##### 



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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, 2002

Commission file number 0-15956

Bank of Granite Corporation




(Exact name of registrant as specified in its charter)


|                                                                           |  |                                                
|-------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization)    |  | 56-1550545
(I.R.S. Employer Identification No.)
|                                                                           |  |                                                
|P.O. Box 128, Granite Falls, N.C.
(Address of principal executive offices) |  | 28630
(Zip Code)                               
|                                                                          
|Registrants telephone number, including area code                         |  | (828) 496-2000                                 

Securities registered pursuant to
Section 12(b) of the Act:   None

|                    |  |                                     
|------------------- |  | ------------------------------------
|Title of each class |  | Name of exchange on which registered
|                    |  |                                     

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value




(Title of Class)


Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in the definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.     [X]

Indicate by check
mark whether the
registrant (1) has
filed all reports
required to be
filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days.     Yes [X]     No [  ]

Indicate by check mark whether the
registrant is an accelerated filer (as
defined in Exchange Act
Rule 12-b-2).     Yes [X]     No [  ]

As of March 10, 2003, 13,265,957 shares
of common stock, $1 par value, were
outstanding.
As of June 28, 2002, the aggregate market value of voting stock held by non-affiliates was
$245,665,967.

Documents Incorporated by Reference

PART III: Definitive Proxy Statement
dated March 21, 2003 as filed pursuant
to Section 14 of the
Securities Exchange Act of 1934 in connection with the 2003 Annual Meeting of Shareholders.



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Exhibit Index begins on page 63

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FORM 10-K CROSS-REFERENCE INDEX

|           |                                                                                                                                                             |  |           |  |           
|---------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- |  | ----------
|           |                                                                                                                                                             |  |           |  | 2003      
|           |                                                                                                                                                             |  | 2002      |  | Proxy     
|           |                                                                                                                                                             |  | Form 10-K |  | Statement 
|           |                                                                                                                                                             |  | Page      |  | Page      
|           |                                                                                                                                                             |  |           |  |           
|PART I     |                                                                                                                                                             |  |           |  |           
|Item 1 -   | Business                                                                                                                                                    |  | 3         |  | n/a       
|Item 2 -   | Properties                                                                                                                                                  |  | 6         |  | n/a       
|Item 3 -   | Legal Proceedings                                                                                                                                           |  | 8         |  | n/a       
|Item 4 -   | Submission of Matters to a
Vote of Security Holders                                                                                                         |  | 8         |  | n/a       
|PART II    |                                                                                                                                                             |  |           |  |           
|Item 5 -   | Market for the Registrants Common Equity
and Related Shareholder Matters                                                                                   |  | 8         |  | n/a       
|Item 6 -   | Selected Financial Data                                                                                                                                     |  | 9         |  | n/a       
|Item 7 -   | Managements Discussion and Analysis
of Financial Condition and Results of
Operations, including Quantitative and
Qualitative Disclosures about Market Risk |  | 11        |  | n/a       
|Item 7A -  | Quantitative and Qualitative Disclosures
about Market Risk                                                                                                  |  | 26        |  |           
|Item 8 -   | Financial Statements and Supplementary Data                                                                                                                 |  | 27        |  | n/a       
|Item 9 -   | Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure                                                                        |  | 56        |  | n/1       
|PART III   |                                                                                                                                                             |  |           |  |           
|Item 10 -  | Directors and Executive Officers of
the Registrant                                                                                                          |  | 57        |  | 4-6       
|Item 11 -  | Executive Compensation                                                                                                                                      |  | 57        |  | 7-13      
|Item 12 -  | Security Ownership of Certain
Beneficial Owners and Management                                                                                              |  | 57        |  | 2,6
and 11
|Item 13 -  | Certain Relationships and Related
Transactions                                                                                                              |  | 57        |  | 15        
|Item 14 -  | Controls and Procedures                                                                                                                                     |  | 57        |  | n/a       
|Item 15 -  | Exhibits, Financial Statement Schedules
and Reports on Forms 8-K *                                                                                          |  | 57        |  | n/a       
|Signatures |                                                                                                                                                             |  | 60        |  | n/a       

*  Exhibits, Financial Statement Schedules and Reports on Forms 8-K, included in or incorporated by
reference into this filing were filed with the Securities and Exchange Commission. Bank of Granite
Corporation provides these documents through its Internet site at www.bankofgranite.com or by mail upon
request.

