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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, 2006
 Commission file number 0-15956
 Bank of Granite Corporation
  Delaware
    
    56-1550545(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)P.O. Box 128, Granite Falls, N.C.
    
    28630(Address of principal executive offices)
    
    (Zip Code)
 (828) 496-2000
   Common Stock, $1.00 par value
 o þ
 o þ
 þ o
 o
  o þ o
 o þ
 SM




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##### 



20072006
    
    
    ProxyForm 10-K
    
    
    StatementPage
    
    
    PagePART IItem 1  Business
    
    
    3
    
    
    
    n/aItem 1A  Risk Factors
    
    
    8
    
    
    
    n/aItem 1B  Unresolved Staff Comments
    
    
    10
    
    
    
    n/aItem 2  Properties
    
    
    10
    
    
    
    n/aItem 3  Legal Proceedings
    
    
    10
    
    
    
    n/aItem 4  Submission of Matters to a Vote of Security Holders
    
    
    10
    
    
    
    n/aPART IIItem 5  Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    11
    
    
    
    n/aItem 6  Selected Financial Data
    
    
    12
    
    
    
    n/aItem 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13
    
    
    
    n/aItem 7A  Quantitative and Qualitative Disclosures about Market Risk
    
    
    35
    
    
    
    n/aItem 8  Financial Statements and Supplementary Data
    
    
    36
    
    
    
    n/aItem 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    70
    
    
    
    n/aItem 9A  Controls and Procedures
    
    
    71
    
    
    
    n/aItem 9B  Other Information
    
    
    73
    
    
    
    n/aPART IIIItem 10  Directors, Executive Officers and Corporate Governance
    
    
    74
    
    
    
    *Item 11  Executive Compensation
    
    
    74
    
    
    
    *Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    74
    
    
    
    *Item 13  Certain Relationships and Related Transactions and Director Independence
    
    
    74
    
    
    
    *Item 14  Principal Accountant Fees and Services
    
    
    74
    
    
    
    *PART IVItem 15  Exhibits and Financial Statement Schedules**
    
    
    75
    
    
    
    n/aSignatures
    
    
    78
    
    
    
    n/aExhibit 10.16Exhibit 10.17Exhibit 21Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  
 *
    
    Incorporated by reference in the Proxy Statement**
    
    Exhibits incorporated by reference into this filing were filed with the Securities and
Exchange Commission. Bank of Granite Corporation provides these documents through
its Internet site at www.bankofgranite.com or by mail upon request. 2




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Month of December
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Unemployment Rates*Caldwell County
    
    
    8.4
    %
    
    
    7.5
    %
    
    
    7.2
    %
    
    
    7.5
    %
    
    
    7.6
    %Catawba County
    
    
    5.4
    %
    
    
    5.3
    %
    
    
    6.1
    %
    
    
    7.0
    %
    
    
    8.2
    %Burke County
    
    
    5.8
    %
    
    
    5.8
    %
    
    
    6.0
    %
    
    
    6.9
    %
    
    
    7.7
    %Watauga County
    
    
    3.1
    %
    
    
    3.2
    %
    
    
    3.4
    %
    
    
    3.5
    %
    
    
    4.2
    %Wilkes County
    
    
    5.7
    %
    
    
    4.9
    %
    
    
    6.0
    %
    
    
    6.4
    %
    
    
    7.5
    %Mecklenburg County
    
    
    4.3
    %
    
    
    4.2
    %
    
    
    4.8
    %
    
    
    5.0
    %
    
    
    5.6
    %Forsyth County
    
    
    4.2
    %
    
    
    4.2
    %
    
    
    4.5
    %
    
    
    5.0
    %
    
    
    5.4
    %Iredell County
    
    
    4.4
    %
    
    
    4.4
    %
    
    
    5.1
    %
    
    
    5.7
    %
    
    
    6.3
    %North Carolina
    
    
    4.9
    %
    
    
    5.1
    %
    
    
    5.3
    %
    
    
    6.1
    %
    
    
    6.5
    %United States
    
    
    4.5
    %
    
    
    4.9
    %
    
    
    5.4
    %
    
    
    5.7
    %
    
    
    6.0
    %
 
 *
    
    Source: Employment Security Commission of North Carolina  July 2009
    
    July 2005
    
    April 2000Projections
    
    Estimates
    
    CensusPopulation Projections and Estimates*Caldwell County
    
    
    79,820
    
    
    
    78,492
    
    
    
    77,386Catawba County
    
    
    156,587
    
    
    
    149,032
    
    
    
    141,686Burke County
    
    
    90,169
    
    
    
    88,293
    
    
    
    89,145Watauga County
    
    
    43,794
    
    
    
    42,934
    
    
    
    42,693Wilkes County
    
    
    68,288
    
    
    
    66,897
    
    
    
    65,632Mecklenburg County
    
    
    884,211
    
    
    
    796,232
    
    
    
    695,370Forsyth County
    
    
    344,139
    
    
    
    326,340
    
    
    
    306,067Iredell County
    
    
    153,092
    
    
    
    139,727
    
    
    
    122,660North Carolina
    
    
    9,243,581
    
    
    
    8,682,066
    
    
    
    8,046,485
 
 *
    
    Source of projection, estimate and census data: North Carolina Office of State Budget and
Management 4




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deposit dollars in
millions
 June 30, 2006
    
    June 30, 2005Bank of Granite
    
    Market
    
    Bank of Granite
    
    MarketCounty
    
    Deposits
    
    Market Share
    
    Deposits
    
    No. of Banks
    
    Deposits
    
    Market Share
    
    Deposits
    
    No. of BanksCaldwell
    
    $
    320.4
    
    
    
    39.2
    %
    
    $
    817.1
    
    
    
    9
    
    
    $
    303.6
    
    
    
    39.6
    %
    
    $
    767.5
    
    
    
    9Catawba
    
    
    386.0
    
    
    
    15.7
    %
    
    
    2,457.9
    
    
    
    13
    
    
    
    331.2
    
    
    
    14.4
    %
    
    
    2,293.7
    
    
    
    13Burke
    
    
    51.7
    
    
    
    7.3
    %
    
    
    706.1
    
    
    
    9
    
    
    
    47.5
    
    
    
    7.1
    %
    
    
    670.5
    
    
    
    9Watauga
    
    
    22.6
    
    
    
    2.8
    %
    
    
    805.8
    
    
    
    12
    
    
    
    15.3
    
    
    
    2.2
    %
    
    
    683.2
    
    
    
    12Wilkes
    
    
    14.3
    
    
    
    1.9
    %
    
    
    749.7
    
    
    
    11
    
    
    
    8.1
    
    
    
    1.2
    %
    
    
    690.8
    
    
    
    11Mecklenburg
    
    
    170.9
    
    
    
    0.2
    %
    
    
    86,748.9
    
    
    
    22
    
    
    
    148.7
    
    
    
    0.2
    %
    
    
    83,121.7
    
    
    
    21Forsyth
    
    
    15.9
    
    
    
    0.1
    %
    
    
    13,168.2
    
    
    
    16
    
    
    
    8.7
    
    
    
    0.1
    %
    
    
    12,953.4
    
    
    
    16Iredell*
    
    none
    
    
    0.0
    %
    
    
    1,916.7
    
    
    
    17
    
    
    none
    
    
    0.0
    %
    
    
    1,744.1
    
    
    
    16
 
 *
    
    Deposit data for Bank of Granite in Iredell County will not be available until June 30, 2007.      5




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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.
  We may have additional tax liabilities.
  9




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If our goodwill or amortizable intangible assets become impaired, we may be required to record a
significant charge to earnings.
  Changes in accounting may affect our reported earnings and operating income.
  
   
   
   
   10




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SM ® The
Wall Street Journal ®
    2006
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Price RangeHigh
    
    $
    16.60
    
    
    $
    16.66
    
    
    $
    18.10
    
    
    $
    19.69Low
    
    
    14.62
    
    
    
    15.09
    
    
    
    15.21
    
    
    
    16.99Close
    
    
    16.22
    
    
    
    16.66
    
    
    
    17.53
    
    
    
    18.97Dividends
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.13
    
    
    
    0.13
 2005
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Price RangeHigh
    
    $
    16.82
    
    
    $
    15.70
    
    
    $
    17.45
    
    
    $
    16.82Low
    
    
    14.16
    
    
    
    13.28
    
    
    
    14.42
    
    
    
    14.01Close
    
    
    14.79
    
    
    
    15.31
    
    
    
    15.23
    
    
    
    14.82Dividends
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.10
    
    
    
    0.11
 
 *
    
    Amounts for periods prior to September 25, 2006 have been adjusted to reflect the 5-for-4 stock
split distributed September 25, 2006.   (a) Number of
    
    
    (b) Weighted-
    
    
    (c) Number of SecuritiesSecurities To Be
    
    
    Average Exercise
    
    
    Remaining Available forIssued Upon Exercise
    
    
    Price Of
    
    
    Future Issuance UnderOf Outstanding
    
    
    Outstanding
    
    
    Equity Compensation PlansOptions, Warrants and
    
    
    Options, Warrants
    
    
    (excluding securitiesRights
    
    
    and Rights
    
    
    reflected in column (a))Equity compensation plans Approved by security holders
    
    
    207,210
    
    
    $
    12.86
    
    
    
    309,774Not approved by security holders
    
    
    -0-
    
    
    
    n/a
    
    
    
    n/aTotal
    
    
    207,210
    
    
    $
    12.86
    
    
    
    309,774
  11




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##### Table of Contents



For the Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Interest income
    
    $
    86,541,783
    
    
    $
    68,159,074
    
    
    $
    55,265,889
    
    
    $
    50,696,176
    
    
    $
    45,710,526Interest expense
    
    
    31,778,230
    
    
    
    20,173,144
    
    
    
    13,107,985
    
    
    
    11,389,491
    
    
    
    10,802,422Net interest income
    
    
    54,763,553
    
    
    
    47,985,930
    
    
    
    42,157,904
    
    
    
    39,306,685
    
    
    
    34,908,104Provision for loan losses
    
    
    6,413,509
    
    
    
    5,193,902
    
    
    
    5,439,160
    
    
    
    4,764,010
    
    
    
    3,492,382Net interest income after
provision for loan losses
    
    
    48,350,044
    
    
    
    42,792,028
    
    
    
    36,718,744
    
    
    
    34,542,675
    
    
    
    31,415,722Other income
    
    
    12,507,115
    
    
    
    11,911,287
    
    
    
    11,256,723
    
    
    
    14,437,740
    
    
    
    11,397,705Other expense
    
    
    32,945,231
    
    
    
    31,815,235
    
    
    
    29,114,940
    
    
    
    25,862,457
    
    
    
    20,316,234Income before income taxes
    
    
    27,911,928
    
    
    
    22,888,080
    
    
    
    18,860,527
    
    
    
    23,117,958
    
    
    
    22,497,193Income taxes
    
    
    9,879,899
    
    
    
    7,878,536
    
    
    
    6,142,307
    
    
    
    7,810,065
    
    
    
    7,394,893Net income
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220
    
    
    $
    15,307,893
    
    
    $
    15,102,300Per share
Net incomeBasic*
    
    $
    1.12
    
    
    $
    0.91
    
    
    $
    0.75
    
    
    $
    0.91
    
    
    $
    0.89Diluted*
    
    
    1.12
    
    
    
    0.91
    
    
    
    0.75
    
    
    
    0.91
    
    
    
    0.89Dividends*
    
    
    0.48
    
    
    
    0.42
    
    
    
    0.39
    
    
    
    0.37
    
    
    
    0.33Book value*
    
    
    9.27
    
    
    
    8.66
    
    
    
    8.47
    
    
    
    8.34
    
    
    
    7.65Share priceHigh*
    
    
    19.69
    
    
    
    17.45
    
    
    
    18.34
    
    
    
    21.57
    
    
    
    17.27Low*
    
    
    14.62
    
    
    
    13.28
    
    
    
    14.14
    
    
    
    12.94
    
    
    
    12.45Close*
    
    
    18.97
    
    
    
    14.82
    
    
    
    16.72
    
    
    
    17.42
    
    
    
    14.00Average shares outstandingBasic*
    
    
    16,048,439
    
    
    
    16,413,742
    
    
    
    16,849,526
    
    
    
    16,797,024
    
    
    
    16,933,453Diluted*
    
    
    16,104,018
    
    
    
    16,469,047
    
    
    
    16,911,919
    
    
    
    16,895,221
    
    
    
    16,940,040Performance ratiosReturn on average assets
    
    
    1.56
    %
    
    
    1.41
    %
    
    
    1.28
    %
    
    
    1.78
    %
    
    
    2.13
    %Return on average equity
    
    
    12.57
    %
    
    
    10.70
    %
    
    
    9.02
    %
    
    
    11.40
    %
    
    
    11.98
    %Average equity to
average assets
    
    
    12.42
    %
    
    
    13.14
    %
    
    
    14.20
    %
    
    
    15.58
    %
    
    
    17.80
    %Dividend payout
    
    
    41.45
    %
    
    
    46.50
    %
    
    
    52.06
    %
    
    
    40.56
    %
    
    
    37.05
    %Efficiency ratio
    
    
    48.26
    %
    
    
    52.12
    %
    
    
    53.17
    %
    
    
    46.81
    %
    
    
    42.29
    %Balances at year-endAssets
    
    $
    1,199,772,473
    
    
    $
    1,106,724,022
    
    
    $
    1,032,238,449
    
    
    $
    971,382,727
    
    
    $
    742,014,674Investment securities
    
    
    169,566,168
    
    
    
