on nonaccruing impaired loans
    
    
    197
    
    
    
    151
    
    
    
    215
    
    
    
    127
    
    
    
    131Total investment in impaired loans
    
    $
    11,047
    
    
    $
    12,138
    
    
    $
    11,534
    
    
    $
    5,338
    
    
    $
    4,387Loan loss allowance related to impaired loans
    
    $
    3,249
    
    
    $
    4,325
    
    
    $
    2,412
    
    
    $
    2,196
    
    
    $
    1,372
   32




---



##### Table of Contents



Accounting By Creditors for Impairment of a
Loan.
 33




---



##### Table of Contents



34




---



##### Table of Contents



dollars in thousands
    
    2005
    
    2004
    
    2003
    
    2002
    
    2001Balance at beginning of year
    
    $
    13,665
    
    
    $
    10,799
    
    
    $
    8,835
    
    
    $
    6,426
    
    
    $
    6,352Loans charged off:Real estate
    
    
    919
    
    
    
    930
    
    
    
    1,616
    
    
    
    329
    
    
    
    1,474Commercial, financial and agricultural
    
    
    3,484
    
    
    
    1,040
    
    
    
    2,275
    
    
    
    538
    
    
    
    2,123Credit cards and related plans
    
    
    45
    
    
    
    88
    
    
    
    41
    
    
    
    57
    
    
    
    19Installment loans to individuals
    
    
    540
    
    
    
    683
    
    
    
    767
    
    
    
    260
    
    
    
    468Demand deposit overdraft program
    
    
    262
    
    
    
    297
    
    
    
    389
    
    
    
    371
    
    
    
    417Total charge-offs
    
    
    5,250
    
    
    
    3,038
    
    
    
    5,088
    
    
    
    1,555
    
    
    
    4,501Recoveries of loans previously charged off:Real estate
    
    
    63
    
    
    
    24
    
    
    
    3
    
    
    
    78
    
    
    
    52Commercial, financial and agricultural
    
    
    29
    
    
    
    70
    
    
    
    176
    
    
    
    168
    
    
    
    53Credit cards and related plans
    
    
    3
    
    
    
    4
    
    
    
    5
    
    
    
    2
    
    
    
    5Installment loans to individuals
    
    
    42
    
    
    
    220
    
    
    
    71
    
    
    
    59
    
    
    
    39Demand deposit overdraft program
    
    
    178
    
    
    
    147
    
    
    
    170
    
    
    
    165
    
    
    
    209Total recoveries
    
    
    315
    
    
    
    465
    
    
    
    425
    
    
    
    472
    
    
    
    358Net charge-offs
    
    
    4,935
    
    
    
    2,573
    
    
    
    4,663
    
    
    
    1,083
    
    
    
    4,143Additions charged to operations
    
    
    5,194
    
    
    
    5,439
    
    
    
    4,764
    
    
    
    3,492
    
    
    
    4,217Allowance of loans acquired in purchase
transaction
    
    
    
    
    
    
    
    
    
    
    1,863
    
    
    
    
    
    
    
    Balance at end of year
    
    $
    13,924
    
    
    $
    13,665
    
    
    $
    10,799
    
    
    $
    8,835
    
    
    $
    6,426Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %
    
    
    0.21
    %
    
    
    0.86
    %Allowance coverage of net charge-offs
    
    
    282.14
    %
    
    
    531.08
    %
    
    
    231.62
    %
    
    
    814.81
    %
    
    
    155.15
    %Allowance as a percentage of gross loans
    
    
    1.67
    %
    
    
    1.76
    %
    
    
    1.51
    %
    
    
    1.66
    %
    
    
    1.32
    %Allowance as a percentage of net loans
    
    
    1.70
    %
    
    
    1.79
    %
    
    
    1.53
    %
    
    
    1.69
    %
    
    
    1.33
    %
   
 2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Totaldollars in thousands
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansReal estate
    
    $
    4,448
    
    
    
    69.7
    %
    
    $
    5,782
    
    
    
    67.5
    %
    
    $
    4,602
    
    
    
    65.3
    %
    
    $
    3,564
    
    
    
    60.1
    %
    
    $
    2,397
    
    
    
    61.6
    %Commercial, financial,
and agricultural
    
    
    8,401
    
    
    
    27.7
    %
    
    
    6,759
    
    
    
    28.7
    %
    
    
    5,226
    
    
    
    29.5
    %
    
    
    4,410
    
    
    
    32.9
    %
    
    
    3,306
    
    
    
    32.7
    %Consumer
    
    
    577
    
    
    
    2.5
    %
    
    
    617
    
    
    
    3.7
    %
    
    
    684
    
    
    
    5.0
    %
    
    
    649
    
    
    
    6.9
    %
    
    
    540
    
    
    
    5.6
    %All other loans
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.2
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %Unallocated
    
    
    498
    
    
    
    n/a
    
    
    
    507
    
    
    
    n/a
    
    
    
    287
    
    
    
    n/a
    
    
    
    212
    
    
    
    n/a
    
    
    
    183
    
    
    
    n/aTotal loans
    
    $
    13,924
    
    
    
    100.0
    %
    
    $
    13,665
    
    
    
    100.0
    %
    
    $
    10,799
    
    
    
    100.0
    %
    
    $
    8,835
    
    
    
    100.0
    %
    
    $
    6,426
    
    
    
    100.0
    %
   35




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##### Table of Contents



After One Year but
    
    
    After Five Years butWithin One Year
    
    
    Within Five Years
    
    
    Within Ten Years
    
    
    After Ten Yearsdollars in thousands
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldAvailable for sale: (1)U.S. Treasury
    
    
    
    
    
    
    
    
    
    $
    5,185
    
    
    
    3.33
    %U.S. government agency
    
    $
    9,521
    
    
    
    3.61
    %
    
    
    76,264
    
    
    
    3.85
    %
    
    $
    6,008
    
    
    
    4.85
    %State and political
subdivisions (2)
    
    
    
    
    
    
    
    
    
    
    262
    
    
    
    4.87
    %
    
    
    2,060
    
    
    
    5.15
    %
    
    $
    3,262
    
    
    
    5.91
    %Other
    
    
    200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,559
    
    
    
    7.06
    %Total
    
    $
    9,721
    
    
    
    3.54
    %
    
    $
    81,711
    
    
    
    3.82
    %
    
    $
    8,068
    
    
    
    4.93
    %
    
    $
    6,821
    
    
    
    6.51
    %Held to maturity:State and political
subdivisions (2)
    
    $
    5,872
    
    
    
    6.98
    %
    
    $
    24,758
    
    
    
    6.54
    %
    
    $
    8,029
    
    
    
    6.89
    %
    
    $
    2,704
    
    
    
    7.37
    %Total
    
    $
    5,872
    
    
    
    6.98
    %
    
    $
    24,758
    
    
    
    6.54
    %
    
    $
    8,029
    
    
    
    6.89
    %
    
    $
    2,704
    
    
    
    7.37
    %
 
 (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
2005. 36




---



##### Table of Contents



dollars in thousands
    
    2005
    
    
    2004
    
    
    2003Available for sale (at estimated fair value):U.S. Treasury
    
    $
    5,048
    
    
    $
    5,238
    
    
    $
    5,372U.S. government agency
    
    
    89,815
    
    
    
    77,410
    
    
    
    68,783State and political subdivisions
    
    
    5,527
    
    
    
    5,606
    
    
    
    5,594Other
    
    
    11,928
    
    
    
    19,104
    
    
    
    17,918Total
    
    $
    112,318
    
    
    $
    107,358
    
    
    $
    97,667Held to maturity (at amortized cost):U.S. government agency
    
    $
    
    
    
    $
    2,700
    
    
    $
    5,209State and political subdivisions
    
    
    41,363
    
    
    
    48,502
    
    
    
    56,560Total
    
    $
    41,363
    
    
    $
    51,202
    
    
    $
    61,769
   
 Within
    
    
    One to
    
    
    Three to
    
    
    FiveOne
    
    
    Three
    
    
    Five
    
    
    Years ordollars in thousands
    
    Year
    
    
    Years
    
    
    Years
    
    
    More
    
    
    TotalContractual Cash ObligationsOperating lease obligations
    
    $
    947
    
    
    $
    1,428
    
    
    $
    947
    
    
    $
    2,141
    
    
    $
    5,463Total
    
    $
    947
    
    
    $
    1,428
    
    
    $
    947
    
    
    $
    2,141
    
    
    $
    5,463Other CommitmentsCommitments to extend credit
    
    $
    70,940
    
    
    $
    31,394
    
    
    $
    6,222
    
    
    $
    49,701
    
    
    $
    158,257Standby letters of credit
    
    
    3,067
    
    
    
    207
    
    
    
    
    
    
    
    
    
    
    
    3,274Total
    
    $
    74,007
    
    
    $
    31,601
    
    
    $
    6,222
    
    
    $
    49,701
    
    
    $
    161,531
     37




---



##### Table of Contents



Community Banking
      Mortgage Banking
    38




---



##### Table of Contents



Other
   The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments.
 Share-Based
Payment Accounting for Stock-Based Compensation.
 Accounting Changes and Error Corrections
 39