2



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PART I

ITEM 1 - BUSINESS

Bank of Granite Corporation (the Company) is a Delaware Corporation organized June 1, 1987 as a bank
holding company. The Company currently engages in no operations other than ownership and operation of
Bank of Granite (the Bank), a state bank chartered under the laws of North Carolina on August 2, 1906
and GLL & Associates, Inc. (GLL), a mortgage bank chartered under the laws of North Carolina on
June 24, 1985. GLL was acquired by the Company on November 5, 1997. The Company conducts its
banking business from 13 offices located in Caldwell, Catawba, and Burke counties in North Carolina.
According to the Federal Deposit Insurance Corporation (the FDIC), the Bank ranked 16th in assets and
14th in deposits among North Carolina commercial banks as of September 30, 2002. The Company
conducts its mortgage banking business from 7 offices in the Central and Southern Piedmont and
Catawba Valley regions of North Carolina.

GENERAL BUSINESS

The Banks principal activities include the taking of demand and time deposits and the making of loans,
secured and unsecured, to individuals, associations, partnerships and corporations. Bank of Granite is an
independent community bank. The majority of its customers are individuals and small businesses. No
material part of its business is dependent upon a single customer or a few customers whose loss would have
an adverse effect on the business of the Bank. No material portion of the business of the Bank is seasonal.

GLLs principal activities include the origination and underwriting of mortgage loans to individuals. GLL also
sells mortgage servicing rights and appraisal services. GLL specializes in government guaranteed mortgage
products. The majority of its customers are individuals. No material part of its business is dependent upon a
single customer or a few customers whose loss would have an adverse effect on the business of GLL. The
mortgage business is sensitive to changes in interest rates in the market. When rates decline, GLL experiences
an increase in its mortgage business. When rates rise, GLLs business declines.

TERRITORY SERVED AND COMPETITION

The Bank operates banking offices in Granite Falls and the Baton section of Granite Falls; Lenoir and the
Hibriten and Whitnel sections of Lenoir; Hudson; Newton; Morganton; Hickory and the Springs Road,
Viewmont, Long View and Mountain View sections of Hickory; for a total of 13 offices. The Bank
has entered into an agreement to sell its banking office in Vale, North Carolina.

The FDIC collects deposit data from
insured depository institutions as of June 30 of each
year.

According to June 30, 2002 data provided by the FDIC, there were 15 other commercial banks and 2 savings
institutions in the Banks Metropolitan Statistical Area (MSA). As of June 30, 2002, the Bank had
$531.7 million, or 13.9%, of total MSA deposits of $3.8 billion, compared with $543.9 million, or 14.9%,
of total MSA deposits of $3.6 billion as of June 30, 2001.

There were 7 other commercial banks in the Banks Caldwell County market. As of June 30, 2002, the Bank
had $243.7 million, or 33.9%, of total county deposits of $719.9 million, compared with $244.1 million, or
34.4%, of total county deposits of $709.9 million as of June 30, 2001.

According to the FDIC data, in the Banks Catawba County market, there were 10 other commercial banks as
of June 30, 2002. The Bank had $256.9 million, or 12%, of total county deposits of $2.1 billion, compared
with $267 million, or 13.4%, of total county deposits of $2 billion as of June 30, 2001.

3



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In the Banks Burke County market, there were 7 other commercial banks and 1 savings institution as of
June 30, 2002 according to the FDIC. The Bank had $31.2 million, or 4.8%, of total county deposits of
of $650 million, compared with $32.8 million, or 5.2%, of $634.1 million in total Burke County deposits
as of June 30, 2001.