    153,682,706
    
    
    
    158,560,042
    
    
    
    159,436,361
    
    
    
    124,924,296Loans (gross)
    
    
    912,491,736
    
    
    
    832,447,148
    
    
    
    778,137,430
    
    
    
    715,844,632
    
    
    
    532,921,937Allowance for loan losses
    
    
    15,787,114
    
    
    
    13,923,884
    
    
    
    13,665,013
    
    
    
    10,798,897
    
    
    
    8,834,611Mortgage loans held for sale
    
    
    11,796,899
    
    
    
    14,219,444
    
    
    
    21,553,548
    
    
    
    23,092,846
    
    
    
    32,452,162Liabilities
    
    
    1,053,338,969
    
    
    
    966,876,031
    
    
    
    891,222,228
    
    
    
    829,567,628
    
    
    
    614,571,832Deposits
    
    
    963,836,692
    
    
    
    879,111,425
    
    
    
    749,861,552
    
    
    
    735,099,355
    
    
    
    547,249,315Stockholders equity
    
    
    146,433,504
    
    
    
    139,847,991
    
    
    
    141,016,221
    
    
    
    141,815,099
    
    
    
    127,442,842Asset quality ratiosNet charge-offs
to average loans
    
    
    0.52
    %
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %
    
    
    0.21
    %Nonperforming assets
to total assets
    
    
    1.29
    %
    
    
    1.04
    %
    
    
    1.18
    %
    
    
    1.35
    %
    
    
    0.76
    %Allowance coverage of
nonperforming loans
    
    
    109.91
    %
    
    
    130.96
    %
    
    
    125.82
    %
    
    
    95.29
    %
    
    
    199.98
    %
 
 *
    
    Amounts for periods prior to September 25, 2006 have been adjusted to reflect the 5-for-4 stock
split distributed September 25, 2006. 12




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MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
      Financial Highlights
    
    2006
    
    2005
    
    % change($ in thousands, except per share data)EarningsNet interest income
    
    $
    54,764
    
    
    $
    47,986
    
    
    
    14.1
    %Provision for loan losses
    
    
    6,414
    
    
    
    5,194
    
    
    
    23.5
    %Other income
    
    
    12,507
    
    
    
    11,911
    
    
    
    5.0
    %Other expense
    
    
    32,945
    
    
    
    31,815
    
    
    
    3.6
    %Net income
    
    
    18,032
    
    
    
    15,010
    
    
    
    20.1
    %Per shareNet income- Basic
    
    $
    1.12
    
    
    $
    0.91
    
    
    
    23.1
    %- Diluted
    
    
    1.12
    
    
    
    0.91
    
    
    
    23.1
    %At year-endAssets
    
    $
    1,199,772
    
    
    $
    1,106,724
    
    
    
    8.4
    %Loans
    
    
    912,492
    
    
    
    832,447
    
    
    
    9.6
    %Deposits
    
    
    963,837
    
    
    
    879,111
    
    
    
    9.6
    %RatiosReturn on average assets
    
    
    1.56
    %
    
    
    1.41
    %Return on average equity
    
    
    12.57
    %
    
    
    10.70
    %Average capital to average assets
    
    
    12.42
    %
    
    
    13.14
    %Efficiency ratio
    
    
    48.26
    %
    
    
    52.12
    %
 13




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o
    
    Net interest income increased $6,777,623, or 14.1%, primarily resulting from increased interest
income from higher rates on loans and, to a lesser extent, higher volumes of loans, which was
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 24 basis
points to 5.18% in 2006 compared to 4.94% in 2005.o
    
    Loans grew by $80,044,588 or 9.6%, and deposits grew by $84,725,267, or 9.6%.o
    
    During 2006, loan loss provisions increased $1,219,607, or 23.5%, from the provisions in 2005,
which were established to provide for possible charge-offs due to continued weak local economies
in certain markets. Total nonperforming loans increased to $14,365,155 as of December 31, 2006
compared to $10,632,029 as of December 31, 2005.o
    
    Other expenses, or operating overhead, increased $1,129,996, or 3.6%. The overhead costs of
community banking operations increased $1,227,943, which was partially offset by a slight
decrease in mortgage banking other expenses. The increase in overhead costs was driven primarily
by higher employee benefit, occupancy, and equipment related costs, which increased $1,121,776.
Personnel costs increased $163,990 in 2006. Excluding a one-time charge in 2005 of $1,265,000
before tax, personnel costs increased $1,428,990 in 2006 compared to 2005.o
    
    Other income increased $595,828, or 5%, primarily due to increased cash surrender values of life
insurance policies owned by the Bank and increased fees on deposits.o
    
    Granite Mortgage posted 2006 net income of $400,671, an increase of 24.6% from the $321,463
earned in 2005, primarily due to a decrease in advertising and other overhead expenses. Mortgage
volumes were $248,041,523 in 2006 compared to $265,696,694 in 2005, a decline of 6.6%.o
    
    During 2006, the Company repurchased 168,410 shares of its common stock for $2,643,410 or
an average cost of $15.70 per share.
     14




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18




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19




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20




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2006
    
    
    2005
    
    
    2004Average
    
    
    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)
    
    $
    886,256
    
    
    
    8.81
    %
    
    $
    78,079
    
    
    $
    827,003
    
    
    
    7.41
    %
    
    $
    61,312
    
    
    $
    762,995
    
    
    
    6.36
    %
    
    $
    48,524Taxable securities
    
    
    134,759
    
    
    
    4.41
    %
    
    
    5,942
    
    
    
    114,306
    
    
    
    3.97
    %
    
    
    4,533
    
    
    
    104,334
    
    
    
    4.06
    %
    
    
    4,232Nontaxable securities (2)
    
    
    42,789
    
    
    
    6.65
    %
    
    
    2,847
    
    
    
    49,060
    
    
    
    6.70
    %
    
    
    3,287
    
    
    
    56,849
    
    
    
    6.77
    %
    
    
    3,851Federal funds sold
    
    
    13,285
    
    
    
    5.04
    %
    
    
    670
    
    
    
    4,671
    
    
    
    3.81
    %
    
    
    178
    
    
    
    555
    
    
    
    1.26
    %
    
    
    7Total interest-earning assets
    
    
    1,077,089
    
    
    
    8.13
    %
    
    
    87,538
    
    
    
    995,040
    
    
    
    6.97
    %
    
    
    69,310
    
    
    
    924,733
    
    
    
    6.12
    %
    
    
    56,614Cash and due from banks
    
    
    28,271
    
    
    
    
    
    
    
    
    
    
    
    27,631
    
    
    
    
    
    
    
    
    
    
    
    26,103All other assets
    
    
    50,114
    
    
    
    
    
    
    
    
    
    
    
    44,536
    
    
    
    
    
    
    
    
    
    
    
    42,185Total assets
    
    $
    1,155,474
    
    
    
    
    
    
    
    
    
    
    $
    1,067,207
    
    
    
    
    
    
    
    
    
    
    $
    993,021Liabilities and
stockholders equityNOW deposits
    
    $
    125,594
    
    
    
    1.16
    %
    
    
    1,452
    
    
    $
    123,953
    
    
    
    0.91
    %
    
    
    1,133
    
    
    $
    117,154
    
    
    
    0.82
    %
    
    
    958Money market deposits
    
    
    192,751
    
    
    
    4.02
    %
    
    
    7,744
    
    
    
    168,826
    
    
    
    2.54
    %
    
    
    4,289
    
    
    
    152,453
    
    
    
    1.70
    %
    
    
    2,587Savings deposits
    
    
    23,505
    
    
    
    0.36
    %
    
    
    85
    
    
    
    25,676
    
    
    
    0.19
    %
    
    
    50
    
    
    
    26,904
    
    
    
    0.16
    %
    
    
    42Time deposits of $100,000
or more
    
    
    206,782
    
    
    
    4.51
    %
    
    
    9,324
    
    
    
    174,464
    
    
    
    3.29
    %
    
    
    5,741
    
    
    
    152,663
    
    
    
    2.37
    %
    
    
    3,622Other time deposits
    
    
    229,740
    
    
    
    4.16
    %
    
    
    9,559
    
    
    
    193,204
    
    
    
    3.02
    %
    
    
    5,833
    
    
    
    168,364
    
    
    
    2.08
    %
    
    
    3,503Interest-bearing deposits
    
    
    778,372
    
    
    
    3.62
    %
    
    
    28,164
    
    
    
    686,123
    
    
    
    2.48
    %
    
    
    17,047
    
    
    
    617,538
    
    
    
    1.73
    %
    
    
    10,712Overnight borrowings
    
    
    29,806
    
    
    
    3.21
    %
    
    
    956
    
    
    
    39,006
    
    
    
    1.85
    %
    
    
    721
    
    
    
    35,575
    
    
    
    1.39
    %
    
    
    493Other borrowings
    
    
    48,168
    
    
    
    5.52
    %
    
    
    2,658
    
    
    
    57,066
    
    
    
    4.21
    %
    
    
    2,405
    
    
    
    63,845
    
    
    
    2.98
    %
    
    
    1,903Total interest-bearing liabilities
    
    
    856,346
    
    
    
    3.71
    %
    
    
    31,778
    
    
    
    782,195
    
    
    
    2.58
    %
    
    
    20,173
    
    
    
    716,958
    
    
    
    1.83
    %
    
    
    13,108Noninterest-bearing deposits
    
    
    145,530
    
    
    
    
    
    
    
    
    
    
    
    137,130
    
    
    
    
    
    
    
    
    
    
    
    128,942Other liabilities
    
    
    10,103
    
    
    
    
    
    
    
    
    
    
    
    7,662
    
    
    
    
    
    
    
    
    
    
    
    6,098Stockholders equity
    
    
    143,495
    
    
    
    
    
    
    
    
    
    
    
    140,220
    
    
    
    
    
    
    
    
    
    
    
    141,023Total liabilities and
stockholders equity
    
    $
    1,155,474
    
    
    
    
    
    
    
    
    
    
    $
    1,067,207
    
    
    
    
    
    
    
    
    
    
    $
    993,021Net yield on earning assets and
net interest income (2)(3)
    
    
    
    
    
    
    5.18
    %
    
    $
    55,760
    
    
    
    
    
    
    
    4.94
    %
    
    $
    49,137
    
    
    
    
    
    
    
    4.70
    %
    
    $
    43,506Interest rate spread (4)
    
    
    
    
    
    
    4.42
    %
    
    
    
    
    
    
    
    
    
    
    4.39
    %
    
    
    
    
    
    
    
    
    
    
    4.29
    %
 
 (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 2006, 2005 and 2004.
The taxable equivalent adjustments were $996,291, $1,150,553 and $1,347,763
for 2006, 2005 and 2004, respectively.(3)
    
    Net yield on earning assets is computed
by dividing net interest earned by average earning assets.(4)
    
    The interest rate spread is the interest earning assets rate less the interest earning
liabilities rate.  
 2006 compared to 2005
    
    
    
    
    
    2005 compared to 2004Change
    
    
    
    
    
    ChangeAttributable to
    
    
    
    
    
    Attributable todollars in thousands
    
    Volume(1)
    
    Rate(1)
    
    Total
    
    Volume(1)
    
    Rate(1)
    
    TotalLoans
    
    $
    4,807
    
    
    $
    11,960
    
    
    $
    16,767
    
    
    $
    4,408
    
    
    $
    8,380
    
    
    $
    12,788Taxable securities
    
    
    856
    
    
    
    553
    
    
    
    1,409
    
    
    
    400
    
    
    
    (99
    )
    
    
    301Nontaxable securities
    
    
    (419
    )
    
    
    (21
    )
    
    
    (440
    )
    
    
    (525
    )
    
    
    (39
    )
    
    
    (564
    )Federal funds sold
    
    
    381
    
    
    
    111
    
    
    
    492
    
    
    
    104
    
    
    
    67
    
    
    
    171Interest-earning assets
    
    $
    5,625
    
    
    $
    12,603
    
    
    $
    18,228
    
    
    $
    4,387
    
    
    $
    8,309
    
    
    $
    12,696NOW deposits
    
    $
    17
    
    
    $
    302
    
    
    $
    319
    
    
    $
    59
    
    
    $
    116
    
    
    $
    175Money market deposits
    
    
    785
    
    
    
    2,670
    
    
    
    3,455
    
    
    
    347
    
    
    
    1,355
    
    
    
    1,702Savings deposits
    
    
    (6
    )
    
    
    41
    
    
    
    35
    
    
    
    (2
    )
    
    
    10
    
    
    
    8Time deposits of $100,000
or more
    
    
    1,260
    
    
    
    2,323
    
    
    
    3,583
    
    
    
    617
    
    
    
    1,502
    
    
    
    2,119Other time deposits
    
    
    1,312
    
    
    
    2,414
    
    
    
    3,726
    
    
    
    633
    
    
    
    1,697
    
    
    
    2,330Interest-bearing deposits
    
    
    3,368
    
    
    