---



##### Table of Contents



40




---



##### Table of Contents



Begins onPageReport Of Independent Registered Public Accounting Firm
    
    
    42Financial Statements:Consolidated
Balance Sheets December 31, 2005 and 2004
    
    
    43Consolidated
Statements Of Income Years Ended December 31, 2005, 2004 and 2003
    
    
    44Consolidated
Statements Of Comprehensive Income Years Ended December 31, 2005, 2004 and 2003
    
    
    45Consolidated
Statements Of Changes In Shareholders Equity 
Years Ended December 31, 2005, 2004 and 2003
    
    
    46Consolidated
Statements Of Cash Flows 
Years Ended December 31, 2005, 2004 and 2003
    
    
    47Notes
To Consolidated Financial Statements 
Years Ended December 31, 2005, 2004 and 2003
    
    
    49Supplementary Financial Data:Selected
Quarterly Financial Data (Unaudited) 
Years Ended December 31, 2005 and 2004
    
    
    72
 41




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal
ControlIntegrated Framework
 DELOITTE & TOUCHE LLP
 42




---



##### Table of Contents



BANK OF
GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
 2005
    
    2004ASSETS:Cash and cash equivalents (Notes 1 and 18):Cash and due from banks
    
    $
    34,976,107
    
    
    $
    27,993,385Interest-bearing deposits
    
    
    3,905,812
    
    
    
    3,577,447Federal funds sold
    
    
    18,600,000
    
    
    
    Total cash and cash equivalents
    
    
    57,481,919
    
    
    
    31,570,832Investment securities (Notes 1, 2 and 18):Available
for sale, at fair value (amortized cost of $114,054,772 and
$106,854,579 at December 31, 2005 and 2004, respectively)
    
    
    112,319,269
    
    
    
    107,358,249Held to maturity, at amortized cost (fair value of $42,513,168 and
$53,527,673 at December 31, 2005 and 2004,
respectively)
    
    
    41,363,437
    
    
    
    51,201,793Loans (Notes 1, 3 and 18)
    
    
    832,447,148
    
    
    
    778,137,430Allowance for loan losses (Notes 1 and 4)
    
    
    (13,923,884
    )
    
    
    (13,665,013
    )Net loans
    
    
    818,523,264
    
    
    
    764,472,417Mortgage loans held for sale (Note 1)
    
    
    14,219,444
    
    
    
    21,553,548Premises and equipment, net (Notes 1, 5 and 10)
    
    
    14,805,876
    
    
    
    13,074,186Accrued interest receivable
    
    
    7,387,075
    
    
    
    5,681,091Investment in bank owned life insurance (Notes 1 and 9)
    
    
    19,692,889
    
    
    
    17,703,961Intangible assets (Note 1)
    
    
    11,129,997
    
    
    
    11,227,365Other assets
    
    
    9,800,852
    
    
    
    8,395,007Total assets
    
    $
    1,106,724,022
    
    
    $
    1,032,238,449LIABILITIES AND SHAREHOLDERS EQUITY:Deposits (Notes 13 and 18):Demand
    
    $
    147,576,746
    
    
    $
    127,678,055NOW accounts
    
    
    129,281,747
    
    
    
    121,617,228Money market accounts
    
    
    174,866,304
    
    
    
    161,140,509Savings
    
    
    23,908,599
    
    
    
    25,750,982Time deposits of $100,000 or more
    
    
    192,568,963
    
    
    
    142,261,311Other time deposits
    
    
    210,909,066
    
    
    
    171,413,467Total deposits
    
    
    879,111,425
    
    
    
    749,861,552Overnight borrowings (Notes 11 and 18)
    
    
    27,737,643
    
    
    
    71,748,432Other borrowings (Notes 12 and 18)
    
    
    49,675,003
    
    
    
    63,585,577Accrued interest payable
    
    
    2,500,743
    
    
    
    1,388,929Other liabilities
    
    
    7,851,217
    
    
    
    4,637,738Total liabilities
    
    
    966,876,031
    
    
    
    891,222,228COMMITMENTS AND CONTINGENCIES (Notes 10 and 17)SHAREHOLDERS EQUITY (Notes 1, 7, 8 and 15):Common
stock, $1.00 par value, authorized  25,000,000 shares;
issued  15,096,699 shares in 2005 and 15,079,133 shares in 2004;
outstanding  12,911,922 shares in 2005 and
13,316,102 shares in 2004
    
    
    15,096,699
    
    
    
    15,079,133Additional paid-in capital
    
    
    32,678,939
    
    
    
    32,478,404Retained earnings
    
    
    133,209,287
    
    
    
    125,178,824Accumulated other comprehensive income (loss), net of
deferred income taxes of $692,017 and $200,867 at
December 31, 2005 and 2004, respectively
    
    
    (1,079,261
    )
    
    
    245,076Less: Cost of common stock in treasury;2,184,777 shares in 2005 and 1,763,031 shares in 2004
    
    
    (40,057,673
    )
    
    
    (31,965,216
    )Total shareholders equity
    
    
    139,847,991
    
    
    
    141,016,221Total liabilities and shareholders equity
    
    $
    1,106,724,022
    
    
    $
    1,032,238,449
  43




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##### Table of Contents



BANK OF
GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 2005
    
    2004
    
    2003INTEREST INCOME:Interest and fees from loans
    
    $
    57,083,639
    
    
    $
    44,151,806
    
    
    $
    38,693,788Interest and fees from mortgage banking
    
    
    4,228,323
    
    
    
    4,372,182
    
    
    
    5,762,032Federal funds sold
    
    
    177,568
    
    
    
    6,747
    
    
    
    96,598Interest-bearing deposits
    
    
    232,056
    
    
    
    71,861
    
    
    
    79,896Investments:U.S. Treasury
    
    
    173,018
    
    
    
    173,011
    
    
    
    69,235U.S. Government agencies
    
    
    3,445,771
    
    
    
    3,155,472
    
    
    
    2,604,432States and political subdivisions
    
    
    2,136,742
    
    
    
    2,502,988
    
    
    
    2,801,332Other
    
    
    681,957
    
    
    
    831,822
    
    
    
    588,863Total interest income
    
    
    68,159,074
    
    
    
    55,265,889
    
    
    
    50,696,176INTEREST EXPENSE:Time deposits of $100,000 or more
    
    
    5,740,572
    
    
    
    3,622,035
    
    
    
    3,471,492Other time and savings deposits
    
    
    11,306,523
    
    
    
    7,090,697
    
    
    
    6,243,594Overnight borrowings
    
    
    721,441
    
    
    
    492,728
    
    
    
    223,516Other borrowed funds
    
    
    2,404,608
    
    
    
    1,902,525
    
    
    
    1,450,889Total interest expense
    
    
    20,173,144
    
    
    
    13,107,985
    
    
    
    11,389,491NET INTEREST INCOME
    
    
    47,985,930
    
    
    
    42,157,904
    
    
    
    39,306,685PROVISION FOR LOAN LOSSES (Notes 1 and 4)
    
    
    5,193,902
    
    
    
    5,439,160
    
    
    
    4,764,010NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    42,792,028
    
    
    
    36,718,744
    
    
    
    34,542,675OTHER INCOME:Service charges on deposit accounts
(Note 6)
    
    
    5,630,576
    
    
    
    5,359,206
    
    
    
    5,537,054Other service charges, fees and
commissions
    
    
    775,284
    
    
    
    797,961
    
    
    
    937,787Mortgage banking income
    
    
    3,990,690
    
    
    
    3,844,297
    
    
    
    6,892,171Securities gains (Note 2)
    
    
    68,326
    
    
    
    14,347
    
    
    
    8,533Other
    
    
    1,446,411
    
    
    
    1,240,912
    
    
    
    1,062,195Total other income
    
    
    11,911,287
    
    
    
    11,256,723
    
    
    
    14,437,740OTHER EXPENSES:Salaries and wages
    
    
    16,544,474
    
    
    
    14,668,944
    
    
    
    13,881,228Employee benefits (Note 9)
    
    
    3,938,426
    
    
    
    3,229,887
    
    
    
    2,590,053Occupancy expense, net
    
    
    2,020,296
    
    
    
    1,729,986
    
    
    
    1,205,806Equipment rentals, depreciation and
maintenance (Notes 1 and 5)
    
    
    2,175,312
    
    
    
    1,958,106
    
    
    
    1,387,978Other (Note 6)
    
    
    7,136,727
    
    
    
    7,528,017
    
    
    
    6,797,392Total other expenses
    
    
    31,815,235
    
    
    
    29,114,940
    
    
    
    25,862,457INCOME BEFORE INCOME TAXES
    
    
    22,888,080
    
    
    
    18,860,527
    
    
    
    23,117,958INCOME TAXES (Note 1 and 7)
    
    
    7,878,536
    
    
    
    6,142,307
    
    
    
    7,810,065NET INCOME
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893PER SHARE AMOUNTS (Notes 1 and 14):Net income  Basic
    
    $
    1.14
    
    
    $
    0.94
    
    
    $
    1.14 Diluted
    
    
    1.14
    
    
    
    0.94
    
    
    
    1.13Cash dividends
    
    
    0.53
    
    
    
    0.49
    
    
    
    0.46Book value
    
    
    10.83
    
    
    
    10.59
    
    
    
    10.43
  44




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##### Table of Contents



BANK OF
GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 2005
    
    2004
    
    2003NET INCOME
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893ITEMS OF OTHER COMPREHENSIVE INCOME:Items of other comprehensive income,
before tax:Unrealized losses on securities
available for sale
    
    
    (2,178,684
    )
    