The mortgage banking business is also highly competitive, with both bank and nonbank mortgage originators.
GLL conducts its mortgage banking business from 7 offices in the North Carolina cities of Winston-Salem,
Hickory, High Point, Lenoir, Morganton, Newton and Salisbury.

EMPLOYEES

As of December 31, 2002, the Bank had 191 and GLL had 40 full-time equivalent employees. Each of the
Bank and GLL considers its relationship with its employees to be excellent.

SUPERVISION AND REGULATION

The following summaries of statutes and regulations affecting bank holding companies, banks and mortgage
banks do not purport to be complete. Such summaries are qualified in their entirety by reference to such
statutes and regulations.

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as
amended (the Bank Holding Company Act), and is required to register as such with the Board of
Governors of the Federal Reserve System (the Federal Reserve Board or FRB).

A bank holding company is required to file with the FRB annual reports and other information regarding its
business operations and those of its subsidiaries. It is also subject to examination by the Federal Reserve
Board and is required to obtain Federal Reserve Board approval prior to acquiring, directly or indirectly,
more than 5% of the voting stock of a bank, unless it already owns a majority of the voting stock of the bank.
Furthermore, a bank holding company must only engage, with limited exceptions, in the business of banking
or managing or controlling banks or furnishing services to or performing services for its subsidiary banks.
One of the exceptions to this prohibition is the ownership of shares of a company the activities of which the
FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper
incident thereto.

The FRB has cease-and-desist powers over parent bank holding companies and non-banking subsidiaries
where their action would constitute a serious threat to the safety, soundness or stability of a subsidiary bank.

While the Company is not presently subject to any regulatory restrictions on dividends, the Companys ability
to pay dividends depends to a large extent on the amount of dividends paid by the Bank and any other
subsidiaries. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided
profits as determined pursuant to North Carolina General Statutes Section 53-87. As of December 31, 2002,
the Bank had undivided profits of approximately $105.5 million. Additionally, current federal regulations
require that the Bank maintain a ratio of total capital to assets, as defined by regulatory authorities, in excess
of 6%. As of December 31, 2002, this ratio was 16.88% for the Bank, leaving approximately $75.2 million
of the Banks undivided profits available for the payment of dividends.

4



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In an effort to achieve a measurement of capital adequacy that is more sensitive to the individual risk profiles
of financial institutions, the various financial institution regulators mandate minimum capital regulations and
guidelines that categorize various components of capital and types of assets and measure capital adequacy in
relation to a particular institutions relative levels of those capital components and the level of risk associated
with various types of assets of that financial institution. The FDIC and the FRB statements of policy on
risk-based capital require the Company to maintain a level of capital commensurate with the risk profile
assigned to its assets in accordance with the policy statements. The capital standards call for minimum total
capital of 8 percent of risk-adjusted assets. At December 31, 2002, the Companys tier 1 ratio and total
capital ratio to risk-adjusted assets was 21.1% and 22.4% respectively. The Companys leverage ratio at
December 31, 2002 was 17.5%. The Company is in compliance with all regulatory capital requirements.

The Bank is subject to supervision and regulation, of which regular bank examinations are a part, by the
FDIC and the North Carolina State Banking Commission (the Banking Commission). The Bank is a
member of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000
per depositor. For this protection, each bank pays a semi-annual statutory assessment and is subject to the
rules and regulations of the FDIC.

Federal banking laws applicable to all depository financial institutions, among other things, (i) afford federal
bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict
preferential loans by banks to insiders of banks; (iii) require banks to keep information on loans to major
shareholders and executive officers, and (iv) bar certain director and officer interlocks between financial
institutions. The prohibitions against preferential loans and certain director and officer interlocks may inhibit
the ability of the Bank and the Company to obtain experienced and capable officers and directors, to replace
presently proposed officers and directors, or to add to their number.