    7,750
    
    
    
    11,118
    
    
    
    1,654
    
    
    
    4,680
    
    
    
    6,334Overnight borrowings
    
    
    (233
    )
    
    
    468
    
    
    
    235
    
    
    
    55
    
    
    
    173
    
    
    
    228Other borrowings
    
    
    (433
    )
    
    
    686
    
    
    
    253
    
    
    
    (244
    )
    
    
    746
    
    
    
    502Interest-bearing liabilities
    
    $
    2,702
    
    
    $
    8,904
    
    
    $
    11,606
    
    
    $
    1,465
    
    
    $
    5,599
    
    
    $
    7,064
 
 (1)
    
    The rate/volume variance for each category has been allocated equally on a consistent
basis between rate and volume variances. 21




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SM
    22




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23




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##### Table of Contents



Non-sensitiveInterest Sensitive Within
    
    Total
    
    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
    
    $
    4,715
    
    
    
    
    
    
    
    
    
    
    $
    4,715
    
    
    
    
    
    
    $
    4,715Federal funds sold
    
    
    15,700
    
    
    
    
    
    
    
    
    
    
    
    15,700
    
    
    
    
    
    
    
    15,700Securities (at amortized cost) (1):U.S. Treasury
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,121
    
    
    
    5,121U.S. Government agencies
    
    
    899
    
    
    
    
    
    
    $
    7,063
    
    
    
    7,962
    
    
    
    105,623
    
    
    
    113,585States and political subdivisions
    
    
    1,515
    
    
    $
    3,953
    
    
    
    100
    
    
    
    5,568
    
    
    
    35,235
    
    
    
    40,803Other (including equity securities)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,576
    
    
    
    11,576Loans (gross):Real estate  Construction
    
    
    145,022
    
    
    
    249
    
    
    
    460
    
    
    
    145,731
    
    
    
    15,340
    
    
    
    161,071Real estate  Mortgage
    
    
    392,942
    
    
    
    2,759
    
    
    
    6,870
    
    
    
    402,571
    
    
    
    85,776
    
    
    
    488,347Commercial, financial and agricultural
    
    
    223,544
    
    
    
    1,681
    
    
    
    2,127
    
    
    
    227,352
    
    
    
    21,339
    
    
    
    248,691Consumer
    
    
    3,550
    
    
    
    528
    
    
    
    1,127
    
    
    
    5,205
    
    
    
    10,112
    
    
    
    15,317All other
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    135
    
    
    
    607
    
    
    
    742Mortgages held for sale
    
    
    11,797
    
    
    
    
    
    
    
    
    
    
    
    11,797
    
    
    
    
    
    
    
    11,797Total interest-earning assets
    
    $
    799,684
    
    
    $
    9,170
    
    
    $
    17,882
    
    
    $
    826,736
    
    
    $
    290,729
    
    
    $
    1,117,465Interest-bearing LiabilitiesInterest-bearing deposits:Savings and NOW accounts
    
    $
    152,889
    
    
    
    
    
    
    
    
    
    
    $
    152,889
    
    
    
    
    
    
    $
    152,889Money market accounts
    
    
    216,573
    
    
    
    
    
    
    
    
    
    
    
    216,573
    
    
    
    
    
    
    
    216,573Time deposits of $100,000 or more
    
    
    75,428
    
    
    $
    51,081
    
    
    $
    57,584
    
    
    
    184,093
    
    
    $
    24,818
    
    
    
    208,911Other time deposits
    
    
    79,053
    
    
    
    55,882
    
    
    
    74,167
    
    
    
    209,102
    
    
    
    31,726
    
    
    
    240,828Overnight borrowings
    
    
    31,152
    
    
    
    
    
    
    
    
    
    
    
    31,152
    
    
    
    
    
    
    
    31,152Other borrowings
    
    
    28,546
    
    
    
    3,000
    
    
    
    2,000
    
    
    
    33,546
    
    
    
    10,141
    
    
    
    43,687Total interest-bearing liabilities
    
    $
    583,641
    
    
    $
    109,963
    
    
    $
    133,751
    
    
    $
    827,355
    
    
    $
    66,685
    
    
    $
    894,040Interest sensitivity gap
    
    $
    216,043
    
    
    $
    (100,793
    )
    
    $
    (115,869
    )
    
    $
    (619
    )Cumulative interest sensitivity gap
    
    
    216,043
    
    
    
    115,250
    
    
    
    (619
    )
    
    
    (619
    )Interest earning-assets as a percentage
of interest-bearing liabilities
    
    
    137
    %
    
    
    8
    %
    
    
    13
    %
    
    
    100
    %
 
 (1)
    
    Interest sensitivity periods for debt securities are based on contractual maturities. 24




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Estimated Resulting Theoretical Tax Equivalent Net Interest IncomeFor the Twelve-month Periods FollowingDecember 31, 2006
    
    December 31, 2005dollars in thousands
    
    
    
    
    
    Amount
    
    % Change
    
    Amount
    
    % Change3% interest rate changes prorated over a twelve-month period+3
    %
    
    $
    58,848
    
    
    
    5.1
    %
    
    $
    56,229
    
    
    
    5.5
    %0
    %
    
    
    55,982
    
    
    
    0.0
    %
    
    
    53,295
    
    
    
    0.0
    %- 3
    %
    
    
    47,625
    
    
    
    -14.9
    %
    
    
    45,337
    
    
    
    -14.9
    %Hypothetical immediate and sustained rate changes of 1%, 2%, 3% and 4%+4
    %
    
    $
    58,275
    
    
    
    7.0
    %
    
    $
    58,943
    
    
    
    14.0
    %+3
    %
    
    
    57,348
    
    
    
    5.3
    %
    
    
    57,161
    
    
    
    10.6
    %+2
    %
    
    
    56,416
    
    
    
    3.5
    %
    
    
    55,371
    
    
    
    7.1
    %+1
    %
    
    
    55,468
    
    
    
    1.8
    %
    
    
    53,547
    
    
    
    3.6
    %0
    %
    
    
    54,486
    
    
    
    0.0
    %
    
    
    51,703
    
    
    
    0.0
    %- 1
    %
    
    
    50,433
    
    
    
    -7.4
    %
    
    
    46,480
    
    
    
    -10.1
    %- 2
    %
    
    
    45,620
    
    
    
    -16.3
    %
    
    
    41,187
    
    
    
    -20.3
    %- 3
    %
    
    
    40,998
    
    
    
    -24.8
    %
    
    
    36,000
    
    
    
    -30.4
    %- 4
    %
    
    
    36,524
    
    
    
    -33.0
    %
    
    
    31,463
    
    
    
    -39.1
    %
    Within
    
    
    One to
    
    
    FiveOne
    
    
    Five
    
    
    Years ordollars in thousands
    
    Year
    
    
    Years
    
    
    More
    
    
    TotalReal estate  Construction
    
    $
    82,400
    
    
    $
    58,551
    
    
    $
    20,120
    
    
    $
    161,071Real estate  Mortgage
    
    
    111,835
    
    
    
    236,020
    
    
    
    140,492
    
    
    
    488,347Commercial, financial and agricultural
    
    
    150,115
    
    
    
    79,781
    
    
    
    18,795
    
    
    
    248,691Consumer
    
    
    3,998
    
    
    
    10,991
    
    
    
    328
    
    
    
    15,317All other
    
    
    742
    
    
    
    
    
    
    
    
    
    
    
    742Total
    
    $
    349,090
    
    
    $
    385,343
    
    
    $
    179,735
    
    
    $
    914,168Predetermined rate, maturity
greater than one year
    
    
    
    
    
    $
    98,657
    
    
    $
    24,662
    
    
    $
    123,319Variable rate or maturing within
one year
    
    $
    349,090
    
    
    
    286,686
    
    
    
    155,073
    
    
    
    790,849Total
    
    $
    349,090
    
    
    $
    385,343
    
    
    $
    179,735
    
    
    $
    914,168
 25




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##### Table of Contents



dollars in thousands
    
    2006
    
    
    2005
    
    
    2004Non-interest-bearing demand deposits
    
    $
    145,530
    
    
    $
    137,130
    
    
    $
    128,942Interest-bearing demand deposits
    
    
    318,345
    
    
    
    292,779
    
    
    
    269,607Savings deposits
    
    
    23,505
    
    
    
    25,676
    
    
    
    26,904Time deposits
    
    
    436,522
    
    
    
    367,668
    
    
    
    321,027Total
    
    $
    923,902
    
    
    $
    823,253
    
    
    $
    746,480
  
 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
    
    $
    75,428
    
    
    $
    51,081
    
    
    $
    57,584
    
    
    $
    184,093
    
    
    $
    24,818
    
    
    $
    208,911
   26




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##### Table of Contents



2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Totaldollars in thousands
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansLoansReal estate -Construction
    
    $
    161,071
    
    
    
    17.6
    %
    
    $
    125,555
    
    
    
    15.1
    %
    
    $
    105,111
    
    
    
    13.5
    %
    
    $
    90,176
    
    
    
    12.6
    %
    
    $
    75,383
    
    
    
    14.1
    %Mortgage
    
    
    488,347
    
    
    
    53.4
    %
    
    
    455,322
    
    
    
    54.6
    %
    
    
    420,860
    
    
    
    54.0
    %
    
    
    377,956
    
    
    
    52.7
    %
    
    
    245,496
    
    
    
    46.0
    %Commercial,
financial and
agricultural
    
    
    248,691
    
    
    
    27.2
    %
    
    
    231,229
    
    
    
    27.7
    %
    
    
    223,605
    
    
    
    28.7
    %
    
    
    211,477
    
    
    
    29.5
    %
    
    
    175,409
    
    
    
    32.9
    %Consumer
    
    
    15,317
    
    
    
    1.7
    %
    
    
    20,911
    
    
    
    2.5
    %
    
    
    29,015
    
    
    
    3.7
    %
    
    
    35,981
    
    
    
    5.0
    %
    
    
    37,046
    
    
    
    6.9
    %All other
    
    
    742
    
    
    
    0.1
    %
    
    
    915
    
    
    
    0.1
    %
    
    
    704
    
    
    
    0.1
    %
    
    
    1,206
    
    
    
    0.2
    %
    
    
    449
    
    
    
    0.1
    %Total loans
    
    
    914,168
    
    
    
    100.0
    %
    
    
    833,932
    
    
    
    100.0
    %
    
    
    779,295
    
    
    
    100.0
    %
    
    
    716,796
    
    
    
    100.0
    %
    
    
    533,783
    
    
    
    100.0
    %Deferred origination
fees, net
    
    
    (1,677
    )
    
    
    
    
    
    
    (1,485
    )
    
    
    
    
    
    
    (1,158
    )
    
    
    
    
    
    
    (951
    )
    
    
    
    
    
    
    (860
    )Total loans, net of
deferred fees
    
    $
    912,491
    
    
    
    
    
    
    $
    832,447
    
    
    
    
    
    
    $
    778,137
    
    
    
    
    
    
    $
    715,845
    
    
    
    
    
    
    $
    532,923
  
 dollars in thousands
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Nonperforming assetsNonaccrual loans
    
    $
    9,289
    
    
    $
    6,424
    
    
    $
    6,634
    
    
    $
    8,115
    
    
    $
    3,265Loans past due 90 days or more
and still accruing interest
    
    
    5,074
    
    
    
    4,208
    
    
    
    4,227
    
    
    
    3,218
    
    
    
    1,153Foreclosed properties
    
    
    1,162
    
    
    
    926
    
    
    
    1,280
    
    
    
    1,775
    
    
    
    1,203Total
    
    $
    15,525
    
    
    $
    11,558
    
    
    $
    12,141
    
    
    $
    13,108
    
    
    $
    5,621Nonperforming loans to total loans
    
    
    1.57
    %
    
    
    1.28
    %
    
    
    1.40
    %
    
    
    1.58
    %
    
    
    0.83
    %Allowance for loan losses to nonperforming loans
    
    
    109.91
    %
    
    
    130.96
    %
    
    
    125.82
    %
    
    
    95.29
    %
    
    
    199.98
    %Nonperforming loans to total assets
    
    
    1.20
    %
    
    
    0.96
    %
    
    
    1.05
    %
    
    
    1.17
    %
    
    
    0.60
    %Nonperforming assets to total assets
    
    
    1.29
    %
    
    
    1.04
    %
    
    
    1.18
    %
    
    
    1.35
    %
    
    
    0.76
    %
 27




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dollars in thousands
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Investment in impaired loans:Impaired loans still accruing interest
    
    $
    5,747
    
    
    $
    4,297
    
    
    $
    5,237
    
    
    $
    3,114
    
    
    $
    1,890Accrued interest on accruing impaired loans
    
    
    423
    
    
    
    129
    
    
    
    116
    
    
    
    90
    
    
    
    56Impaired loans not accruing interest
    
    
    9,289
    
    
    
    6,424
    
    
    
    6,634
    
    
    
    8,115
    
    
    
    3,265Accrued interest on nonaccruing impaired loans
    
    
    57
    
    
    
    197
    
    
    
    151
    
    
    
    215
    
    
    