    
    (878,316
    )
    
    
    (265,303
    )Less: Reclassification adjustment for
gains included in net income
    
    
    60,489
    
    
    
    
    
    
    
    8,533Unrealized gains (losses) on mortgage
derivative instruments
    
    
    36,587
    
    
    
    7,529
    
    
    
    (103,740
    )Other comprehensive loss,
before tax
    
    
    (2,202,586
    )
    
    
    (870,787
    )
    
    
    (377,576
    )Less: Changes in deferred income taxes
related to change in unrealized gains
or losses on securities available for sale
    
    
    (892,884
    )
    
    
    (350,230
    )
    
    
    (109,186
    )Less: Changes in deferred income taxes
related to change in unrealized gains
or losses on mortgage derivative
instruments
    
    
    14,635
    
    
    
    3,012
    
    
    
    (41,496
    )Other comprehensive loss,
net of tax
    
    
    (1,324,337
    )
    
    
    (523,569
    )
    
    
    (226,894
    )COMPREHENSIVE INCOME
    
    $
    13,685,207
    
    
    $
    12,194,651
    
    
    $
    15,080,999
  45




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##### Table of Contents



BANK OF
GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 2005
    
    2004
    
    2003COMMON STOCK, $1.00 par valueAt beginning of year
    
    $
    15,079,133
    
    
    $
    14,993,493
    
    
    $
    14,420,986Par value of shares issued for
First Commerce acquisition
    
    
    
    
    
    
    
    
    
    
    543,217Par value of shares issued
under stock option plan
    
    
    17,566
    
    
    
    85,640
    
    
    
    29,290At end of year
    
    
    15,096,699
    
    
    
    15,079,133
    
    
    
    14,993,493ADDITIONAL PAID-IN CAPITALAt beginning of year
    
    
    32,478,404
    
    
    
    31,497,057
    
    
    
    20,694,133Surplus of shares issued for
First Commerce acquisition
    
    
    
    
    
    
    
    
    
    
    10,417,467Surplus of shares issued under
stock option plan
    
    
    146,830
    
    
    
    848,108
    
    
    
    310,671Tax benefit from
nonqualifying dispositions of
stock options
    
    
    53,705
    
    
    
    133,239
    
    
    
    74,786At end of year
    
    
    32,678,939
    
    
    
    32,478,404
    
    
    
    31,497,057RETAINED EARNINGSAt beginning of year
    
    
    125,178,824
    
    
    
    119,081,744
    
    
    
    109,982,826Net income
    
    
    15,009,544
    
    
    
    12,718,220
    
    
    
    15,307,893Cash dividends
    
    
    (6,979,081
    )
    
    
    (6,621,140
    )
    
    
    (6,208,975
    )At end of year
    
    
    133,209,287
    
    
    
    125,178,824
    
    
    
    119,081,744ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXESAt beginning of year
    
    
    245,076
    
    
    
    768,645
    
    
    
    995,539Net change in unrealized gains or losses on securities
available for sale, net of
deferred income taxes
    
    
    (1,346,289
    )
    
    
    (528,086
    )
    
    
    (164,650
    )Net change in unrealized gains or losses on mortgage
derivative instruments, net
of deferred income taxes
    
    
    21,952
    
    
    
    4,517
    
    
    
    (62,244
    )At end of year
    
    
    (1,079,261
    )
    
    
    245,076
    
    
    
    768,645COST OF COMMON STOCK
IN TREASURYAt beginning of year
    
    
    (31,965,216
    )
    
    
    (24,525,840
    )
    
    
    (18,650,642
    )Cost of common stock repurchased
    
    
    (8,092,457
    )
    
    
    (7,439,376
    )
    
    
    (5,875,198
    )At end of year
    
    
    (40,057,673
    )
    
    
    (31,965,216
    )
    
    
    (24,525,840
    )Total shareholders equity
(Notes 1, 7 and 15)
    
    $
    139,847,991
    
    
    $
    141,016,221
    
    
    $
    141,815,099Shares issuedAt beginning of year
    
    
    15,079,133
    
    
    
    14,993,493
    
    
    
    14,420,986Shares issued for First
Commerce acquisition
    
    
    
    
    
    
    
    
    
    
    543,217Shares issued under incentive
stock option plans
    
    
    17,566
    
    
    
    85,640
    
    
    
    29,290At end of year
    
    
    15,096,699
    
    
    
    15,079,133
    
    
    
    14,993,493Common shares in treasuryAt beginning of year
    
    
    (1,763,031
    )
    
    
    (1,393,311
    )
    
    
    (1,087,312
    )Common shares repurchased
    
    
    (421,746
    )
    
    
    (369,720
    )
    
    
    (305,999
    )At end of year
    
    
    (2,184,777
    )
    
    
    (1,763,031
    )
    
    
    (1,393,311
    )Total shares outstanding
    
    
    12,911,922
    
    
    
    13,316,102
    
    
    
    13,600,182
  46




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##### Table of Contents



BANK
OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 2005
    
    
    2004
    
    
    2003INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:Cash flows from operating activities:Net Income
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,563,257
    
    
    
    1,344,432
    
    
    
    895,421Provision for loan loss
    
    
    5,193,902
    
    
    
    5,439,160
    
    
    
    4,764,010Investment security premium
amortization, net
    
    
    423,259
    
    
    
    489,703
    
    
    
    442,226Acquisition premium amortization
(discount accretion), net
    
    
    245,842
    
    
    
    (150,565
    )
    
    
    (177,483
    )Deferred income taxes
    
    
    (482,929
    )
    
    
    (1,517,901
    )
    
    
    82,827Losses (gains) on sales or calls of
securities
available for sale
    
    
    (60,489
    )
    
    
    
    
    
    
    2,698Gains on calls of securities
held to maturity
    
    
    (7,837
    )
    
    
    (14,347
    )
    
    
    (11,231
    )Net decrease in mortgage loans held for
sale
    
    
    7,454,578
    
    
    
    1,643,060
    
    
    
    9,043,168Losses (gains) on disposal or sale of
equipment
    
    
    5,665
    
    
    
    (1,500
    )
    
    
    (38,255
    )Loss (gain) on sale of other real estate
    
    
    (169,271
    )
    
    
    (77,310
    )
    
    
    353,867Increase (decrease) in taxes payable
    
    
    349,066
    
    
    
    1,191,228
    
    
    
    (1,209,631
    )Increase in interest receivable
    
    
    (1,705,984
    )
    
    
    (60,257
    )
    
    
    (227,882
    )Increase (decrease) in interest payable
    
    
    1,111,814
    
    
    
    92,390
    
    
    
    (333,949
    )Increase in cash surrender value of bank
owned life insurance
    
    
    (568,928
    )
    
    
    (598,683
    )
    
    
    (489,038
    )Decrease (increase) in other assets
    
    
    (531,387
    )
    
    
    437,418
    
    
    
    (1,566,475
    )Increase (decrease) in other liabilities
    
    
    2,780,526
    
    
    
    864,686
    
    
    
    (3,445,394
    )Net cash provided by
operating activities
    
    
    30,610,628
    
    
    
    21,799,734
    
    
    
    23,392,772CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    218,725
    
    
    
    29,570,573
    
    
    
    33,867,957Proceeds from maturities, calls and paydowns of
securities held to maturity
    
    
    9,799,250
    
    
    
    10,511,475
    
    
    
    10,801,300Proceeds from sales of securities
available for sale
    
    
    14,638,657
    
    
    
    5,885,000
    
    
    
    1,207,210Purchases of securities available for sale
    
    
    (22,373,402
    )
    
    
    (46,444,401
    )
    
    
    (53,855,273
    )Net increase in loans
    
    
    (59,435,864
    )
    
    
    (65,194,466
    )
    
    
    (72,391,674
    )Increases (decreases) in unrealized gains or losses
on hedged mortgage loan commitments
    
    
    
    
    
    
    (96,233
    )
    
    
    273,982Increases in unrealized gains or losses
on contracts to sell mortgage-backed
securities
    
    
    
    
    
    
    
    
    
    
    (218,084
    )Investment in bank owned life insurance
    
    
    (1,420,000
    )
    
    
    (3,745,000
    )
    
    
    Capital expenditures
    
    
    (3,314,136
    )
    
    
    (2,277,650
    )
    
    
    (2,409,757
    )Proceeds from sales of fixed assets
    
    
    13,524
    
    
    
    72,807
    
    
    
    235,909Proceeds from sales of other real estate
    
    
    709,696
    
    
    
    835,424
    
    
    
    967,105Net cash received in acquisition
    
    
    
    
    
    
    
    
    
    
    13,272,682Net cash used by investing activities
    
    
    (61,163,550
    )
    
    
    (70,882,471
    )
    
    
    (68,248,643
    )
   47




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES  CONSOLIDATED STATEMENTS OF CASH FLOWS  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 2005
    
    
    2004
    
    
    2003CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in demand deposits, NOW and
savings accounts
    
    $
    39,446,622
    
    
    $
    35,252,860
    
    
    $
    47,031,803Net increase (decrease) in time deposits
    
    
    89,843,926
    
    
    
    (19,982,849
    )
    
    
    9,200,623Net increase (decrease) in overnight
borrowings
    
    
    (44,010,789
    )
    
    
    46,543,261
    
    
    
    8,148,807Net decrease in other borrowings
    
    
    (13,908,608
    )
    