The Company is an affiliate of the Bank within the meaning of the Federal Reserve Act, which imposes
restrictions on loans by the Bank to the Company and on investments by the Bank in the stock or securities of
the Company, which serve as security for loans by the Bank to any borrower. The Company is also subject to
certain restrictions with respect to engaging in the business of issuing, underwriting and distributing securities.

Shareholders of banks (including bank holding companies which own stock in banks) may be compelled by
bank regulatory authorities to invest additional capital in the event their banks experience either significant loan
losses or rapid growth of loans or deposits. In addition, the Company may also be required to provide
additional capital to any additional banks which it acquires as a condition to obtaining the approvals and
consents of regulatory authorities in connection with such acquisitions.

GLL, as a mortgage bank, is regulated by the Banking Commission. Because GLL is a nonbank subsidiary of
a bank holding company, it is also regulated by both the Banking Commission and the FRB. In addition,
because GLL underwrites mortgages guaranteed by the government, it is subject to other audits and
examinations as required by the government agencies or the investors who purchase the mortgages.

The Company cannot predict what other legislation might be enacted or what other regulation might be
adopted or, if enacted or adopted, the effect thereof.

EFFECTS OF GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONTROLS

The Company is directly affected by governmental monetary policy and by regulatory measures affecting the
banking industry in general. Of primary importance is the FRB, whose actions directly affect the money
supply and, in general, affect banks lending abilities by increasing or decreasing the cost and availability of
bank credit in order to combat recession and curb inflationary pressures in the economy by open market
operations in the United States government securities, changes in the discount rate on member bank
borrowings, and changes in reserve requirements against bank deposits.

5



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Deregulation of interest rates paid by banks on deposits and the types of deposits that may be offered by banks
have eliminated minimum balance requirements and rate ceilings on various types of time deposit accounts.
The effect of these specific actions and, in general, the deregulation of deposit interest rates have increased
banks costs of funds and made them more sensitive to fluctuations in money market rates.

In view of changing conditions in the national economy and money markets, as well as the effect of actions by
monetary and fiscal authorities, no prediction can be made as to possible future changes in interest rates,
deposit levels, loan demand or the business and earnings of the Company.

AVAILABLE INFORMATION

Additional information about the Company and its business is available at the Companys website, at
www.bankofgranite.com. The Companys filings with the Securities and Exchange Commission, including
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports files or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
of 1934, are available on the Companys website under the
heading Investor Relations - SEC Filings.

ITEM 2 - PROPERTIES

The Bank owns all of its facilities, except for the leased grocery store offices in Baton and Vale, which are
listed in the table below. The Banks management considers its facilities well maintained and sufficiently
suitable for present operations.