    127Total investment in impaired loans
    
    $
    15,516
    
    
    $
    11,047
    
    
    $
    12,138
    
    
    $
    11,534
    
    
    $
    5,338Loan loss allowance related to impaired loans
    
    $
    3,926
    
    
    $
    3,249
    
    
    $
    4,325
    
    
    $
    2,412
    
    
    $
    2,196
   28




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29




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##### Table of Contents



30




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##### Table of Contents



dollars in thousands
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Balance at beginning of year
    
    $
    13,924
    
    
    $
    13,665
    
    
    $
    10,799
    
    
    $
    8,835
    
    
    $
    6,426Loans charged off:Real estate
    
    
    1,708
    
    
    
    919
    
    
    
    930
    
    
    
    1,616
    
    
    
    329Commercial, financial and agricultural
    
    
    2,808
    
    
    
    3,484
    
    
    
    1,040
    
    
    
    2,275
    
    
    
    538Credit cards and related plans
    
    
    26
    
    
    
    45
    
    
    
    88
    
    
    
    41
    
    
    
    57Installment loans to individuals
    
    
    410
    
    
    
    540
    
    
    
    683
    
    
    
    767
    
    
    
    260Demand deposit overdraft program
    
    
    251
    
    
    
    262
    
    
    
    297
    
    
    
    389
    
    
    
    371Total charge-offs
    
    
    5,203
    
    
    
    5,250
    
    
    
    3,038
    
    
    
    5,088
    
    
    
    1,555Recoveries of loans previously charged off:Real estate
    
    
    84
    
    
    
    63
    
    
    
    24
    
    
    
    3
    
    
    
    78Commercial, financial and agricultural
    
    
    282
    
    
    
    29
    
    
    
    70
    
    
    
    176
    
    
    
    168Credit cards and related plans
    
    
    10
    
    
    
    3
    
    
    
    4
    
    
    
    5
    
    
    
    2Installment loans to individuals
    
    
    138
    
    
    
    42
    
    
    
    220
    
    
    
    71
    
    
    
    59Demand deposit overdraft program
    
    
    138
    
    
    
    178
    
    
    
    147
    
    
    
    170
    
    
    
    165Total recoveries
    
    
    652
    
    
    
    315
    
    
    
    465
    
    
    
    425
    
    
    
    472Net charge-offs
    
    
    4,551
    
    
    
    4,935
    
    
    
    2,573
    
    
    
    4,663
    
    
    
    1,083Provision for loan losses
    
    
    6,414
    
    
    
    5,194
    
    
    
    5,439
    
    
    
    4,764
    
    
    
    3,492Allowance of loans acquired in purchase transaction
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,863
    
    
    
    Balance at end of year
    
    $
    15,787
    
    
    $
    13,924
    
    
    $
    13,665
    
    
    $
    10,799
    
    
    $
    8,835Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    0.52
    %
    
    
    0.61
    %
    
    
    0.35
    %
    
    
    0.75
    %
    
    
    0.21
    %Allowance coverage of net charge-offs
    
    
    346.95
    %
    
    
    282.14
    %
    
    
    531.08
    %
    
    
    231.62
    %
    
    
    814.81
    %Allowance as a percentage of gross loans
    
    
    1.73
    %
    
    
    1.67
    %
    
    
    1.76
    %
    
    
    1.51
    %
    
    
    1.66
    %Allowance as a percentage of net loans
    
    
    1.76
    %
    
    
    1.70
    %
    
    
    1.79
    %
    
    
    1.53
    %
    
    
    1.69
    %
   
 2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofTotal
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    Totaldollars in thousands
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    Loans
    
    
    Amount
    
    
    LoansReal estate
    
    $
    5,091
    
    
    
    71.0
    %
    
    $
    4,448
    
    
    
    69.7
    %
    
    $
    5,782
    
    
    
    67.5
    %
    
    $
    4,602
    
    
    
    65.3
    %
    
    $
    3,564
    
    
    
    60.1
    %Commercial,
financial,
and agricultural
    
    
    9,891
    
    
    
    27.2
    %
    
    
    8,401
    
    
    
    27.7
    %
    
    
    6,759
    
    
    
    28.7
    %
    
    
    5,226
    
    
    
    29.5
    %
    
    
    4,410
    
    
    
    32.9
    %Consumer
    
    
    443
    
    
    
    1.7
    %
    
    
    577
    
    
    
    2.5
    %
    
    
    617
    
    
    
    3.7
    %
    
    
    684
    
    
    
    5.0
    %
    
    
    649
    
    
    
    6.9
    %All other loans
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.1
    %
    
    
    
    
    
    
    0.2
    %
    
    
    
    
    
    
    0.1
    %Unallocated
    
    
    362
    
    
    
    n/a
    
    
    
    498
    
    
    
    n/a
    
    
    
    507
    
    
    
    n/a
    
    
    
    287
    
    
    
    n/a
    
    
    
    212
    
    
    
    n/aTotal loans
    
    $
    15,787
    
    
    
    100.0
    %
    
    $
    13,924
    
    
    
    100.0
    %
    
    $
    13,665
    
    
    
    100.0
    %
    
    $
    10,799
    
    
    
    100.0
    %
    
    $
    8,835
    
    
    
    100.0
    %
   31




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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
    
    
    
    
    
    
    
    
    
    $
    5,121
    
    
    
    3.33
    %U.S. government agency
    
    $
    7,962
    
    
    
    3.28
    %
    
    
    103,624
    
    
    
    4.39
    %
    
    $
    1,999
    
    
    
    5.13
    %State and political subdivisions (2)
    
    
    
    
    
    
    
    
    
    
    718
    
    
    
    4.91
    %
    
    
    2,014
    
    
    
    5.34
    %
    
    $
    2,817
    
    
    
    5.93
    %Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,546
    
    
    
    7.43
    %Total
    
    $
    7,962
    
    
    
    3.28
    %
    
    $
    109,463
    
    
    
    4.34
    %
    
    $
    4,013
    
    
    
    5.24
    %
    
    $
    6,363
    
    
    
    6.77
    %Held to maturity:State and political subdivisions (2)
    
    $
    5,568
    
    
    
    6.59
    %
    
    $
    22,204
    
    
    
    6.55
    %
    
    $
    4,973
    
    
    
    7.00
    %
    
    $
    2,509
    
    
    
    7.40
    %Total
    
    $
    5,568
    
    
    
    6.59
    %
    
    $
    22,204
    
    
    
    6.55
    %
    
    $
    4,973
    
    
    
    7.00
    %
    
    $
    2,509
    
    
    
    7.40
    %
 
 (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 2006. 32




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##### Table of Contents



dollars in thousands
    
    2006
    
    
    2005
    
    
    2004Available for sale (at estimated fair value):U.S. Treasury
    
    $
    4,994
    
    
    $
    5,048
    
    
    $
    5,238U.S. government agency
    
    
    111,740
    
    
    
    89,815
    
    
    
    77,410State and political subdivisions
    
    
    5,533
    
    
    
    5,527
    
    
    
    5,606Other
    
    
    12,046
    
    
    
    11,928
    
    
    
    19,104Total
    
    $
    134,313
    
    
    $
    112,318
    
    
    $
    107,358Held to maturity (at amortized cost):U.S. government agency
    
    $
    
    
    
    $
    
    
    
    $
    2,700State and political subdivisions
    
    
    35,254
    
    
    
    41,363
    
    
    
    48,502Total
    
    $
    35,254
    
    
    $
    41,363
    
    
    $
    51,202
   
 Within
    
    
    One to
    
    
    Three to
    
    
    FiveOne
    
    
    Three
    
    
    Five
    
    
    Years ordollars in thousands
    
    Year
    
    
    Years
    
    
    Years
    
    
    More
    
    
    TotalContractual Cash ObligationsOvernight borrowings
    
    $
    49,640
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    49,640Short-term borrowings
    
    
    8,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Long-term borrowings
    
    
    
    
    
    
    7,059
    
    
    
    3,141
    
    
    
    7,000
    
    
    
    17,200Capitalized lease obligations
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    1,199
    
    
    
    1,254Operating lease obligations
    
    
    702
    
    
    
    754
    
    
    
    609
    
    
    
    
    
    
    
    2,065Purchase obligations
    
    
    522
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    522Total
    
    $
    58,919
    
    
    $
    7,813
    
    
    $
    3,750
    
    
    $
    8,199
    
    
    $
    78,681Other CommitmentsCommitments to extend credit
    
    $
    92,578
    
    
    $
    25,468
    
    
    $
    4,651
    
    
    $
    53,178
    
    
    $
    175,875Standby letters of credit
    
    
    5,559
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    5,900Total
    
    $
    98,137
    
    
    $
    25,809
    
    
    $
    4,651
    
    
    $
    53,178
    
    
    $
    181,775
     33




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##### Table of Contents



Community Banking
       Mortgage Banking
       34




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##### Table of Contents



Other
        35




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##### Table of Contents



Begins onPageReport Of Independent Registered Public Accounting Firm
    
    
    37 & 38Financial Statements:Consolidated Balance Sheets
December 31, 2006 and 2005
    
    
    39Consolidated Statements Of Income
Years Ended December 31, 2006, 2005 and 2004
    
    
    40Consolidated Statements Of Comprehensive Income
Years Ended December 31, 2006, 2005 and 2004
    
    
    41Consolidated Statements Of Changes In Stockholders Equity
Years Ended December 31, 2006, 2005 and 2004
    
    
    42Consolidated Statements Of Cash Flows
Years Ended December 31, 2006, 2005 and 2004
    
    
    43Notes To Consolidated Financial Statements
Years Ended December 31, 2006, 2005 and 2004
    
    
    45Supplementary Financial Data:Selected Quarterly Financial Data (Unaudited)
Years Ended December 31, 2006 and 2005
    
    
    70
 36




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     Internal
Control  Integrated Framework
 /s/ Dixon Hughes PLLC  DIXON HUGHES PLLC
 37




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ Deloitte & Touche LLP  DELOITTE & TOUCHE LLP
 38




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
 2006
    
    
    2005ASSETS:Cash and cash equivalentsCash and due from banks
    
    $
    29,566,519
    
    
    $
    34,976,107Interest-bearing deposits
    
    
    4,714,736
    
    
    
    3,905,812Federal funds sold
    
    
    15,700,000
    
    
    
    18,600,000Total cash and cash equivalents
    
    
    49,981,255
    
    
    
    57,481,919Investment securitiesAvailable for sale, at fair value (amortized cost of $135,831,343
and
$114,054,772 at December 31, 2006 and 2005, respectively)
    
    
    134,312,576
    
    
    
    112,319,269Held to maturity, at amortized cost (fair value of $36,019,901 and
$42,513,168 at December 31, 2006 and 2005, respectively)
    
    
    35,253,592
    
    
    
    41,363,437Loans
    
    
    912,491,736
    
    
    
    832,447,148Allowance for loan losses
    
    
    (15,787,114
    )
    
    
    (13,923,884
    )Net loans
    
    
    896,704,622
    
    
    
    818,523,264Mortgage loans held for sale
    
    
    11,796,899
    
    
    
    14,219,444Premises and equipment, net
    
    
    13,426,075
    
    
    
    14,805,876Accrued interest receivable
    
    
    8,620,893
    
    
    
    7,387,075Investment in bank owned life insurance
    
    
    26,925,411
    
    
    
    19,692,889Intangible assets
    
    
    11,044,083
    
    
    
    11,129,997Other assets
    
    
    11,707,067
    
    
    
    9,800,852Total assets
    
    $
    1,199,772,473
    
    
    $
    1,106,724,022LIABILITIES AND STOCKHOLDERS EQUITY:DepositsDemand
    
    $
    144,635,530
    
    
    $
    147,576,746NOW accounts
    
    
    130,971,241
    
    
    
    129,281,747Money market accounts
    
    
    216,573,314
    
    
    
    174,866,304Savings
    
    
    21,917,407
    
    
    
    23,908,599Time deposits of $100,000 or more
    
    
    208,911,053
    
    
    
    192,568,963Other time deposits
    
    
    240,828,147
    
    
    
    210,909,066Total deposits
    
    
    963,836,692
    
    
    
    879,111,425Overnight borrowings
    
    
    31,152,468
    
    
    
    27,737,643Other borrowings
    
    
    43,687,183
    
    
    
    49,675,003Accrued interest payable
    
    
    3,326,943
    
    
    
    2,500,743Other liabilities
    
    
    11,335,683
    
    
    
    7,851,217Total liabilities
    
    
    1,053,338,969
    
    
    
    966,876,031COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYCommon
stock, $1.00 par value, authorized  25,000,000 shares;
issued  18,921,611 shares in 2006 and 15,096,699 shares in 2005;
outstanding  16,022,230 shares in 2006 and 12,911,922 shares in
2005
    
    
    18,921,611
    
    
    
    15,096,699Additional paid-in capital
    
    
    29,524,350
    
    
    
    32,678,939Retained earnings
    
    
    141,661,875
    
    
    
    133,209,287Accumulated other comprehensive loss, net of
deferred income taxes of $645,633 and $715,866 at
December 31, 2006 and 2005, respectively
    
    
    (973,249
    )
    
    
    (1,079,261
    )Less: Cost of common stock in treasury;
2,899,381 shares in 2006 and 2,184,777 shares in 2005
    
    
    (42,701,083
    )
    