    
    (1,628,769
    )
    
    
    (7,569,928
    )Net proceeds from issuance of common
stock
    
    
    164,396
    
    
    
    933,748
    
    
    
    339,961Dividends paid
    
    
    (6,979,081
    )
    
    
    (6,621,140
    )
    
    
    (6,208,975
    )Purchases of common stock for treasury
    
    
    (8,092,457
    )
    
    
    (7,439,376
    )
    
    
    (5,875,198
    )Net cash provided by financing
activities
    
    
    56,464,009
    
    
    
    47,057,735
    
    
    
    45,067,093NET INCREASE (DECREASE) IN
CASH EQUIVALENTS
    
    
    25,911,087
    
    
    
    (2,025,002
    )
    
    
    211,222CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
    
    
    31,570,832
    
    
    
    33,595,834
    
    
    
    33,384,612CASH AND CASH EQUIVALENTS
AT END OF YEAR
    
    $
    57,481,919
    
    
    $
    31,570,832
    
    
    $
    33,595,834SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
    
    
    :Cash paid during the year for:Interest
    
    $
    19,061,330
    
    
    $
    13,015,595
    
    
    $
    11,282,316Income taxes
    
    
    7,529,470
    
    
    
    5,014,227
    
    
    
    9,061,008Noncash investing and financing
activities:Transfer from loans to other real
estate owned
    
    
    944,513
    
    
    
    905,609
    
    
    
    2,595,819
  48




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       49




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##### Table of Contents



50




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##### Table of Contents



2005
    
    
    2004
    
    
    2003Net income as reported
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (22,108
    )
    
    
    (40,991
    )
    
    
    (170,543
    )Pro forma net income
    
    $
    14,987,436
    
    
    $
    12,677,229
    
    
    $
    15,137,350Net income per share as reported  Basic
    
    $
    1.14
    
    
    $
    0.94
    
    
    $
    1.14 Diluted
    
    
    1.14
    
    
    
    0.94
    
    
    
    1.13Pro forma net income per share  Basic
    
    
    1.14
    
    
    
    0.94
    
    
    
    1.13 Diluted
    
    
    1.14
    
    
    
    0.94
    
    
    
    1.12
   2005
    
    
    2004
    
    
    2003Risk-free rate
    
    
    4.03
    %
    
    
    3.45
    %
    
    
    3.45
    %Average expected term (years)
    
    5.6 years
    
    5.6 years
    
    5.7 yearsExpected volatility
    
    
    37.53
    %
    
    
    41.04
    %
    
    
    44.61
    %Expected dividend yield
    
    
    2.96
    %
    
    
    2.61
    %
    
    
    2.53
    %Expected turnover
    
    
    8.76
    %
    
    
    8.96
    %
    
    
    9.26
    %
   51




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##### Table of Contents



The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments.
 Share-Based
Payment Accounting
for Stock-Based Compensation.
 Accounting Changes and Error Corrections 52
    Table of Contents   2. INVESTMENT SECURITIES
  Amortized
    
    
    Gross Unrealized
    
    
    FairType and Contractual Maturity
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAVAILABLE FOR SALEAt December 31, 2005:U. S. Treasury due:After 1 year but within 5 years
    
    $
    5,185,320
    
    
    $
    
    
    
    $
    136,882
    
    
    $
    5,048,438Total U.S. Treasury
    
    
    5,185,320
    
    
    
    
    
    
    
    136,882
    
    
    
    5,048,438U. S. Government agencies due:Within 1 year
    
    
    9,521,111
    
    
    
    26,150
    
    
    
    17,371
    
    
    
    9,529,890After 1 year but within 5 years
    
    
    76,263,846
    
    
    
    
    
    
    
    1,857,251
    
    
    
    74,406,595After 5 years but within 10 years
    
    
    6,007,726
    
    
    
    
    
    
    
    129,027
    
    
    
    5,878,699Total U.S. Government agencies
    
    
    91,792,683
    
    
    
    26,150
    
    
    
    2,003,649
    
    
    
    89,815,184State and local due:After 1 year but within 5 years
    
    
    261,626
    
    
    
    
    
    
    
    1,662
    
    
    
    259,964After 5 years but within 10 years
    
    
    2,060,322
    
    
    
    
    
    
    
    19,016
    
    
    
    2,041,306After 10 years
    
    
    3,261,808
    
    
    
    
    
    
    
    35,631
    
    
    
    3,226,177Total state and local
    
    
    5,583,756
    
    
    
    
    
    
    
    56,309
    
    
    
    5,527,447Others due:Within 1 year
    
    
    199,964
    
    
    
    845
    
    
    
    
    
    
    
    200,809After 10 years
    
    
    3,558,909
    
    
    
    247,449
    
    
    
    42,543
    
    
    
    3,763,815Equity securities
    
    
    7,734,140
    
    
    
    435,071
    
    
    
    205,635
    
    
    
    7,963,576Total others
    
    
    11,493,013
    
    
    
    683,365
    
    
    
    248,178
    
    
    
    11,928,200Total available for sale
    
    $
    114,054,772
    
    
    $
    709,515
    
    
    $
    2,445,018
    
    
    $
    112,319,269HELD TO MATURITYAt December 31, 2005:State and local due:Within 1 year
    
    $
    5,871,982
    
    
    $
    22,033
    
    
    $
    
    
    
    $
    5,894,015After 1 year but within 5 years
    
    
    24,757,828
    
    
    
    574,613
    
    
    
    
    
    
    
    25,332,441After 5 years but within 10 years
    
    
    8,029,428
    
    
    
    364,879
    
    
    
    
    
    
    
    8,394,307After 10 years
    
    
    2,704,199
    
    
    
    188,206
    
    
    
    
    
    
    
    2,892,405Total state and local
    
    
    41,363,437
    
    
    
    1,149,731
    
    
    
    
    
    
    
    42,513,168Total held to maturity
    
    $
    41,363,437
    
    
    $
    1,149,731
    
    
    $
    
    
    
    $
    42,513,168
  53




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##### Table of Contents



Amortized
    
    
    Gross Unrealized
    
    
    FairType and Contractual Maturity
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAVAILABLE FOR SALEAt December 31, 2004:U. S. Treasury due:After 1 year but within 5 years
    
    $
    5,249,802
    
    
    $
    
    
    
    $
    11,520
    
    
    $
    5,238,282Total U.S. Treasury
    
    
    5,249,802
    
    
    
    
    
    
    
    11,520
    
    
    
    5,238,282U. S. Government agencies due:After 1 year but within 5 years
    
    
    74,740,442
    
    
    
    147,276
    
    
    
    466,667
    
    
    
    74,421,051After 5 years but within 10 years
    
    
    3,003,155
    
    
    
    1,752
    
    
    
    16,236
    
    
    
    2,988,671Total U.S. Government agencies
    
    
    77,743,597
    
    
    
    149,028
    
    
    
    482,903
    
    
    
    77,409,722State and local due:After 5 years but within 10 years
    
    
    2,341,845
    
    
    
    14,681
    
    
    
    1,410
    
    
    
    2,355,116After 10 years
    
    
    3,275,725
    
    
    
    1,664
    
    
    
    26,070
    
    
    
    3,251,319Total state and local
    
    
    5,617,570
    
    
    
    16,345
    
    
    
    27,480
    
    
    
    5,606,435Others due:After 1 year but within 5 years
    
    
    199,793
    
    
    
    8,302
    
    
    
    
    
    
    
    208,095After 10 years
    
    
    8,370,818
    
    
    
    401,637
    
    
    
    23,162
    
    
    
    8,749,293Equity securities
    
    
    9,672,999
    
    
    
    535,449
    
    
    
    62,026
    
    
    
    10,146,422Total others
    
    
    18,243,610
    
    
    
    945,388
    
    
    
    85,188
    
    
    
    19,103,810Total available for sale
    
    $
    106,854,579
    
    
    $
    1,110,761
    
    
    $
    607,091
    
    
    $
    107,358,249HELD TO MATURITYAt December 31, 2004:U. S. Government agencies due:Within 1 year
    
    $
    2,700,106
    
    
    $
    1,770
    
    
    $
    
    
    
    $
    2,701,876Total U.S. Government agencies
    
    
    2,700,106
    
    
    
    1,770
    
    
    
    
    
    
    
    2,701,876State and local due:Within 1 year
    
    
    5,945,556
    
    
    
    36,462
    
    
    
    
    
    
    
    5,982,018After 1 year but within 5 years
    
    
    25,103,992
    
    
    
    1,070,610
    
    
    
    
    
    
    
    26,174,602After 5 years but within 10 years
    
    
    13,849,218
    
    
    
    931,995
    
    
    
    
    
    
    
    14,781,213After 10 years
    
    
    3,602,921
    
    
    
    285,043
    
    
    
    
    
    
    
    3,887,964Total state and local
    
    
    48,501,687
    
    
    
    2,324,110
    
    
    
    
    
    
    
    50,825,797Total held to maturity
    
    $
    51,201,793
    
    
    $
    2,325,880
    
    
    $
    
    
    
    $
    53,527,673
    54




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##### Table of Contents



3. LOANS
  2005
    
    
    2004Real estate:Construction
    
    $
    125,555,445
    
    
    $
    105,110,671Mortgage
    
    
    455,322,477
    
    
    
    420,860,460Commercial, financial and agricultural
    
    
    231,228,504
    
    
    