|                              |                         |                                   |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|----------------------------- | ----------------------- | --------------------------------- | ---------------- | ------------------------- | ----------- | ------- | --- | ------------- |  | -------- | ---- | ----- |  | ------ | ----- |  |  | 
|                              |                         |                                   |                  |                           |             |         |     | Approximate   |  |          |      |      
|                              |                         |                                   |                  |                           |             |         |     |               |  |          |      |      
|                              |                         |                                   |                  |                           |             |         |     | Facility Size |  | Lot Size |      | Owned
|Location                      |                         | Principal Use                     |                  | (square feet)             |             | (acres) |     | or Leased    
|                              |                         |                                   |                  |                           |             |         |     |               | 
|                              |                         |                                   |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|Conover, North Carolina       |                         | (anticipated to open in May 2003) |                  |                           |             |         |     |               |  |          |      |       |  |        |      
|                              | 1109 Conover Blvd, East |                                   |                  | Banking office            |             |         |     | 4,421         |  |          |      | 1.4   |  |        | owned
|                             
|Granite Falls, North Carolina |                         |                                   |                  |                           |             |         |     |               |  |          |      |       |  |        |       | 
|                              | 23 North Main Street    |                                   |                  | Home office               |             |         |     | 8,735         |  |          |      | 1.2   |  |        | owned
|                              |                         |                                   | Storage building |                           |             |         | 735 |               |  |          | 0.5  |       |  | owned 
|                              | 56 North Main Street    |                                   |                  | Operations center         |             |         |     | 11,769        |  |          |      | 1.1   |  |        | owned
|                              |                         |                                   | Print shop       |                           |             |         | 375 |               |  |          | 0.2  |       |  | owned 
|                              | 2630 Connelly           |                                   |                  | Banking office in Ingle's |             |         |     | 430           |  |          | none |       |  | leased
|                              |                         | Springs Road (Baton)              |                  |                           | Supermarket |         |     |               |  |          |      |       |  |        |       |  |  | 
|                             
|Hickory, North Carolina       |                         |                                   |                  |                           |             |         |     |               |  |          |      |       |  |        |       | 
|                              | 25 3rd Street NW        |                                   |                  | Banking office            |             |         |     | 9,515         |  |          |      | 0.5   |  |        | owned
|                              | 315 1st Avenue NW       |                                   |                  | Loan and support offices  |             |         |     | 15,092        |  |          |      | 0.5   |  |        | owned
|                              |                         | (Bank of Granite Plaza)           |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|                              | 2220 12th Avenue NE     |                                   |                  | Banking office            |             |         |     | 3,612         |  |          |      | 1.6   |  |        | owned
|                              |                         | (Springs Road)                    |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|                              | 281 14th Avenue NE      |                                   |                  | Banking office            |             |         |     | 4,200         |  |          |      | 2.0   |  |        | owned
|                              |                         | (Viewmont)                        |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|                              | 2637 1st Avenue SW      |                                   |                  | Banking office            |             |         |     | 2,440         |  |          |      | 1.1   |  |        | owned
|                              |                         | (Lng View)                        |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|                              | 2900 Highway 127 South  |                                   |                  | Banking office            |             |         |     | 2,480         |  |          |      | 1.8   |  |        | owned
|                              |                         | (Mountain View)                   |                  |                           |             |         |     |               |  |          |      |       |  |        |       |  |  | 
|                             
|Hudson, North Carolina        |                         |                                   |                  |                           |             |         |     |               |  |          |      |       |  |        |       | 
|                              | 537 Main Street         |                                   |                  | Banking office            |             |         |     | 4,235         |  |          |      | 4.1   |  |        | owned

6



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|                                                                |  |                                       |  |               |  |  |  |          |  |            
|--------------------------------------------------------------- |  | ------------------------------------- |  | ------------- |  |  |  | -------- |  | -----------
|                                                                |  |                                       |  | Approximate   |  | 
|                                                                |  |                                       |  |               |  | 
|                                                                |  |                                       |  | Facility Size |  |  |  | Lot Size |  | Owned      
|Location                                                        |  | Principal Use                         |  | (square feet) |  |  |  | (acres)  |  | or Leased  
|                                                                |  |                                       |  |               |  |  |  |          |  |            
|                                                                |  |                                       |  |               |  |  |  |          |  |            
|Lenoir, North Carolina                                          |  |                                       |  |               |  |  |  |          |  |            
|707 College Avenue SW
   1351 Norwood
      Street SW (Whitnel) |  | Banking office
Banking office         |  | 7,400
2,530   |  |  |  | 1.2
1.0  |  | owned
owned
|701 Wilkesboro
   Boulevard NE (Hibriten)                       |  | Banking office                        |  | 2,480         |  |  |  | 2.1      |  | owned      
|                                                                |  |                                       |  |               |  |  |  |          |  |            
|Morganton, North Carolina                                       |  |                                       |  |               |  |  |  |          |  |            
|201 East Meeting Street                                         |  | Banking office                        |  | 5,400         |  |  |  | 0.8      |  | owned      
|                                                                |  |                                       |  |               |  |  |  |          |  |            
|Newton, North Carolina                                          |  |                                       |  |               |  |  |  |          |  |            
|311 North Main Avenue                                           |  | Banking office                        |  | 3,612         |  |  |  | 0.9      |  | owned      
|                                                                |  |                                       |  |               |  |  |  |          |  |            
|Vale, North Carolina*                                           |  |                                       |  |               |  |  |  |          |  |            
|9580 Highway 10 West                                            |  | Banking office in Honeys
Supermarket |  | 400           |  |  |  | none     |  | leased     

*   The Bank has entered into an agreement to sell its banking office in Vale, North Carolina.