    
    (40,057,673
    )Total stockholders equity
    
    
    146,433,504
    
    
    
    139,847,991Total liabilities and stockholders equity
    
    $
    1,199,772,473
    
    
    $
    1,106,724,022
  39




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 2006
    
    
    2005
    
    
    2004INTEREST INCOME:Interest and fees from loans
    
    $
    73,682,108
    
    
    $
    57,083,639
    
    
    $
    44,151,806Interest and fees from mortgage banking
    
    
    4,397,380
    
    
    
    4,228,323
    
    
    
    4,372,182Federal funds sold
    
    
    669,618
    
    
    
    177,568
    
    
    
    6,747Interest-bearing deposits
    
    
    755,164
    
    
    
    232,056
    
    
    
    71,861Investments:U.S. Treasury
    
    
    173,018
    
    
    
    173,018
    
    
    
    173,011U.S. Government agencies
    
    
    4,308,680
    
    
    
    3,445,771
    
    
    
    3,155,472States and political subdivisions
    
    
    1,850,254
    
    
    
    2,136,742
    
    
    
    2,502,988Other
    
    
    705,561
    
    
    
    681,957
    
    
    
    831,822Total interest income
    
    
    86,541,783
    
    
    
    68,159,074
    
    
    
    55,265,889INTEREST EXPENSE:Time deposits of $100,000 or more
    
    
    9,324,454
    
    
    
    5,740,572
    
    
    
    3,622,035Other time and savings deposits
    
    
    18,839,489
    
    
    
    11,306,523
    
    
    
    7,090,697Overnight borrowings
    
    
    956,161
    
    
    
    721,441
    
    
    
    492,728Other borrowed funds
    
    
    2,658,126
    
    
    
    2,404,608
    
    
    
    1,902,525Total interest expense
    
    
    31,778,230
    
    
    
    20,173,144
    
    
    
    13,107,985NET INTEREST INCOME
    
    
    54,763,553
    
    
    
    47,985,930
    
    
    
    42,157,904PROVISION FOR LOAN LOSSES
    
    
    6,413,509
    
    
    
    5,193,902
    
    
    
    5,439,160NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    48,350,044
    
    
    
    42,792,028
    
    
    
    36,718,744OTHER INCOME:Service charges on deposit accounts
    
    
    5,755,116
    
    
    
    5,630,576
    
    
    
    5,359,206Other service charges, fees and commissions
    
    
    862,704
    
    
    
    775,284
    
    
    
    797,961Mortgage banking income
    
    
    3,974,980
    
    
    
    3,990,690
    
    
    
    3,844,297Securities gains
    
    
    91,317
    
    
    
    68,326
    
    
    
    14,347Other
    
    
    1,822,998
    
    
    
    1,446,411
    
    
    
    1,240,912Total other income
    
    
    12,507,115
    
    
    
    11,911,287
    
    
    
    11,256,723OTHER EXPENSES:Salaries and wages
    
    
    16,170,194
    
    
    
    16,544,474
    
    
    
    14,668,944Employee benefits
    
    
    4,476,696
    
    
    
    3,938,426
    
    
    
    3,229,887Occupancy expense, net
    
    
    2,290,933
    
    
    
    2,020,296
    
    
    
    1,729,986Equipment rentals, depreciation and
maintenance
    
    
    2,488,181
    
    
    
    2,175,312
    
    
    
    1,958,106Other
    
    
    7,519,227
    
    
    
    7,136,727
    
    
    
    7,528,017Total other expenses
    
    
    32,945,231
    
    
    
    31,815,235
    
    
    
    29,114,940INCOME BEFORE INCOME TAXES
    
    
    27,911,928
    
    
    
    22,888,080
    
    
    
    18,860,527INCOME TAXES
    
    
    9,879,899
    
    
    
    7,878,536
    
    
    
    6,142,307NET INCOME
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220PER SHARE AMOUNTSNet income  Basic
    
    $
    1.12
    
    
    $
    0.91
    
    
    $
    0.75 Diluted
    
    
    1.12
    
    
    
    0.91
    
    
    
    0.75Dividends
    
    
    0.48
    
    
    
    0.42
    
    
    
    0.39Book value
    
    
    9.27
    
    
    
    8.66
    
    
    
    8.47
  40




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 2006
    
    
    2005
    
    
    2004NET INCOME
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220ITEMS OF OTHER COMPREHENSIVE INCOME:Items of other comprehensive income,
before tax:Unrealized gains (losses) on securities
available for sale
    
    
    125,419
    
    
    
    (2,178,684
    )
    
    
    (878,316
    )Reclassification adjustment for
gains included in net income
    
    
    91,317
    
    
    
    (60,489
    )
    
    
    Unrealized gains (losses) on mortgage
derivative instruments
    
    
    (40,492
    )
    
    
    36,587
    
    
    
    7,529Other comprehensive income (loss),
before tax
    
    
    176,244
    
    
    
    (2,202,586
    )
    
    
    (870,787
    )Change in deferred income taxes
related to change in unrealized gains
or losses on securities available for sale
    
    
    (86,429
    )
    
    
    892,884
    
    
    
    350,230Changes in deferred income taxes
related to change in unrealized gains
or losses on mortgage derivative instruments
    
    
    16,197
    
    
    
    (14,635
    )
    
    
    (3,012
    )Items of other comprehensive income (loss),
net of tax
    
    
    106,012
    
    
    
    (1,324,337
    )
    
    
    (523,569
    )COMPREHENSIVE INCOME
    
    $
    18,138,041
    
    
    $
    13,685,207
    
    
    $
    12,194,651
  41




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 2006
    
    
    2005
    
    
    2004COMMON STOCK, $1.00 par valueAt beginning of year
    
    $
    15,096,699
    
    
    $
    15,079,133
    
    
    $
    14,993,493Par value of shares issued under stock option plan
    
    
    41,321
    
    
    
    17,566
    
    
    
    85,640Transfer from surplus due to stock splits
    
    
    3,783,591
    
    
    
    
    
    
    
    At end of year
    
    
    18,921,611
    
    
    
    15,096,699
    
    
    
    15,079,133ADDITIONAL PAID-IN CAPITALAt beginning of year
    
    
    32,678,939
    
    
    
    32,478,404
    
    
    
    31,497,057Surplus of shares issued under stock option plan
    
    
    573,878
    
    
    
    146,830
    
    
    
    848,108Tax benefit from nonqualifying
dispositions of stock options
    
    
    34,108
    
    
    
    53,705
    
    
    
    133,239Stock-based compensation expense
    
    
    21,016
    
    
    
    
    
    
    
    Transfer to common stock due to stock splits
    
    
    (3,783,591
    )
    
    
    
    
    
    
    At end of year
    
    
    29,524,350
    
    
    
    32,678,939
    
    
    
    32,478,404RETAINED EARNINGSAt beginning of year
    
    
    133,209,287
    
    
    
    125,178,824
    
    
    
    119,081,744Cumulative effect of adoption of SAB 108
    
    
    (1,807,501
    )
    
    
    
    
    
    
    Net income
    
    
    18,032,029
    
    
    
    15,009,544
    
    
    
    12,718,220Dividends
    
    
    (7,760,725
    )
    
    
    (6,979,081
    )
    
    
    (6,621,140
    )Cash paid for fractional shares
    
    
    (11,215
    )
    
    
    
    
    
    
    At end of year
    
    
    141,661,875
    
    
    
    133,209,287
    
    
    
    125,178,824ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXESAt beginning of year
    
    
    (1,079,261
    )
    
    
    245,076
    
    
    
    768,645Net change in unrealized gains or losses on
securities
available for sale, net of deferred income taxes
    
    
    130,307
    
    
    
    (1,346,289
    )
    
    
    (528,086
    )Net change in unrealized gains or losses on
mortgage
derivative instruments, net of deferred income
taxes
    
    
    (24,295
    )
    
    
    21,952
    
    
    
    4,517At end of year
    
    
    (973,249
    )
    
    
    (1,079,261
    )
    
    
    245,076COST OF COMMON STOCK
IN TREASURYAt beginning of year
    
    
    (40,057,673
    )
    
    
    (31,965,216
    )
    
    
    (24,525,840
    )Cost of common stock repurchased
    
    
    (2,643,410
    )
    
    
    (8,092,457
    )
    
    
    (7,439,376
    )At end of year
    
    
    (42,701,083
    )
    
    
    (40,057,673
    )
    
    
    (31,965,216
    )Total stockholders equity
    
    $
    146,433,504
    
    
    $
    139,847,991
    
    
    $
    141,016,221Shares issuedAt beginning of year
    
    
    15,096,699
    
    
    
    15,079,133
    
    
    
    14,993,493Shares issued under incentive stock option plans
    
    
    41,321
    
    
    
    17,566
    
    
    
    85,640Shares issued due to stock splits
    
    
    3,783,591
    
    
    
    
    
    
    
    At end of year
    
    
    18,921,611
    
    
    
    15,096,699
    
    
    
    15,079,133Common shares in treasuryAt beginning of year
    
    
    (2,184,777
    )
    
    
    (1,763,031
    )
    
    
    (1,393,311
    )Common shares repurchased
    
    
    (134,728
    )
    
    
    (421,746
    )
    
    
    (369,720
    )Shares issued due to stock splits
    
    
    (579,876
    )
    
    
    
    
    
    
    At end of year
    
    
    (2,899,381
    )
    
    
    (2,184,777
    )
    
    
    (1,763,031
    )Total shares outstanding
    
    
    16,022,230
    
    
    
    12,911,922
    
    
    
    13,316,102
  42




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 2006
    
    
    2005
    
    
    2004INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:Cash flows from operating activities:Net income
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,795,232
    
    
    
    1,563,257
    
    
    
    1,344,432Provision for loan loss
    
    
    6,413,509
    
    
    
    5,193,902
    
    
    
    5,439,160Stock-based compensation expense
    
    
    21,016
    
    
    
    
    
    
    
    Investment security premium amortization, net
    
    
    239,181
    
    
    
    423,259
    
    
    
    489,703Acquisition premium amortization (discount accretion),
    
    
    212,424
    
    
    
    245,842
    
    
    
    (150,565
    )Deferred income taxes
    
    
    (1,635,483
    )
    
    
    (482,929
    )
    
    
    (1,517,901
    )Gains on sales or calls of securities
available for sale
    
    
    (88,861
    )
    
    
    (60,489
    )
    
    
    Gains on calls of securities
held to maturity
    
    
    (2,456
    )
    
    
    (7,837
    )
    
    
    (14,347
    )Net decrease in mortgage loans held for sale
    
    
    2,285,877
    
    
    
    7,454,578
    
    
    
    1,643,060Loss on disposal or sale of premises
    
    
    102,805
    
    
    
    
    
    
    
    Losses (gains) on disposal or sale of equipment
    
    
    (13,306
    )
    
    
    5,665
    
    
    
    (1,500
    )Gain on sale of other real estate
    
    
    (25,343
    )
    
    
    (169,271
    )
    
    
    (77,310
    )Increase (decrease) in taxes payable
    
    
    (195,584
    )
    
    
    349,066
    
    
    
    1,191,228Increase in interest receivable
    
    
    (1,233,818
    )
    
    
    (1,705,984
    )
    
    
    (60,257
    )Increase in interest payable
    
    
    826,200
    
    
    
    1,111,814
    
    
    
    92,390Increase in cash surrender value of bank
owned life insurance
    
    
    (862,522
    )
    
    
    (568,928
    )
    
    
    (598,683
    )Decrease (increase) in other assets
    
    
    (1,029,166
    )
    
    
    (531,387
    )
    
    
    437,418Increase in other liabilities
    
    
    1,693,133
    
    
    
    2,780,526
    
    
    
    864,686Net cash provided by
operating activities
    
    
    26,534,867
    
    
    
    30,610,628
    
    
    
    21,799,734CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from maturities, calls and paydowns of
securities available for sale
    
    
    15,898,118
    
    
    
    218,725
    
    
    
    29,570,573Proceeds from maturities, calls and paydowns of
securities held to maturity
    
    
    6,073,000
    
    
    
    9,799,250
    
    
    
    10,511,475Proceeds from sales of securities available for
sale
    
    
    759,413
    
    
    
    14,638,657
    
    
    
    5,885,000Purchases of securities available for sale
    
    
    (38,545,120
    )
    
    
    (22,373,402
    )
    
    
    (46,444,401
    )Net increase in loans
    
    
    (84,686,036
    )
    
    
    (59,435,864
    )
    
    
    (65,194,466
    )Increases in unrealized gains or losses
on hedged mortgage loan commitments
    
    
    
    
    
    
    
    
    
    
    (96,233
    )Investment in bank owned life insurance
    
    
    (6,370,000
    )
    
    
    (1,420,000
    )
    
    
    (3,745,000
    )Capital expenditures
    
    
    (2,464,520
    )
    
    
    (3,314,136
    )
    
    
    (2,277,650
    )Proceeds from sales of fixed assets
    
    
    1,959,590
    
    
    
    13,524
    
    
    
    72,807Proceeds from sales of other real estate
    
    
    747,652
    
    
    
    709,696
    
    
    
    835,424Net cash used by investing activities
    
    
    (106,627,903
    )
    
    
    (61,163,550
    )
    