    223,605,232Consumer
    
    
    20,910,544
    
    
    
    29,014,711All other loans
    
    
    915,154
    
    
    
    704,247833,932,124
    
    
    
    779,295,321Deferred origination fees, net
    
    
    (1,484,976
    )
    
    
    (1,157,891
    )Total
    
    $
    832,447,148
    
    
    $
    778,137,430
  2005
    
    
    2004Nonaccrual loans
    
    $
    6,423,997
    
    
    $
    6,633,924Loans 90 days or more and still
accruing interest
    
    
    4,208,032
    
    
    
    4,227,180Foreclosed properties
    
    
    925,984
    
    
    
    1,279,636Total
    
    $
    11,558,013
    
    
    $
    12,140,740
   55




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##### Table of Contents



4. ALLOWANCE FOR LOAN LOSSES
  2005
    
    
    2004
    
    
    2003Balance at beginning of year
    
    $
    13,665,013
    
    
    $
    10,798,897
    
    
    $
    8,834,611Loans charged off:Real estate
    
    
    919,071
    
    
    
    929,609
    
    
    
    1,615,998Commercial, financial and agricultural
    
    
    3,484,172
    
    
    
    1,040,391
    
    
    
    2,274,594Credit cards and related plans
    
    
    45,150
    
    
    
    87,711
    
    
    
    41,229Installment loans to individuals
    
    
    540,254
    
    
    
    683,282
    
    
    
    766,818Demand deposit overdraft program
    
    
    261,789
    
    
    
    297,456
    
    
    
    389,022Total charge-offs
    
    
    5,250,436
    
    
    
    3,038,449
    
    
    
    5,087,661Recoveries of loans previously charged off:Real estate
    
    
    62,957
    
    
    
    23,675
    
    
    
    3,100Commercial, financial and agricultural
    
    
    29,004
    
    
    
    70,245
    
    
    
    176,095Credit cards and related plans
    
    
    3,492
    
    
    
    3,925
    
    
    
    5,471Installment loans to individuals
    
    
    41,662
    
    
    
    220,389
    
    
    
    70,606Demand deposit overdraft program
    
    
    178,290
    
    
    
    147,171
    
    
    
    170,130Total recoveries
    
    
    315,405
    
    
    
    465,405
    
    
    
    425,402Net charge-offs
    
    
    4,935,031
    
    
    
    2,573,044
    
    
    
    4,662,259Additions charged to operations
    
    
    5,193,902
    
    
    
    5,439,160
    
    
    
    4,764,010Allowance acquired in purchase transaction
    
    
    
    
    
    
    
    
    
    
    1,862,535Balance at end of year
    
    $
    13,923,884
    
    
    $
    13,665,013
    
    
    $
    10,798,897Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %
  56




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##### Table of Contents



5. PREMISES AND EQUIPMENT
  Premises andAccumulated
    
    
    Equipment,Cost
    
    
    Depreciation
    
    
    NetAt December 31, 2005:Land
    
    $
    3,241,745
    
    
    $
    
    
    
    $
    3,241,745Buildings
    
    
    11,405,532
    
    
    
    3,825,997
    
    
    
    7,579,535Leasehold improvements
    
    
    322,817
    
    
    
    114,282
    
    
    
    208,535Furniture, equipment and vehicles
    
    
    12,768,518
    
    
    
    9,476,983
    
    
    
    3,291,535Construction in progress
    
    
    484,526
    
    
    
    
    
    
    
    484,526Total
    
    $
    28,223,138
    
    
    $
    13,417,262
    
    
    $
    14,805,876At December 31, 2004:Land
    
    $
    2,331,599
    
    
    $
    
    
    
    $
    2,331,599Buildings
    
    
    9,969,561
    
    
    
    3,537,098
    
    
    
    6,432,463Leasehold improvements
    
    
    299,316
    
    
    
    58,074
    
    
    
    241,242Furniture, equipment and vehicles
    
    
    11,449,981
    
    
    
    8,358,697
    
    
    
    3,091,284Construction in progress
    
    
    977,598
    
    
    
    
    
    
    
    977,598Total
    
    $
    25,028,055
    
    
    $
    11,953,869
    
    
    $
    13,074,186
 6. OTHER INCOME AND EXPENSES
  2005
    
    
    2004
    
    
    2003Items included in service charges on deposit accountsFees from demand deposit overdrafts
    
    $
    3,973,899
    
    
    $
    3,740,312
    
    
    $
    3,895,535Items included in other expensesTelephone
    
    
    690,486
    
    
    
    768,781
    
    
    
    608,687Marketing
    
    
    806,866
    
    
    
    820,892
    
    
    
    805,117
 7. INCOME TAXES
  2005
    
    
    2004
    
    
    2003Income tax provisionCurrent
    
    $
    8,361,465
    
    
    $
    7,660,208
    
    
    $
    7,727,238Deferred
    
    
    (482,929
    )
    
    
    (1,517,901
    )
    
    
    82,827Total
    
    $
    7,878,536
    
    
    $
    6,142,307
    
    
    $
    7,810,065
  57




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##### Table of Contents



2005
    
    2004
    
    
    2003Statutory federal income tax rate
    
    35%
    
    35%
    
    
    35%Tax provision at statutory rate
    
    $8,010,828
    
    $6,601,184
    
    $
    8,091,285Increase (decrease) in income taxes
resulting from:Tax-exempt interest income
    
    (765,073
    )
    (888,588
    )
    
    (995,475
    )State income taxes net of federal tax benefit
    
    790,801
    
    606,663
    
    
    795,840Other
    
    (158,020
    )
    (176,952
    )
    
    (81,585
    )Income tax provision
    
    $7,878,536
    
    $6,142,307
    
    $
    7,810,065
  December 31, 2005Assets
    
    
    Liabilities
    
    
    TotalExcess book over tax bad debt expense
    
    $
    5,506,001
    
    
    $
    
    
    
    $
    5,506,001Excess tax over book depreciation
    
    
    
    
    
    
    (614,166
    )
    
    
    (614,166
    )Unrealized losses on securities
available for sale
    
    
    692,017
    
    
    
    
    
    
    
    692,017Unrealized losses on mortgage
derivative instruments
    
    
    23,849
    
    
    
    
    
    
    
    23,849Other, net
    
    
    1,671,459
    
    
    
    (948,510
    )
    
    
    722,949Total
    
    $
    7,893,326
    
    
    $
    (1,562,676
    )
    
    $
    6,330,650
 December 31, 2004Assets
    
    
    Liabilities
    
    
    TotalExcess book over tax bad debt expense
    
    $
    5,391,179
    
    
    $
    
    
    
    $
    5,391,179Excess tax over book depreciation
    
    
    
    
    
    
    (530,778
    )
    
    
    (530,778
    )Unrealized gains on securities
available for sale
    
    
    
    
    
    
    (200,867
    )
    
    
    (200,867
    )Unrealized losses on mortgage
derivative instruments
    
    
    38,484
    
    
    
    
    
    
    
    38,484Other, net
    
    
    1,298,895
    
    
    
    (1,027,441
    )
    
    
    271,454Total
    
    $
    6,728,558
    
    
    $
    (1,759,086
    )
    
    $
    4,969,472
   8. STOCK OPTIONS
 58
    Table of Contents    2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    237,812
    
    
    $
    15.67
    
    
    
    340,157
    
    
    $
    14.58
    
    
    
    189,017
    
    
    $
    19.11Issued in purchase transactions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    182,695
    
    
    
    9.58Granted
    
    
    2,500
    
    
    
    17.85
    
    
    
    9,000
    
    
    
    18.13
    
    
    
    7,000
    
    
    
    18.03Exercised
    
    
    17,566
    
    
    
    9.36
    
    
    
    85,640
    
    
    
    10.90
    
    
    
    29,290
    
    
    
    11.61Expired, forfeited or canceled
    
    
    5,191
    
    
    
    19.22
    
    
    
    25,705
    
    
    
    17.92
    
    
    
    9,265
    
    
    
    18.78Outstanding at end of year
    
    
    217,555
    
    
    $
    16.12
    
    
    
    237,812
    
    
    $
    15.67
    
    
    
    340,157
    
    
    $
    14.58Options exercisable at end of year
    
    
    202,855
    
    
    $
    15.97
    
    
    
    211,630
    
    
    $
    15.41
    
    
    
    297,222
    
    
    $
    14.14
  Outstanding Options
    
    
    Exercisable OptionsWeightedShares
    
    
    Average
    
    
    Weighted
    
    
    Shares
    
    
    WeightedOutstanding at
    
    
    Remaining
    
    
    Average
    
    
    Exercisable at
    
    
    AverageRange of
    
    December 31,
    
    
    Contractual
    
    
    Exercise
    
    
    December 31,
    
    
    ExerciseExercise Prices
    
    2005
    
    
    Life (years)
    
    
    Price
    
    
    2005
    
    
    Price$0.00-8.25
    
    
    23,729
    
    
    
    4.6
    
    
    $
    7.69
    
    
    
    23,729
    
    
    $
    7.698.26 - 10.75
    
    
    25,268
    
    
    
    1.9
    
    
    
    9.64
    
    
    
    25,268
    
    
    
    9.6410.76 - 15.75
    
    
    22,111
    
    
    
    5.1
    
    
    
    11.40
    
    
    
    22,111
    
    
    
    11.4015.76 - 17.75
    
    
    59,184
    
    
    