GLL leases all of its facilities which are listed below. GLLs management considers its facilities well
maintained and sufficiently suitable for present operations.

|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |          |  | 
|----------------------------- | ----------------------- | ----------------------- |  | --------------- |  | ------- |  | ------------- |  | -------- | ---- | ----- | ----------- | -------- |  | -------- |  | 
|                              |                         |                         |  |                 |  |         |  | Approximate   |  |          |      |      
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |      
|                              |                         |                         |  |                 |  |         |  | Facility Size |  | Lot Size |      | Owned
|Location                      |                         | Principal Use           |  | (square feet)   |  | (acres) |  | or Leased    
|                              |                         |                         |  |                 |  |         |  |              
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |          |  | 
|Winston-Salem, North Carolina |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              | 4550 Country Club Road  |                         |  | Home office     |  |         |  | 8,353         |  |          | none |       | leased     
|Hickory, North Carolina       |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              | 315 1st Avenue NW       |                         |  | Mortgage office |  |         |  | 1,080         |  |          | none |       | leased from
|                              |                         | (Bank of Granite Plaza) |  |                 |  |         |  |               |  |          |      |       |             |          |  | the Bank
|High Point, North Carolina    |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              | 211 West Lexington      |                         |  | Mortgage office |  |         |  | 830           |  |          | none |       | leased     
|                              |                         | Avenue, Suite 102       |  |                 |  |         |  |               |  |          |      |       |             |          |  |          |  | 
|Lenoir, North Carolina        |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|
|                              | 707 College Avenue SW   |                         |  | Mortgage office |  |         |  | 200           |  |          | none |       | leased from
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             | the Bank
|Morganton, North Carolina     |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              | 201 East Meeting Street |                         |  | Mortgage office |  |         |  | 196           |  |          | none |       | leased from
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             | the Bank
|Newton, North Carolina        |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              | 311 North Main Avenue   |                         |  | Mortgage office |  |         |  | 64            |  |          | none |       | leased from
|                              |                         |                         |  |                 |  |         |  |               |  |          |      |       |             | the Bank
|Salisbury, North Carolina     |                         |                         |  |                 |  |         |  |               |  |          |      |       |             |          |  |         
|                              | 315 North Main Street   |                         |  | Mortgage office |  |         |  | 457           |  |          | none |       | leased     

7



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ITEM 3 - LEGAL PROCEEDINGS

There were no significant legal proceedings as of December 31, 2002.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of shareholders in the fourth quarter of 2002.

PART II

ITEM 5 -  MARKET FOR THE REGISTRANTS COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS

The Companys common stock, $1
par value, trades on The NASDAQ National Market® tier of The
NASDAQ Stock Market® under the symbol GRAN. Price and volume information is contained in The
Wall Street Journal®and most major daily newspapers in the NASDAQ section under the National Market
System listings.

During 2002, the investment firms making a market in the Companys common stock with the highest
volumes of Company shares traded were Wachovia Securities, Inc., Spear, Leeds & Kellogg, Knight
Securities, LP, First Union Securities, Inc. and Herzog, Heine,
Geduld, LLC.

As of December 31, 2002, there were 13,333,674 shares outstanding, owned by approximately 2,400
shareholders of record and an estimated 3,100 holders of shares registered in street name or as beneficial
owners. The following table presents the quarterly market sales prices and dividend information for the two
years in the period ended December 31, 2002.