    
    (70,882,471
    )
   43




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BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
  2006
    
    
    2005
    
    
    2004CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in demand deposits, NOW and
savings accounts
    
    $
    38,464,096
    
    
    $
    39,446,622
    
    
    $
    35,252,860Net increase (decrease) in time deposits
    
    
    46,261,718
    
    
    
    89,843,926
    
    
    
    (19,982,849
    )Net increase (decrease) in overnight borrowings
    
    
    3,414,825
    
    
    
    (44,010,789
    )
    
    
    46,543,261Net decrease in other borrowings
    
    
    (6,023,708
    )
    
    
    (13,908,608
    )
    
    
    (1,628,769
    )Net proceeds from issuance of common stock
    
    
    615,199
    
    
    
    164,396
    
    
    
    933,748Dividends paid
    
    
    (7,485,133
    )
    
    
    (6,979,081
    )
    
    
    (6,621,140
    )Purchases of common stock for treasury
    
    
    (2,643,410
    )
    
    
    (8,092,457
    )
    
    
    (7,439,376
    )Cash paid for fractional shares
    
    
    (11,215
    )
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    72,592,372
    
    
    
    56,464,009
    
    
    
    47,057,735NET INCREASE (DECREASE) IN
CASH EQUIVALENTS
    
    
    (7,500,664
    )
    
    
    25,911,087
    
    
    
    (2,025,002
    )CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR
    
    
    57,481,919
    
    
    
    31,570,832
    
    
    
    33,595,834CASH AND CASH EQUIVALENTS
AT END OF YEAR
    
    $
    49,981,255
    
    
    $
    57,481,919
    
    
    $
    31,570,832SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:Cash paid during the year for:Interest
    
    $
    30,952,030
    
    
    $
    19,061,330
    
    
    $
    13,015,595Income taxes
    
    
    10,075,483
    
    
    
    7,529,470
    
    
    
    5,014,227Noncash investing and financing activities:Transfer from surplus to common
stock due to stock split
    
    
    3,783,591
    
    
    
    
    
    
    
    Transfer from loans to other real
estate owned
    
    
    1,281,191
    
    
    
    944,513
    
    
    
    905,609
  44




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##### Table of Contents



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        45




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46




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2006
    
    2005
    
    2004Risk-free rate
    
    
    5.00
    %
    
    
    4.03
    %
    
    
    3.45
    %Average expected term (years)
    
    5.6 years
    
    5.6 years
    
    5.6 yearsExpected volatility
    
    
    34.24
    %
    
    
    37.53
    %
    
    
    41.04
    %Expected dividend yield
    
    
    2.85
    %
    
    
    2.96
    %
    
    
    2.61
    %Expected turnover
    
    
    8.66
    %
    
    
    8.76
    %
    
    
    8.96
    %
   47




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48




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49




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2. INVESTMENT SECURITIES
  Amortized
    
    
    Gross Unrealized
    
    
    FairType and Contractual Maturity
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueAVAILABLE FOR SALEAt December 31, 2006:U. S. Treasury due:After 1 year but within 5
years
    
    $
    5,120,838
    
    
    $
    
    
    
    $
    127,088
    
    
    $
    4,993,750Total U.S. Treasury
    
    
    5,120,838
    
    
    
    
    
    
    
    127,088
    
    
    
    4,993,750U. S. Government agencies
due:Within 1 year
    
    
    7,961,624
    
    
    
    
    
    
    
    127,194
    
    
    
    7,834,430After 1 year but within 5
years
    
    
    103,623,668
    
    
    
    22,998
    
    
    
    1,701,502
    
    
    
    101,945,164After 5 years but within 10
years
    
    
    1,999,339
    
    
    
    
    
    
    
    38,880
    
    
    
    1,960,459Total U.S. Government
agencies
    
    
    113,584,631
    
    
    
    22,998
    
    
    
    1,867,576
    
    
    
    111,740,053State and local due:After 1 year but within 5
years
    
    
    718,083
    
    
    
    
    
    
    
    9,970
    
    
    
    708,113After 5 years but within 10
years
    
    
    2,014,392
    
    
    
    4,922
    
    
    
    4,618
    
    
    
    2,014,696After 10 years
    
    
    2,817,468
    
    
    
    9,452
    
    
    
    16,627
    
    
    
    2,810,293Total state and local
    
    
    5,549,943
    
    
    
    14,374
    
    
    
    31,215
    
    
    
    5,533,102Others due:After 10 years
    
    
    3,545,551
    
    
    
    218,126
    
    
    
    24,917
    
    
    
    3,738,760Equity securities
    
    
    8,030,380
    
    
    
    437,887
    
    
    
    161,356
    
    
    
    8,306,911Total others
    
    
    11,575,931
    
    
    
    656,013
    
    
    
    186,273
    
    
    
    12,045,671Total available for sale
    
    $
    135,831,343
    
    
    $
    693,385
    
    
    $
    2,212,152
    
    
    $
    134,312,576HELD TO MATURITYAt December 31, 2006:State and local due:Within 1 year
    
    $
    5,567,780
    
    
    $
    12,419
    
    
    $
    225
    
    
    $
    5,579,974After 1 year but within 5
years
    
    
    22,203,573
    
    
    
    376,441
    
    
    
    
    
    
    
    22,580,014After 5 years but within 10
years
    
    
    4,973,161
    
    
    
    207,551
    
    
    
    
    
    
    
    5,180,712After 10 years
    
    
    2,509,078
    
    
    
    170,123
    
    
    
    
    
    
    
    2,679,201Total state and local
    
    
    35,253,592
    
    
    
    766,534
    
    
    
    225
    
    
    
    36,019,901Total held to maturity
    
    $
    35,253,592
    
    
    $
    766,534
    
    
    $
    225
    
    
    $
    36,019,901
  50




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##### Table of Contents



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
    51




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##### Table of Contents



Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss2006U.S. Treasury
    
    $
    
    
    
    $
    
    
    
    $
    4,993,750
    
    
    $
    (   127,088
    )
    
    $
    4,993,750
    
    
    $
    (   127,088
    )U.S. Government agencies
    
    
    25,371,398
    
    
    
    ( 89,916
    )
    
    
    77,373,818
    
    
    
    (1,777,661
    )
    
    
    102,745,216
    
    
    
    (1,867,577
    )State and local
    
    
    559,887
    
    
    
    (225
    )
    
    
    3,976,365
    
    
    
    ( 31,215
    )
    
    
    4,536,252
    
    
    
    (     31,440
    )Others
    
    
    
    
    
    
    
    
    
    
    4,680,266
    
    
    
    (   186,272
    )
    
    
    4,680,266
    
    
    
    (   186,272
    )Total temporarily impaired
    
    $
    25,931,285
    
    
    $
    (  90,141
    )
    
    $
    91,024,199
    
    
    $
    (2,122,236
    )
    
    $
    116,955,484
    
    
    $
    (2,212,377
    )
       52




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##### Table of Contents



3. LOANS
  2006
    
    2005Real estate:Construction
    
    $
    161,071,478
    
    
    $
    125,555,445Mortgage
    
    
    488,347,172
    
    
    
    455,322,477Commercial, financial and agricultural
    
    
    248,690,527
    
    
    
    231,228,504Consumer
    
    
    15,316,637
    
    
    
    20,910,544All other loans
    
    
    742,430
    
    
    
    915,154914,168,244
    
    
    
    833,932,124Deferred origination fees, net
    
    
    (1,676,508
    )
    
    
    (1,484,976
    )Total
    
    $
    912,491,736
    
    
    $
    832,447,148
  2006
    
    2005Nonaccrual loans
    
    $
    9,288,977
    
    
    $
    6,423,997Loans 90 days or more and still
accruing interest
    
    
    5,074,178
    
    
    
    4,208,032Foreclosed properties
    
    
    1,162,448
    
    
    
    925,984Total
    
    $
    15,525,603
    
    
    $
    11,558,013
   53




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##### Table of Contents



4. ALLOWANCE FOR LOAN LOSSES
  2006
    
    2005
    
    2004Balance at beginning of year
    
    $
    13,923,884
    
    
    $
    13,665,013
    
    
    $
    10,798,897Loans charged off:Real estate
    
    
    1,707,800
    
    
    
    919,071
    
    
    
    929,609Commercial, financial and agricultural
    
    
    2,807,522
    
    
    
    3,484,172
    
    
    
    1,040,391Credit cards and related plans
    
    
    25,559
    
    
    
    45,150
    
    
    
    87,711Installment loans to individuals
    
    
    410,378
    
    
    
    540,254
    
    
    
    683,282Demand deposit overdraft program
    
    
    251,320
    
    
    
    261,789
    
    
    
    297,456Total charge-offs
    
    
    5,202,579
    
    
    
    5,250,436
    
    
    
    3,038,449Recoveries of loans previously charged off:Real estate
    
    
    83,508
    
    
    
    62,957
    
    
    
    23,675Commercial, financial and agricultural
    
    
    282,099
    
    
    
    29,004
    
    
    
    70,245Credit cards and related plans
    
    
    9,927
    
    
    
    3,492
    
    
    
    3,925Installment loans to individuals
    
    
    138,427
    
    
    
    41,662
    
    
    
    220,389Demand deposit overdraft program
    
    
    138,339
    
    
    
    178,290
    
    
    
    147,171Total recoveries
    
    
    652,300
    
    
    
    315,405
    
    
    
    465,405Net charge-offs
    
    
    4,550,279
    
    
    
    4,935,031
    
    
    
    2,573,044Provision for loan losses
    
    
    6,413,509
    
    
    
    5,193,902
    
    
    
    5,439,160Balance at end of year
    
    $
    15,787,114
    
    
    $
    13,923,884
    
    
    $
    13,665,013Ratio of net charge-offs during the year to
average loans outstanding during the year
    
    
    0.52
    %
    
    
    0.61
    %
    
    
    0.35
    %
  54




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##### Table of Contents



5. PREMISES AND EQUIPMENT
  PremisesandAccumulated
    
    Equipment,Cost
    
    Depreciation
    
    NetAt December 31, 2006:Land
    
    $
    2,813,762
    
    
    $
    
    
    
    $
    2,813,762Buildings
    
    
    9,837,071
    
    
    
    3,995,756
    
    
    
    5,841,315Leasehold improvements
    
    
    567,986
    
    
    
    213,745
    
    
    
    354,241Furniture, equipment and vehicles
    
    
    13,839,207
    
    
    
    10,695,519
    
    
    
    3,143,688Capitalized leases
    
    
    1,212,743
    
    
    
    50,100
    
    
    
    1,162,643Construction in progress
    
    
    110,426
    
    
    
    
    
    
    
    110,426Total
    
    $
    28,381,195
    
    
    $
    14,955,120
    
    
    $
    13,426,075At 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
    
    
    $
    14,805,876
 6. OTHER INCOME AND EXPENSES
  2006
    
    2005
    
    2004Items included in service charges on deposit accountsFees from demand deposit overdrafts
    
    $
    4,085,249
    
    
    $
    3,973,899
    
    
    $
    3,740,312Items included in other expensesTelephone
    
    
    780,690
    
    
    
    690,486
    
    
    
    768,781Marketing
    
    
    923,910
    
    
    
    806,866
    
    
    
    820,892
 7. INCOME TAXES
  2006
    
    2005
    
    2004Income tax provisionCurrent
    
    $
    11,515,382
    
    
    $
    8,361,465
    
    
    $
    7,660,208Deferred
    
    
    (1,635,483
    )
    
    
    (482,929
    )
    
    
    (1,517,901
    )Total
    
    $
    9,879,899
    
    
    $
    7,878,536
    
    
    $
    6,142,307
 55




---



##### Table of Contents



2006
    
    2005
    
    2004Statutory federal income tax rate
    

    35%

    

    35%

    

    35%Tax provision at statutory rate
    
    $
    9,769,175
    
    
    $
    8,010,828
    
    
    $
    6,601,184Increase (decrease) in income taxes
resulting from:Tax-exempt interest income
    
    
    (668,203
    )
    
    
    (765,073
    )
    
    
    (888,588
    )State income taxes net of federal tax benefit
    
    
    1,011,745
    
    
    
    790,801
    
    
    
    606,663Other
    
    
    (232,818
    )
    
    
    (158,020
    )
    
    
    (176,952
    )Income tax provision
    
    $
    9,879,899
    
    
    $
    7,878,536
    
    
    $
    6,142,307
  December 31, 2006Assets
    
    Liabilities
    
    TotalExcess book over tax bad debt expense
    
    $
    6,232,594
    
    
    $
    
    
    
    $
    6,232,594Excess tax over book depreciation
    
    
    
    
    
    
    (362,137
    )
    
    
    (362,137
    )Unrealized losses on securities
available for sale
    
    
    605,587
    
    
    
    
    
    
    
    605,587Unrealized losses on mortgage
derivative instruments
    
    
    40,046
    
    
    
    
    
    
    
    40,046Other, net
    
    
    2,302,881
    
    
    
    (923,071
    )
    
    
    1,379,810Total
    
    $
    9,181,108
    
    
    $
    (1,285,208
    )
    
    $
    7,895,900
 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
   56




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##### Table of Contents



8. STOCK OPTIONS
   2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares

    
    

    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    271,890
    
    
    $
    12.90
    
    
    