    1.1
    
    
    
    16.77
    
    
    
    54,184
    
    
    
    16.6917.76 - 18.25
    
    
    22,185
    
    
    
    4.6
    
    
    
    18.08
    
    
    
    19,785
    
    
    
    18.1018.26 - 26.50
    
    
    65,078
    
    
    
    2.0
    
    
    
    22.06
    
    
    
    57,778
    
    
    
    22.487.18 - 26.20
    
    
    217,555
    
    
    
    2.6
    
    
    $
    16.07
    
    
    
    202,855
    
    
    $
    16.01
  59
    Table of Contents   9. EMPLOYEE BENEFIT PLANS
       60




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##### Table of Contents



10. LEASES
  Year
    
    Payments2006
    
    $
    947,3152007
    
    
    849,9722008
    
    
    578,4122009
    
    
    488,7062010
    
    
    457,9342011 and thereafter
    
    
    2,141,064Total
    
    $
    5,463,403
   11. OVERNIGHT BORROWINGS
  2005
    
    
    2004Federal funds purchased:Balance at end of year
    
    $
    
    
    
    $
    5,500,000Weighted average interest rate at end of year
    
    
    
    
    
    
    2.50
    %Maximum amount outstanding at any month-end during the year
    
    $
    3,000,000
    
    
    $
    5,500,000Average daily balance outstanding during the year
    
    $
    853,288
    
    
    $
    1,586,885Average annual interest rate paid during the year
    
    
    3.00
    %
    
    
    1.68
    %Securities sold under agreements to repurchase:Balance at end of year
    
    $
    947,290
    
    
    $
    1,520,877Weighted average interest rate at end of year
    
    
    3.64
    %
    
    
    1.60
    %Maximum amount outstanding at any month-end during the year
    
    $
    2,069,740
    
    
    $
    2,163,506Average daily balance outstanding during the year
    
    $
    1,488,949
    
    
    $
    1,891,372Average annual interest rate paid during the year
    
    
    2.46
    %
    
    
    0.66
    %
 61




---



##### Table of Contents



2005
    
    
    2004Overnight borrowings from the Federal Home Loan Bank:Balance at end of year
    
    $
    
    
    
    $
    40,900,000Weighted average interest rate at end of year
    
    
    
    
    
    
    2.44
    %Maximum amount outstanding at any month-end during the year
    
    $
    34,900,000
    
    
    $
    40,900,000Average daily balance outstanding during the year
    
    $
    11,716,164
    
    
    $
    9,939,208Average annual interest rate paid during the year
    
    
    2.94
    %
    
    
    1.74
    %
  2005
    
    
    2004Commercial deposits swept into commercial paper:Balance at end of year
    
    $
    26,790,353
    
    
    $
    23,827,555Weighted average interest rate at end of year
    
    
    1.25
    %
    
    
    1.25
    %Maximum amount outstanding at any month-end during the year
    
    $
    27,648,454
    
    
    $
    23,827,555Average daily balance outstanding during the year
    
    $
    24,947,832
    
    
    $
    22,157,733Average annual interest rate paid during the year
    
    
    1.26
    %
    
    
    1.26
    %
 12. OTHER BORROWINGS
  2005
    
    
    2004Federal Home Loan Bank borrowings:Balance at end of year
    
    $
    24,104,997
    
    
    $
    29,106,963Weighted average interest rate at end of year
    
    
    3.14
    %
    
    
    3.43
    %Maximum amount outstanding at any month-end during the year
    
    $
    29,000,000
    
    
    $
    34,000,000Average daily balance outstanding during the year
    
    $
    26,830,137
    
    
    $
    31,636,612Average annual interest rate paid during the year
    
    
    3.74
    %
    
    
    3.18
    %
    62




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##### Table of Contents



13. MATURITIES OF TIME DEPOSITS
  Year
    
    Maturities2006
    
    $
    309,379,5702007
    
    
    57,589,1882008
    
    
    18,812,9842009
    
    
    17,599,3002010
    
    
    96,987Total
    
    $
    403,478,029
 14. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
  2005
    
    
    2004
    
    
    2003BASIC EARNINGS PER SHARENet income
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893Divide by:
    Weighted average shares outstanding
    
    
    13,131,530
    
    
    
    13,481,397
    
    
    
    13,438,007Basic earnings per share
    
    $
    1.14
    
    
    $
    0.94
    
    
    $
    1.14DILUTED EARNINGS PER SHARENet income
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893Divide by:
    Weighted average shares outstanding
    
    
    13,131,530
    
    
    
    13,481,397
    
    
    
    13,438,007Potentially dilutive effect of
stock options
    
    
    44,244
    
    
    
    49,827
    
    
    
    78,693Weighted average shares outstanding,
including potentially dilutive effect
of stock options
    
    
    13,175,774
    
    
    
    13,531,224
    
    
    
    13,516,700Diluted earnings per share
    
    $
    1.14
    
    
    $
    0.94
    
    
    $
    1.13
 63




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15. REGULATION AND REGULATORY RESTRICTIONS
       To Be WellCapitalizedUnder PromptFor Capital
    
    
    CorrectiveAdequacy
    
    
    ActionActual
    
    
    Purposes
    
    
    Provisions(dollars in thousands)
    

    Amount
    
    Ratio
    
    
    Amount
    
    Ratio
    
    
    Amount
    
    RatioAs of December 31, 2005Total capital to risk weighted assets
    
    $
    146,290
    
    16.10
    %
    
    $
    72,694
    
    8.00
    %
    
    $
    90,868
    
    10.00
    %Tier I capital to risk weighted assets
    
    
    134,797
    
    14.83
    %
    
    
    36,347
    
    4.00
    %
    
    
    54,521
    
    6.00
    %Tier I capital to average assets
    
    
    134,797
    
    12.37
    %
    
    
    43,597
    
    4.00
    %
    
    
    54,496
    
    5.00
    %As of December 31, 2005Total capital to risk weighted assets
    
    $
    145,328
    
    17.25
    %
    
    $
    67,405
    
    8.00
    %
    
    $
    84,256
    
    10.00
    %Tier I capital to risk weighted assets
    
    
    134,544
    
    15.97
    %
    
    
    33,702
    
    4.00
    %
    
    
    50,553
    
    6.00
    %Tier I capital to average assets
    
    
    134,544
    
    13.39
    %
    
    
    40,190
    
    4.00
    %
    
    
    50,238
    
    5.00
    %
  64




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16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
  December 31,2005
    
    2004Condensed Balance SheetsAssets:Cash on deposit with bank subsidiary
    
    $
    31,622,272
    
    
    $
    28,179,385Investment in subsidiary bank at equity
    
    
    129,398,857
    
    
    
    130,853,334Investment in subsidiary mortgage bank at equity
    
    
    6,014,733
    
    
    
    5,881,093Other investments
    
    
    4,662,545
    
    
    
    4,959,501Other assets
    
    
    246,935
    
    
    
    158,673Total
    
    $
    171,945,342
    
    
    $
    170,031,986Liabilities and Shareholders Equity:Other borrowings
    
    $
    31,790,353
    
    
    $
    28,827,555Other liabilities
    
    
    306,998
    
    
    
    188,210Shareholders equity
    
    
    139,847,991
    
    
    
    141,016,221Total
    
    $
    171,945,342
    
    
    $
    170,031,986
 For the Years Ended December 31,2005
    
    2004
    
    2003Condensed Results of OperationsEquity in earnings of subsidiary bank:Dividends
    
    $
    15,576,244
    
    
    $
    15,353,514
    
    
    $
    22,287,838Earnings retained
    
    
    (272,183
    )
    
    
    (2,459,608
    )
    
    
    (8,916,288
    )Equity in earnings of subsidiary mortgage bank:Dividends
    
    
    203,360
    
    
    
    853,005
    
    
    
    449,155Earnings retained
    
    
    118,103
    
    
    
    (318,375
    )
    
    
    1,795,484Income (expenses), net
    
    
    (615,980
    )
    
    
    (710,316
    )
    
    
    (308,296
    )Net income
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893
 65




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##### Table of Contents



For the Years Ended December 31,2005
    
    2004
    
    2003Condensed Cash FlowCash flows from operating activities:Net income
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893Adjustments to reconcile net income to net
cash provided by operating activities:Equity in undistributed earnings of
subsidiaries
    
    
    154,079
    
    
    
    2,777,983
    
    
    
    7,120,804Premium amortization and discount
accretion, net
    
    
    (2,248
    )
    
    
    (2,090
    )
    
    
    (1,890
    )Losses (gains) on sales or calls of
securities available for sale
    
    
    (147,323
    )
    
    
    
    
    
    
    17,756Increase in interest receivable
    
    
    
    
    
    
    (711
    )
    
    
    (867
    )Decrease in interest payable
    
    
    
    
    
    
    
    
    
    
    (25,386
    )Decrease (increase) in other assets
    
    
    69,950
    
    
    
    637,544
    
    
    
    (414,706
    )Increase (decrease) in other liabilities
    
    
    118,788
    
    
    
    31,562
    
    
    
    (450,106
    )Net cash provided by operating activities
    
    
    15,202,790
    
    
    
    16,162,508
    
    
    
    21,553,498Cash flows from investing activities:Proceeds from maturities of securities
available for sale
    
    
    4,122
    
    
    
    204,089
    
    
    