    297,298
    
    
    $
    12.54
    
    
    
    425,113
    
    
    $
    11.66Granted
    
    
    2,500
    
    
    
    15.36
    
    
    
    3,125
    
    
    
    14.28
    
    
    
    11,250
    
    
    
    14.50Exercised
    
    
    51,401
    
    
    
    11.97
    
    
    
    21,954
    
    
    
    7.49
    
    
    
    107,033
    
    
    
    8.72Expired, forfeited or canceled
    
    
    15,779
    
    
    
    16.81
    
    
    
    6,579
    
    
    
    15.38
    
    
    
    32,032
    
    
    
    14.34Outstanding at end of year
    
    
    207,210
    
    
    $
    12.86
    
    
    
    271,890
    
    
    $
    12.90
    
    
    
    297,298
    
    
    $
    12.54Options exercisable at end of year
    
    
    194,210
    
    
    $
    12.74
    
    
    
    253,515
    
    
    $
    12.78
    
    
    
    264,464
    
    
    $
    12.33
  Outstanding Options
    
    Exercisable OptionsWeightedShares
    
    Average
    
    Weighted
    
    Shares
    
    WeightedOutstanding at
    
    Remaining
    
    Average
    
    Exercisable at
    
    AverageRange of
    
    December 31,
    
    Contractual
    
    Exercise
    
    December 31,
    
    ExerciseExercise Prices
    
    2006
    
    Life (years)
    
    Price
    
    2006
    
    Price$  0.00      8.25
    
    
    37,980
    
    
    
    2.9
    
    
    $
    6.44
    
    
    
    37,980
    
    
    $
    6.448.26    10.25
    
    
    41,127
    
    
    
    3.1
    
    
    
    8.92
    
    
    
    41,127
    
    
    
    8.9210.26    14.25
    
    
    33,738
    
    
    
    0.9
    
    
    
    13.91
    
    
    
    29,238
    
    
    
    13.8714.26    15.25
    
    
    42,051
    
    
    
    2.6
    
    
    
    14.56
    
    
    
    37,301
    
    
    
    14.5615.26    18.25
    
    
    6,718
    
    
    
    2.9
    
    
    
    15.71
    
    
    
    2,968
    
    
    
    15.8718.26    20.25
    
    
    44,815
    
    
    
    1.4
    
    
    
    18.97
    
    
    
    44,815
    
    
    
    18.9720.26    26.50
    
    
    781
    
    
    
    1.4
    
    
    
    20.96
    
    
    
    781
    
    
    
    20.967.18    26.20
    
    
    207,210
    
    
    
    2.2
    
    
    $
    12.86
    
    
    
    194,210
    
    
    $
    12.74
  57




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##### Table of Contents



9. EMPLOYEE BENEFIT PLANS
       58




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##### Table of Contents



10. LEASES
   Year
    
    Payments2007
    
    $
    300,2212008
    
    
    237,5672009
    
    
    237,5672010
    
    
    237,5672011
    
    
    237,5672012 and thereafter
    
    
    1,806,590Total minimum lease payments
    
    
    3,057,078Less amount representing interest
    
    
    (1,803,263
    )Present value of net minimum lease payments
    
    $
    1,253,815
  Year
    
    Payments2007
    
    $
    701,7622008
    
    
    425,3262009
    
    
    328,3662010
    
    
    294,3872011
    
    
    314,456Total
    
    $
    2,064,297
   59




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##### Table of Contents



11. OVERNIGHT AND SHORT-TERM BORROWED FUNDS
  December 31,2006
    
    2005Overnight borrowingsBank of Granite Corporation:Commercial deposits swept into commercial paper
    
    $
    29,662,145
    
    
    $
    26,790,353Bank of Granite:Securities sold under agreements to repurchase
    
    
    1,490,323
    
    
    
    947,290Total overnight borrowings
    
    
    31,152,468
    
    
    
    27,737,643Short-term
borrowingsBank of Granite:Short-term borrowings from the
Federal Home Loan Bank
    
    
    8,000,000
    
    
    
    12,000,000Granite Mortgage:Warehouse line of credit
    
    
    18,487,421
    
    
    
    17,335,942Total short-term borrowings
    
    
    26,487,421
    
    
    
    29,335,942Total overnight and short-term borrowings
    
    $
    57,639,889
    
    
    $
    57,073,585
   December 31,2006
    
    2005
    
    2004Balance outstanding at end of year
    
    $
    31,152,468
    
    
    $
    27,737,643
    
    
    $
    71,748,432Maximum outstanding at any month-end during the year
    
    
    35,785,626
    
    
    
    67,618,194
    
    
    
    72,391,061Average daily balance outstanding during the year
    
    
    29,805,688
    
    
    
    39,006,233
    
    
    
    35,575,198Average interest rate during the year
    
    
    3.20
    %
    
    
    1.85
    %
    
    
    1.38
    %Average interest rate at end of year
    
    
    3.70
    %
    
    
    1.33
    %
    
    
    2.03
    %Other short-term borrowings*
 December 31,2006Balance outstanding at end of year
    
    $
    26,487,421Maximum outstanding at any month-end during the year
    
    
    35,328,260Average daily balance outstanding during the year
    
    
    31,583,260Average interest rate during the year
    
    
    5.74
    %Average interest rate at end of year
    
    
    6.16
    %
 
 *
    
    Included in other borrowings for prior years  60




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##### Table of Contents



12. LONG-TERM BORROWINGS
  December 31, 20062006
    
    2005Bank of Granite Corporation:Unsecured line of credit at 30-day LIBOR plus 1.20%
due June 30, 2009
    
    $
    5,000,000
    
    
    $
    Junior subordinated debt to unconsolidated trusts at
60-day LIBOR plus 3.75%, due December 8, 2031
callable on or after December 8, 2006 (1)
    
    
    
    
    
    
    5,000,000Bank of Granite:Federal Home Loan Bank convertible advance at 4.78%
due February 1, 2011 callable on or after February 1, 2006 (2)
    
    
    
    
    
    
    2,000,000Federal Home Loan Bank convertible advance at 5.22%
due March 9, 2011 callable on March 9, 2006
    
    
    3,140,885
    
    
    
    3,000,000Federal Home Loan Bank convertible advance at 3.24%
due September 20, 2012 callable on September 20, 2007
    
    
    7,000,000
    
    
    
    7,000,000
 
 (1)
    
    The Company called this debt on December 8, 2006.(2)
    
    The Federal Home Loan Bank called this advance on February 1, 2006.   13. MATURITIES OF TIME DEPOSITS
  Year
    
    Maturities2007
    
    $
    392,951,7812008
    
    
    28,716,3882009
    
    
    14,439,2772010
    
    
    13,631,754Total
    
    $
    449,739,200
 61




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##### Table of Contents



14. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
  2006
    
    2005
    
    2004BASIC EARNINGS PER SHARENet income
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220Divide by: Weighted average shares outstanding
    
    
    16,048,439
    
    
    
    16,413,742
    
    
    
    16,849,526Basic earnings per share
    
    $
    1.12
    
    
    $
    0.91
    
    
    $
    0.75DILUTED EARNINGS PER SHARENet income
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220Divide by: Weighted average shares outstanding
    
    
    16,048,439
    
    
    
    16,413,742
    
    
    
    16,849,526Potentially dilutive effect of
stock options
    
    
    55,579
    
    
    
    55,305
    
    
    
    62,393Weighted average shares outstanding,
including potentially dilutive effect
of stock options
    
    
    16,104,018
    
    
    
    16,469,047
    
    
    
    16,911,919Diluted earnings per share
    
    $
    1.12
    
    
    $
    0.91
    
    
    $
    0.75
 62




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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, 2006Total capital to risk weighted assets
    
    $
    148,898
    
    
    
    15.05
    %
    
    $
    79,154
    
    
    
    8.00
    %
    
    $
    98,943
    
    
    
    10.00
    %Tier I capital to risk weighted assets
    
    
    136,363
    
    
    
    13.78
    %
    
    
    39,577
    
    
    
    4.00
    %
    
    
    59,366
    
    
    
    6.00
    %Tier I capital to average assets
    
    
    136,363
    
    
    
    11.56
    %
    
    
    47,173
    
    
    
    4.00
    %
    
    
    58,966
    
    
    
    5.00
    %As 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
    %
  63




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16. ADOPTION OF STAFF ACCOUNTING BULLETIN NUMBER 108
     17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
  December 31,Condensed Balance Sheets
    
    2006
    
    2005Assets:Cash on deposit with bank subsidiary
    
    $
    34,436,675
    
    
    $
    31,622,272Investment in subsidiary bank at equity
    
    
    137,242,831
    
    
    
    129,398,857Investment in subsidiary mortgage bank
at equity
    
    
    6,394,216
    
    
    
    6,014,733Other investments
    
    
    4,858,767
    
    
    
    4,662,545Other assets
    
    
    254,987
    
    
    
    246,935Total
    
    $
    183,187,476
    
    
    $
    171,945,342Liabilities and Stockholders Equity:Other borrowings
    
    $
    34,662,145
    
    
    $
    31,790,353Other liabilities
    
    
    2,091,827
    
    
    
    306,998Stockholders equity
    
    
    146,433,504
    
    
    
    139,847,991Total
    
    $
    183,187,476
    
    
    $
    171,945,342
 64




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##### Table of Contents



For the Years Ended December 31,Condensed Results of Operations
    
    2006
    
    2005
    
    2004Equity in earnings of subsidiary bank:Dividends
    
    $
    11,210,739
    
    
    $
    15,576,244
    
    
    $
    15,353,514Earnings retained
    
    
    7,755,466
    
    
    
    (272,183
    )
    
    
    (2,459,608
    )Equity in earnings of subsidiary mortgage bank:Dividends
    
    
    
    
    
    
    203,360
    
    
    
    853,005Earnings retained
    
    
    400,671
    
    
    
    118,103
    
    
    
    (318,375
    )Income (expenses), net
    
    
    (1,334,847
    )
    
    
    (615,980
    )
    
    
    (710,316
    )Net income
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220Condensed Cash FlowCash flows from operating activities:Net income
    
    $
    18,032,029
    
    
    $
    15,009,544
    
    
    $
    12,718,220Adjustments to reconcile net income to net
cash provided by operating activities:Equity in undistributed earnings of
subsidiaries
    
    
    (8,156,138
    )
    
    
    154,079
    
    
    
    2,777,983Stock-based compensation expense
    
    
    21,016
    
    
    
    
    
    
    
    Premium amortization and discount
accretion, net
    
    
    (2,315
    )
    
    
    (2,248
    )
    
    
    (2,090
    )Gains on sales or calls of
securities available for sale
    
    
    (117,557
    )
    
    
    (147,323
    )
    
    
    Decrease (increase) in interest receivable
    
    
    4,196
    
    
    
    
    
    
    
    (711
    )Increase in interest payable
    
    
    910
    
    
    
    
    
    
    
    Decrease (increase) in other assets
    
    
    (3,800
    )
    
    
    69,950
    
    
    
    637,544Increase (decrease) in other liabilities
    
    
    (299,174
    )
    
    
    118,788
    
    
    
    31,562Net cash provided by operating activities
    
    
    9,479,167
    
    
    
    15,202,790
    
    
    
    16,162,508Cash flows from investing activities:Proceeds from maturities of securities
available for sale
    
    
    398,118
    
    
    
    4,122
    
    
    
    204,089Proceeds from sales of securities
available for sale
    
    
    484,913
    
    
    
    280,319
    
    
    
    Purchases of securities available for sale
    
    
    (895,027
    )
    
    
    (100,000
    )
    
    
    (700,000
    )Net cash provided (used) by investing activities
    
    
    (11,996
    )
    
    
    184,441
    
    
    
    (495,911
    )Cash flows from financing activities:Net increase in overnight borrowings
    
    
    2,871,792
    
    
    
    2,962,798
    
    
    
    6,411,501Net proceeds from issuance of common stock
    
    
    615,199
    
    
    
    164,396
    
    
    
    933,748Net dividends paid
    
    
    (7,485,134
    )
    
    
    (6,979,081
    )
    
    
    (6,621,140
    )Purchases of common stock for treasury
    
    
    (2,643,410
    )
    
    
    (8,092,457
    )
    
    
    (7,439,376
    )Cash paid for fractional shares
    
    
    (11,215
    )
    
    
    
    
    
    
    Net cash used by financing activities
    
    
    (6,652,768
    )
    
    
    (11,944,344
    )
    
    
    (6,715,267
    )Net increase in cash
    
    
    2,814,403
    
    
    
    3,442,887
    
    
    
    8,951,330Cash at beginning of year
    
    
    31,622,272
    
    
    
    28,179,385
    
    
    
    19,228,055Cash at end of year
    
    $
    34,436,675
    
    
    $
    31,622,272
    
    
    $
    28,179,385Supplemental disclosure of non-cash transactions:Cash paid during the year for:Interest paid
    
    $
    1,328,081
    
    
    $
    670,835
    
    
    $
    555,572Transfer from surplus to common
stock due to stock split
    
    
    3,783,591
    
    
    
    
    
    
    
    
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18. COMMITMENTS AND CONTINGENCIES
  December 31,2006
    