    300,000Proceeds from sales of securities
available for sale
    
    
    280,319
    
    
    
    
    
    
    
    682,210Purchases of securities available for sale
    
    
    (100,000
    )
    
    
    (700,000
    )
    
    
    (537,628
    )Net cash paid in acquisition
    
    
    
    
    
    
    
    
    
    
    (9,317,616
    )Net cash provided (used) by investing activities
    
    
    184,441
    
    
    
    (495,911
    )
    
    
    (8,873,034
    )Cash flows from financing activities:Cash flows from financing activities:Net increase in overnight borrowings
    
    
    2,962,798
    
    
    
    6,411,501
    
    
    
    2,400,362Net proceeds from issuance of common stock
    
    
    164,396
    
    
    
    933,748
    
    
    
    339,961Net dividends paid
    
    
    (6,979,081
    )
    
    
    (6,621,140
    )
    
    
    (6,208,975
    )Purchases of common stock for treasury
    
    
    (8,092,457
    )
    
    
    (7,439,376
    )
    
    
    (5,875,198
    )Net cash used by financing activities
    
    
    (11,944,344
    )
    
    
    (6,715,267
    )
    
    
    (9,343,850
    )Net increase in cash
    
    
    3,442,887
    
    
    
    8,951,330
    
    
    
    3,336,614Cash at beginning of year
    
    
    28,179,385
    
    
    
    19,228,055
    
    
    
    15,891,441Cash at end of year
    
    $
    31,622,272
    
    
    $
    28,179,385
    
    
    $
    19,228,055Supplemental disclosure of non-cash transactions:Cash paid during the year for:Interest paid
    
    $
    670,835
    
    
    $
    555,572
    
    
    $
    339,840
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17. COMMITMENTS AND CONTINGENCIES
  December 31,2005
    
    
    2004Financial instruments whose contract amounts represent credit riskCommitments to extend credit
    
    $
    158,256,508
    
    
    $
    138,012,770Standby letters of credit
    
    
    3,273,905
    
    
    
    4,795,138Financial instruments whose notional or contract amounts are
intended to hedge against interest rate riskForward commitments and options to sell mortgage-backed securities
    
    $
    12,348,187
    
    
    $
    14,605,060
      67




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18. FAIR VALUE OF FINANCIAL INSTRUMENTS
  December 31, 2005
    
    
    December 31, 2004Estimated
    
    
    
    
    
    
    EstimatedCarrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAssets:Cash and cash equivalents
    
    $
    57,481,919
    
    
    $
    57,481,919
    
    
    $
    31,570,832
    
    
    $
    31,570,832Marketable securities
    
    
    153,682,706
    
    
    
    154,832,437
    
    
    
    158,560,042
    
    
    
    160,885,922Loans
    
    
    818,523,264
    
    
    
    813,681,236
    
    
    
    764,472,417
    
    
    
    763,843,986Mortgage loans held for sale
    
    
    14,219,444
    
    
    
    14,219,444
    
    
    
    21,553,548
    
    
    
    21,553,548Liabilities:Demand deposits
    
    
    475,633,396
    
    
    
    475,633,396
    
    
    
    436,186,774
    
    
    
    436,186,774Time deposits
    
    
    403,478,029
    
    
    
    401,968,659
    
    
    
    313,674,778
    
    
    
    313,382,562Overnight borrowings
    
    
    27,737,643
    
    
    
    27,737,643
    
    
    
    71,748,432
    
    
    
    71,748,432Other borrowings
    
    
    49,675,003
    
    
    
    49,506,400
    
    
    
    63,585,577
    
    
    
    63,700,817Financial instruments whose contract
amounts represent credit risk:Commitments to extend credit
    
    
    
    
    
    
    158,256,508
    
    
    
    
    
    
    
    138,012,770Standby letters of credit
    
    
    
    
    
    
    3,273,905
    
    
    
    
    
    
    
    4,795,138
    68




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December 31, 2005
    
    
    
    
    

    December 31, 2004Estimated
    
    
    
    
    
    
    
    
    
    
    EstimatedNotional
    
    
    Fair
    
    
    
    
    
    
    Notional
    
    
    FairAmount
    
    
    Value
    
    
    
    
    
    
    Amount
    
    
    ValueForward commitments and options
to sell mortgage-backed securities
    
    $
    12,348,187
    
    
    $
    12,264,322
    
    

    
    
    
    
    $
    14,605,060
    
    
    $
    14,508,827
  19. DERIVATIVE FINANCIAL INSTRUMENTS
  December 31, 2005EstimatedNotional
    
    
    FairAmount
    
    
    ValueForward commitments and options to sell mortgage-backed securities
    
    $
    12,348,187
    
    
    $
    12,264,322
   69




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20. OPERATING SEGMENTS
    COMMUNITY BANKING
  MORTGAGE BANKING
  OTHER
  70




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##### Table of Contents



2005
    
    
    2004
    
    
    2003COMMUNITY BANKINGNet interest income
    
    $
    45,156,254
    
    
    $
    38,754,743
    
    
    $
    34,362,277Provision for loan losses
    
    
    5,157,902
    
    
    
    5,431,160
    
    
    
    4,764,010Noninterest income
    
    
    7,773,274
    
    
    
    7,413,753
    
    
    
    7,566,079Noninterest expense
    
    
    24,803,256
    
    
    
    22,057,715
    
    
    
    17,479,249Income before income taxes
    
    
    22,968,370
    
    
    
    18,679,621
    
    
    
    19,685,097Net income
    
    
    15,304,061
    
    
    
    12,893,906
    
    
    
    13,371,550Identifiable segment assets
    
    
    1,074,552,282
    
    
    
    991,369,653
    
    
    
    933,907,945MORTGAGE BANKINGNet interest income
    
    
    3,186,195
    
    
    
    3,673,497
    
    
    
    4,969,103Provision for loan losses
    
    
    36,000
    
    
    
    8,000
    
    
    
    Noninterest income
    
    
    3,990,690
    
    
    
    3,844,297
    
    
    
    6,892,171Noninterest expense
    
    
    6,605,195
    
    
    
    6,618,572
    
    
    
    8,120,117Income before income taxes
    
    
    535,690
    
    
    
    891,222
    
    
    
    3,741,157Net income
    
    
    321,463
    
    
    
    534,630
    
    
    
    2,244,639Identifiable segment assets
    
    
    27,522,124
    
    
    
    36,326,380
    
    
    
    32,609,851ALL OTHERNet interest expense
    
    
    (356,519
    )
    
    
    (270,336
    )
    
    
    (24,695
    )Noninterest income
    
    
    147,323
    
    
    
    (1,327
    )
    
    
    (20,510
    )Noninterest expense
    
    
    406,784
    
    
    
    438,653
    
    
    
    263,091Loss before income taxes
    
    
    (615,980
    )
    
    
    (710,316
    )
    
    
    (308,296
    )Net loss
    
    
    (615,980
    )
    
    
    (710,316
    )
    
    
    (308,296
    )Identifiable segment assets
    
    
    4,649,616
    
    
    
    4,542,416
    
    
    
    4,864,931TOTAL SEGMENTSNet interest income
    
    
    47,985,930
    
    
    
    42,157,904
    
    
    
    39,306,685Provision for loan losses
    
    
    5,193,902
    
    
    
    5,439,160
    
    
    
    4,764,010Noninterest income
    
    
    11,911,287
    
    
    
    11,256,723
    
    
    
    14,437,740Noninterest expense
    
    
    31,815,235
    
    
    
    29,114,940
    
    
    
    25,862,457Income before income taxes
    
    
    22,888,080
    
    
    
    18,860,527
    
    
    
    23,117,958Net income
    
    
    15,009,544
    
    
    
    12,718,220
    
    
    
    15,307,893Identifiable segment assets
    
    
    1,106,724,022
    
    
    
    1,032,238,449
    
    
    
    971,382,727
  71




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Interest income
    
    $
    14,961,878
    
    
    $
    16,313,361
    
    
    $
    17,894,355
    
    
    $
    18,989,480Interest expense
    
    
    4,075,652
    
    
    
    4,687,864
    
    
    
    5,361,342
    
    
    
    6,048,286Net interest income
    
    
    10,886,226
    
    
    
    11,625,497
    
    
    
    12,533,013
    
    
    
    12,941,194Provision for loan losses
    
    
    1,230,119
    
    
    
    891,710
    
    
    
    1,601,680
    
    
    
    1,470,393Net interest income after
provision for loan losses
    
    
    9,656,107
    
    
    
    10,733,787
    
    
    
    10,931,333
    
    
    
    11,470,801Other income
    
    
    2,457,747
    
    
    
    3,152,370
    
    
    
    3,337,711
    
    
    
    2,963,459Other expense
    
    
    7,314,624
    
    
    
    7,936,945
    
    
    
    7,898,217
    
    
    
    8,665,449Income before income taxes
    
    
    4,799,230
    
    
    
    5,949,212
    
    
    
    6,370,827
    
    
    
    5,768,811Income taxes
    
    
    1,613,993
    
    
    
    2,041,182
    
    
    
    2,231,423
    
    
    
    1,991,938Net income
    
    $
    3,185,237
    
    
    $
    3,908,030
    
    
    $
    4,139,404
    
    
    $
    3,776,873Net income per shareBasic
    
    $
    0.24
    
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.29Diluted
    
    
    0.24
    
    
    
    0.30
    
    
    