    2005Financial instruments whose contract amounts represent credit riskCommitments to extend credit
    
    $
    175,874,722
    
    
    $
    158,256,508Standby letters of credit
    
    
    5,911,050
    
    
    
    3,273,905Financial instruments whose notional or contract amounts are
intended to hedge against interest rate riskForward commitments and options to sell mortgage-backed securities
    
    $
    9,030,913
    
    
    $
    12,348,187
      66




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19. FAIR VALUE OF FINANCIAL INSTRUMENTS
  December 31, 2006
    
    December 31, 2005Estimated
    
    
    
    
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAssets:Cash and cash equivalents
    
    $
    49,981,255
    
    
    $
    49,981,255
    
    
    $
    57,481,919
    
    
    $
    57,481,919Marketable securities
    
    
    169,566,168
    
    
    
    170,332,477
    
    
    
    153,682,706
    
    
    
    154,832,437Loans
    
    
    896,704,622
    
    
    
    892,835,083
    
    
    
    818,523,264
    
    
    
    813,681,236Mortgage loans held for sale
    
    
    11,796,899
    
    
    
    12,019,532
    
    
    
    14,219,444
    
    
    
    14,219,444Liabilities:Demand deposits
    
    
    514,097,492
    
    
    
    514,097,492
    
    
    
    475,633,396
    
    
    
    475,633,396Time deposits
    
    
    449,739,200
    
    
    
    449,258,732
    
    
    
    403,478,029
    
    
    
    401,968,659Overnight borrowings
    
    
    31,152,468
    
    
    
    31,152,468
    
    
    
    27,737,643
    
    
    
    27,737,643Other borrowings
    
    
    43,687,183
    
    
    
    43,267,469
    
    
    
    49,675,003
    
    
    
    49,506,400Financial instruments whose contract
amounts represent credit risk:Commitments to extend credit
    
    
    
    
    
    
    175,874,722
    
    
    
    
    
    
    
    158,256,508Standby letters of credit
    
    
    
    
    
    
    5,911,050
    
    
    
    
    
    
    
    3,273,905
     67




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20. DERIVATIVE FINANCIAL INSTRUMENTS
   December 31, 2006EstimatedNotional
    
    FairAmount
    
    ValueMortgage interest rate lock commitments
    
    $
    5,836,250
    
    
    $
    (112,427
    )Forward commitments and options
to sell mortgage-backed securities
    
    
    9,030,913
    
    
    
    12,311Total
    
    $
    14,867,163
    
    
    $
    (100,116
    )
   21. OPERATING SEGMENTS
    68




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##### Table of Contents



COMMUNITY BANKING
  MORTGAGE BANKING
  OTHER
   2006
    
    2005
    
    2004COMMUNITY BANKINGNet interest income
    
    $
    52,561,122
    
    
    $
    45,156,254
    
    
    $
    38,754,743Provision for loan losses
    
    
    6,365,509
    
    
    
    5,157,902
    
    
    
    5,431,160Noninterest income
    
    
    8,414,578
    
    
    
    7,773,274
    
    
    
    7,413,753Noninterest expense
    
    
    26,031,199
    
    
    
    24,803,256
    
    
    
    22,057,715Income before income taxes
    
    
    28,578,992
    
    
    
    22,968,370
    
    
    
    18,679,621Net income
    
    
    18,966,205
    
    
    
    15,304,061
    
    
    
    12,893,906Identifiable segment assets
    
    
    1,166,170,945
    
    
    
    1,074,552,282
    
    
    
    991,369,653MORTGAGE BANKINGNet interest income
    
    
    3,225,374
    
    
    
    3,186,195
    
    
    
    3,673,497Provision for loan losses
    
    
    48,000
    
    
    
    36,000
    
    
    
    8,000Noninterest income
    
    
    3,974,980
    
    
    
    3,990,690
    
    
    
    3,844,297Noninterest expense
    
    
    6,484,571
    
    
    
    6,605,195
    
    
    
    6,618,572Income before income taxes
    
    
    667,783
    
    
    
    535,690
    
    
    
    891,222Net income
    
    
    400,671
    
    
    
    321,463
    
    
    
    534,630Identifiable segment assets
    
    
    28,557,035
    
    
    
    27,522,124
    
    
    
    36,326,380ALL OTHERNet interest expense
    
    
    (1,022,943
    )
    
    
    (356,519
    )
    
    
    (270,336
    )Noninterest income
    
    
    117,557
    
    
    
    147,323
    
    
    
    (1,327
    )Noninterest expense
    
    
    429,461
    
    
    
    406,784
    
    
    
    438,653Loss before income taxes
    
    
    (1,334,847
    )
    
    
    (615,980
    )
    
    
    (710,316
    )Net loss
    
    
    (1,334,847
    )
    
    
    (615,980
    )
    
    
    (710,316
    )Identifiable segment assets
    
    
    5,044,493
    
    
    
    4,649,616
    
    
    
    4,542,416TOTAL SEGMENTSNet interest income
    
    
    54,763,553
    
    
    
    47,985,930
    
    
    
    42,157,904Provision for loan losses
    
    
    6,413,509
    
    
    
    5,193,902
    
    
    
    5,439,160Noninterest income
    
    
    12,507,115
    
    
    
    11,911,287
    
    
    
    11,256,723Noninterest expense
    
    
    32,945,231
    
    
    
    31,815,235
    
    
    
    29,114,940Income before income taxes
    
    
    27,911,928
    
    
    
    22,888,080
    
    
    
    18,860,527Net income
    
    
    18,032,029
    
    
    
    15,009,544
    
    
    
    12,718,220Identifiable segment assets
    
    
    1,199,772,473
    
    
    
    1,106,724,022
    
    
    
    1,032,238,449
  69




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22. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 BANK OF GRANITE CORPORATION AND SUBSIDIARIES
 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEARS ENDED DECEMBER 31, 2006 AND 2005
 2006
    
    Quarter 1
    
    Quarter 2
    
    Quarter 3
    
    Quarter 4Interest income
    
    $
    19,739,945
    
    
    $
    21,484,708
    
    
    $
    22,445,968
    
    
    $
    22,871,162Interest expense
    
    
    6,621,011
    
    
    
    7,516,259
    
    
    
    8,652,585
    
    
    
    8,988,375Net interest income
    
    
    13,118,934
    
    
    
    13,968,449
    
    
    
    13,793,383
    
    
    
    13,882,787Provision for loan losses
    
    
    1,235,012
    
    
    
    1,914,540
    
    
    
    1,387,678
    
    
    
    1,876,279Net interest income after
provision for loan losses
    
    
    11,883,922
    
    
    
    12,053,909
    
    
    
    12,405,705
    
    
    
    12,006,508Other income
    
    
    3,001,256
    
    
    
    3,293,910
    
    
    
    3,184,070
    
    
    
    3,027,879Other expense
    
    
    8,043,318
    
    
    
    8,384,795
    
    
    
    8,488,501
    
    
    
    8,028,617Income before income taxes
    
    
    6,841,860
    
    
    
    6,963,024
    
    
    
    7,101,274
    
    
    
    7,005,770Income taxes
    
    
    2,395,034
    
    
    
    2,501,003
    
    
    
    2,519,079
    
    
    
    2,464,783Net income
    
    $
    4,446,826
    
    
    $
    4,462,021
    
    
    $
    4,582,195
    
    
    $
    4,540,987Net income per shareBasic*
    
    $
    0.28
    
    
    $
    0.28
    
    
    $
    0.29
    
    
    $
    0.28Diluted*
    
    
    0.28
    
    
    
    0.28
    
    
    
    0.29
    
    
    
    0.28Average shares outstandingBasic*
    
    
    16,097,986
    
    
    
    16,057,941
    
    
    
    16,017,290
    
    
    
    16,021,912Diluted*
    
    
    16,152,821
    
    
    
    16,107,931
    
    
    
    16,071,740
    
    
    
    16,081,234
 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*
    
    $
    0.19
    
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.23Diluted*
    
    
    0.19
    
    
    
    0.24
    
    
    
    0.25
    
    
    
    0.23Average shares outstandingBasic*
    
    
    16,606,046
    
    
    
    16,479,468
    
    
    
    16,334,298
    
    
    
    16,239,930Diluted*
    
    
    16,653,464
    
    
    
    16,527,053
    
    
    
    16,391,776
    
    
    
    16,295,485
 
 The quarterly financial data may not aggregate to annual amounts due to rounding.*
    
    Amounts reflect the 5-for-4 stock split distributed September 25, 2006. 
   70




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MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 Internal
Control  Integrated Framework
    /s/ Bank of Granite

BANK OF GRANITE CORPORATIONGranite Falls, North CarolinaMarch 9, 2007
 71




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal Control  Integrated Framework
    72




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Internal
Control  Integrated Framework Internal Control  Integrated Framework
   /s/ Dixon Hughes PLLCDIXON HUGHES PLLCCharlotte, North CarolinaMarch 9, 2007
 
   73




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
 (a)1.
    
    Financial StatementsThe information required by this item is set forth under Item 8.2.
    
    Financial Statement SchedulesThe information required by this item is set forth in the Notes to
Consolidated Financial Statements under Item 8.3.
    
    Exhibits3.1
    
    Certificate of IncorporationBank of Granite Corporations Restated Certificate of Incorporation, as
amended, filed as Exhibit 3.1 to the Registrants Quarterly Report on Form 10-Q
for the quarter ended March 31, 2006 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 holders4.1
    
    Form of stock certificate for Bank of Granite Corporations common stock, filed
as Exhibit 4.1 to the Registrants Registration Statement on Form S-4 (Registration
Statement No. 333-104233) on April 1, 2003 is incorporated herein by reference.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 Contracts10.1
    
    Bank of Granite Employees Profit Sharing Plan and Trust, as amended, filed as
Exhibit 4.1 to the Registrants Registration Statement on Form S-8 (Registration
Statement No. 333-102383) on January 7, 2003, is incorporated herein by
reference.10.2
    
    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.**
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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.**10.7
    
    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 filed as Exhibit 10.9 to the Registrants
Annual Report on Form 10-K for the fiscal year ended December 31, 2005 is incorporated
herein by reference.**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-K, of the Registrants Current Report on Form 8-K, dated April 17, 2006,
is incorporated herein by reference.**10.14
    
    Written Description of Executive Officer Compensation pursuant to Item
601(b)(10)(iii)(A) of Regulation S-K of the Registrants Current Report on Form 8-K,
dated December 18, 2006, 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.10.16
    
    Change of Control Agreement, dated January 1, 2002, between the Company and D. Mark
Stephens.**10.17
    
    Executive Supplemental Retirement Plan Executive Agreement, dated January 26, 2002,
Amended December 29, 2005, between the Bank and D. Mark Stephens.**
 76




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##### Table of Contents



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.23.1
    
    Consent of Dixon Hughes PLLC23.2
    
    Consent of Deloitte & Touche LLP31.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200231.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 200232.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 **
    
    Management Compensatory plan or arrangement 77




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##### Table of Contents



BANK OF GRANITE CORPORATIONBy:
    /s/ Charles M. SnipesCharles M. SnipesChairman and Chief Executive OfficerMarch 15, 2007  Signature
    
    Title
    
    Date/s/ Charles M. Snipes

Charles M. Snipes
    
    Chairman and Chief Executive Officer
    
    March 15, 2007/s/ Kirby A. Tyndall
    
    Secretary, Treasurer,
    
    March 15, 2007Kirby A. Tyndall
    
    Chief Financial
Officer and Principal
Accounting Officer/s/ John N. Bray

John N. Bray
    
    Director
    
    March 15, 2007/s/ Joseph D. Crocker

Joseph D. Crocker
    
    Director
    
    March 15, 2007/s/ Leila N. Erwin

Leila N. Erwin
    
    Director
    
    March 15, 2007/s/ Paul M. Fleetwood, III

Paul M. Fleetwood, III
    
    Director
    
    March 15, 2007/s/ Hugh R. Gaither

Hugh R. Gaither
    
    Director
    
    March 15, 2007/s/ James Y. Preston

James Y. Preston
    
    Director
    
    March 15, 2007/s/ Charles M. Snipes

Charles M. Snipes
    
    Director
    
    March 15, 2007/s/ Boyd C. Wilson, Jr.

Boyd C. Wilson, Jr.
    
    Director
    
    March 15, 2007
 78




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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**
    
    *10.7
    
    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**
    
    *10.10
    
    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**
    
    *10.14
    
    Written Description of Executive Officer Compensation**
    
    *10.15
    
    Consulting Agreement between the Company and
John A. Forlines, Jr.
    
    *10.16
    
    Change of Control Agreement between the Company and
D. Mark Stephens**
    
    Filed herewith10.17
    
    Amended Executive Supplemental Retirement Plan Executive
Agreement between the Bank and D. Mark Stephens**
    
    Filed herewith14
    
    Ethics Policy
    
    *21
    
    Subsidiaries of the Registrant
    
    Filed herewith23.1
    
    Consent of Independent Auditors
    
    Filed herewith23.2
    
    Consent of Independent Auditors
    
    Filed herewith31.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith31.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith32.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith32.2
    
    Chief Financial Officer Certification Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    Filed herewith
 
 *
    
    Incorporated herein by reference**
    
    Management compensatory plan or arrangement 79