    0.32
    
    
    
    0.29Average shares outstandingBasic
    
    
    13,285,373
    
    
    
    13,184,111
    
    
    
    13,067,975
    
    
    
    12,992,480Diluted
    
    
    13,323,308
    
    
    
    13,222,179
    
    
    
    13,113,958
    
    
    
    13,036,924
 2004
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Interest income
    
    $
    13,310,997
    
    
    $
    13,678,282
    
    
    $
    13,779,407
    
    
    $
    14,497,203Interest expense
    
    
    3,078,488
    
    
    
    3,073,389
    
    
    
    3,258,965
    
    
    
    3,697,143Net interest income
    
    
    10,232,509
    
    
    
    10,604,893
    
    
    
    10,520,442
    
    
    
    10,800,060Provision for loan losses
    
    
    1,244,687
    
    
    
    1,104,325
    
    
    
    1,677,889
    
    
    
    1,412,259Net interest income after
provision for loan losses
    
    
    8,987,822
    
    
    
    9,500,568
    
    
    
    8,842,553
    
    
    
    9,387,801Other income
    
    
    2,648,548
    
    
    
    2,875,142
    
    
    
    2,850,046
    
    
    
    2,882,987Other expense
    
    
    7,208,060
    
    
    
    7,475,157
    
    
    
    7,075,974
    
    
    
    7,355,749Income before income taxes
    
    
    4,428,310
    
    
    
    4,900,553
    
    
    
    4,616,625
    
    
    
    4,915,039Income taxes
    
    
    1,436,983
    
    
    
    1,584,863
    
    
    
    1,498,707
    
    
    
    1,621,754Net income
    
    $
    2,991,327
    
    
    $
    3,315,690
    
    
    $
    3,117,918
    
    
    $
    3,293,285Net income per shareBasic
    
    $
    0.22
    
    
    $
    0.25
    
    
    $
    0.23
    
    
    $
    0.25Diluted
    
    
    0.22
    
    
    
    0.24
    
    
    
    0.23
    
    
    
    0.25Average shares outstandingBasic
    
    
    13,622,566
    
    
    
    13,521,847
    
    
    
    13,426,381
    
    
    
    13,351,883Diluted
    
    
    13,683,212
    
    
    
    13,568,718
    
    
    
    13,468,457
    
    
    
    13,401,346
 
 The quarterly financial data may not aggregate to annual amounts due to rounding. 
  
 72




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MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
   Internal ControlIntegrated Framework
  /s/ Charles M. Snipes
    
    /s/ Kirby A. TyndallCHARLES M. SNIPES
    
    KIRBY A. TYNDALLChief Executive Officer
    
    Chief Financial OfficerMarch 2, 2006
    
    March 2, 2006
 73




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




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##### Table of Contents



Internal ControlIntegrated
Framework Internal ControlIntegrated
Framework
  DELOITTE & TOUCHE LLP
 
   75




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76




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*
    
    Exhibits and Financial Statement Schedules included in or 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 request to Investor Relations, Bank of Granite Corporation, P.O. Box 128, Granite Falls, North Carolina
28630. 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.
    
    Exhibits
 3.1
    
    Certificate of IncorporationBank of Granite Corporations Restated Certificate of Incorporation, as amended, filed as
Exhibit 3.1 to the Registrants Registration Statement on Form S-4 (Registration Statement
No. 333-104233) on April 1, 2003 is incorporated herein by reference.3.2
    
    Bylaws of the RegistrantBank of Granite Corporations Bylaws, filed as Exhibit 3.2 to the Registrants Registration
Statement on Form S-4 (Registration Statement No. 333-104233) on April 1, 2003 is
incorporated herein by reference.
 4.
    
    Instruments defining the rights of holders
 4.1
    
    Form of stock certificate for Bank of Granite
Corporations common stock, filed as Exhibit to the Registrants 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, as amended, are included in Exhibit 3.1.
 10.
    
    Material Contracts
 10.1.
    
    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.
    
    Bank of Granite Supplemental Executive Retirement Plan filed as Exhibit 10.2. to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2000 is
incorporated herein by reference.10.3.
    
    Bank of Granite Corporations 1997 Incentive Stock Option Plan, filed as Exhibit 4.1 to the
Registrants Registration Statement on Form S-8 (Registration Statement No. 333-29157) on
June 13, 1997 is incorporated herein by reference.
 77




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##### Table of Contents



10.4.
    
    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.10.5.
    
    Bank of Granite Corporations 2001 Incentive Stock Option Plan, filed as Exhibit 4.1 to the
Registrants Registration Statement on Form S-8 (Registration Statement No. 333-61640) on
May 25, 2001 is incorporated herein by reference.10.6.
    
    Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and John A. Forlines, Jr. filed as Exhibit 10.6 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 is incorporated herein by
reference.10.7.
    
    Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and Charles M. Snipes filed as Exhibit 10.7 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 is incorporated herein by
reference.10.8.
    
    Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and Kirby A. Tyndall filed as Exhibit 10.8 to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 is incorporated herein by
reference.10.9.
    
    Executive Supplemental Retirement Plan Executive Agreement, dated March 30, 2005
between the Bank and R. Scott Anderson.10.10.
    
    Change of Control Agreement, dated January 1, 2002, between the Company and
Charles M. Snipes filed as Exhibit 10.10 to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 is incorporated herein by reference.10.11.
    
    Change of Control Agreement, dated January 1, 2002, between the Company and
Kirby A. Tyndall filed as Exhibit 10.11 to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 is incorporated herein by reference.10.12.
    
    Change of Control Agreement, dated June 22, 2004, between the Company and
R. Scott Anderson filed as Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2004 is incorporated herein by reference.10.13.
    
    Written Description of Director Compensation pursuant to
Item 601(b)(10)(iii)(A) of Regulation S-K10.14.
    
    Written Description of Executive Officer Compensation pursuant to
Item 601(b)(10)(iii)(A) of Regulation S-K filed under Item 1.01-Entry into a
Material Definitive Agreement, of the Registrants Current Report on Form 8-K,
dated November 21, 2005, is incorporated herein by reference.10.15.
    
    Consulting Agreement, dated December 19, 2005, between the Bank and
John A. Forlines, Jr. filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated December 19, 2005, is incorporated herein by reference.
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##### Table of Contents



11.
    
    Schedule of Computation of Net Income Per ShareThe information required by this item is also set forth under Item 8, Note 1. Summary
Of Significant Accounting Policies and Item 8, Note 14. Reconciliation Of Basic And
Diluted Earnings Per Share.14.
    
    Ethics Policy, dated March 8, 2004, filed as Exhibit 14 to the Registrants 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.23.
    
    Consent of Independent Auditors31.1
    
    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
 79




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##### Table of Contents



BANK OF GRANITE CORPORATIONBy:
    
    /s/ Charles M. SnipesCharles M. SnipesChairman and Chief Executive OfficerMarch 14, 2006
  Signature
    
    Title
    
    Date/s/ Charles M. Snipes
    
    Chairman and Chief Executive Officer
    
    March 14, 2006Charles M. Snipes/s/ Kirby A. Tyndall
    
    Secretary, Treasurer,
    
    March 14, 2006Kirby A. Tyndall
    
    Chief FinancialOfficer and PrincipalAccounting Officer/s/ John N. Bray
    
    Director
    
    March 14, 2006John N. Bray/s/ Lelia N. Erwin
    
    Director
    
    March 14, 2006Lelia N. Erwin/s/ Paul M. Fleetwood, III
    
    Director
    
    March 14, 2006Paul M. Fleetwood, III/s/ Hugh R. Gaither
    
    Director
    
    March 14, 2006Hugh R. Gaither/s/ Bob J. McCreary
    
    Director
    
    March 14, 2006Bob J. McCreary/s/ James Y. Preston
    
    Director
    
    March 14, 2006James Y. Preston/s/ Charles M. Snipes
    
    Director
    
    March 14, 2006Charles M. Snipes/s/ Boyd C. Wilson, Jr.
    
    Director
    
    March 14, 2006Boyd C. Wilson, Jr.
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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
    
    Bank of Granite Corporations 1997 Incentive Stock
Option Plan
    
    *10.4
    
    Amended and Restated Employment and Noncompetition
Agreement between GLL & Associates, Inc. and
Gary L. Lackey
    
    *10.5
    
    Bank of Granite Corporations 2001 Incentive Stock
Option Plan
    
    *10.6
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and John A. Forlines, Jr.
    
    *10.7
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and Charles M. Snipes
    
    *10.8
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and Kirby A. Tyndall
    
    *10.9
    
    Executive Supplemental Retirement Plan Executive
Agreement between the Bank and R. Scott Anderson
    
    Filed herewith10.10
    
    Change of Control Agreement between the Company and
Charles M. Snipes
    
    *10.11
    
    Change of Control Agreement between the Company and
Kirby A. Tyndall
    
    *10.12
    
    Change of Control Agreement between the Company and
R. Scott Anderson
    
    *10.13
    
    Written Description of Director Compensation
    
    Filed herewith10.14
    
    Written Description of Executive Officer Compensation
    
    *10.15
    
    Consulting Agreement between the Company and
John A. Forlines, Jr.
    
    *11
    
    Schedule of Computation of Net Income Per Share
    
    Filed herewith14
    
    Ethics Policy
    
    *21
    
    Subsidiaries of the Registrant
    
    Filed herewith23
    
    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 81