Quarterly Common Stock Market Price Ranges and Dividends

|            |           |           |   |           |  |           |   |           |  |  |   |       |  |  |   |       | 
|----------- | --------- | --------- | - | --------- |  | --------- | - | --------- |  |  | - | ----- |  |  | - | ----- | 
|2002        |           | Quarter 1 |   | Quarter 2 |  | Quarter 3 |   | Quarter 4
|Price Range |           |           |   |           |  |           |   |           |  |  |   |       |  |  |   |      
|            | High*     |           | $ | 18.88     |  |           | $ | 21.59     |  |  | $ | 20.00 |  |  | $ | 19.14 | 
|            | Low*      |           |   | 15.56     |  |           |   | 16.80     |  |  |   | 17.00 |  |  |   | 17.08 | 
|            | Close*    |           |   | 18.40     |  |           |   | 19.69     |  |  |   | 18.00 |  |  |   | 17.50 | 
|            | Dividend* |           |   | 0.10      |  |           |   | 0.10      |  |  |   | 0.11  |  |  |   | 0.11  | 

|            |           |           |   |           |  |           |   |           |  |  |   |       |  |  |   |       | 
|----------- | --------- | --------- | - | --------- |  | --------- | - | --------- |  |  | - | ----- |  |  | - | ----- | 
|2001        |           | Quarter 1 |   | Quarter 2 |  | Quarter 3 |   | Quarter 4
|Price Range |           |           |   |           |  |           |   |           |  |  |   |       |  |  |   |      
|            | High*     |           | $ | 18.45     |  |           | $ | 18.49     |  |  | $ | 19.12 |  |  | $ | 18.40 | 
|            | Low*      |           |   | 15.30     |  |           |   | 15.09     |  |  |   | 15.47 |  |  |   | 15.38 | 
|            | Close*    |           |   | 16.95     |  |           |   | 18.40     |  |  |   | 17.77 |  |  |   | 15.82 | 
|            | Dividend* |           |   | 0.09      |  |           |   | 0.09      |  |  |   | 0.10  |  |  |   | 0.10  | 

     Amounts for periods prior to May 31, 2002 have been restated to reflect the 5-for-4 stock split paid May 31, 2002.

The following table sets forth information as of December 31, 2002 regarding shares of the Companys
common stock that may be issued upon exercise of options previously granted and currently outstanding
options under the Companys stock option plans, as well as the number of shares available for the grant
of options that had not been granted as of that date.

|                            |                                  |  |                       |         |                   |  |                          |       |  |  |  |         | 
|--------------------------- | -------------------------------- |  | --------------------- | ------- | ----------------- |  | ------------------------ | ----- |  |  |  | ------- | 
|                            |                                  |  | (a) Number of         |         | (b) Weighted-     |  | (c) Number of Securities
|                            |                                  |  | Securities To Be      |         | Average Exercise  |  | Remaining Available for 
|                            |                                  |  | Issued Upon Exercise  |         | Price Of          |  | Future Issuance Under   
|                            |                                  |  | Of Outstanding        |         | Outstanding       |  | Equity Compensation Plan
|                            |                                  |  | Options, Warrants and |         | Options, Warrants |  | (excluding securities   
|                            |                                  |  | Rights                |         | and Rights        |  | reflected in column (a))
|Equity compensation plans - |                                  |  |                       |         |                   |  |                          |       |  |  |  |        
|                            | Approved by security holders     |  |                       | 189,017 |                   |  | $                        | 19.11 |  |  |  | 215,498 | 
|                            | Not approved by security holders |  | none                  |         | none              |  | none                    
|                            |                                  |  |                       |         |                   |  |                          |       |  |  |  |         | 
|                            | Total                            |  |                       | 189,017 |                   |  | $                        | 19.11 |  |  |  | 215,498 | 
|                            |                                  |  |                       |         |                   |  |                          |       |  |  |  |         | 

8



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##### 



ITEM 6  SELECTED FINANCIAL DATA

Bank of Granite Corporation and Subsidiaries

|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |             |            | 
|--------------------------------------------------- | ----------------------------------------- | -------- | ---------- | -------------------------------- | ---------- | ---- | ---------- | ----------- | ---------- | ---- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | 
|                                                    |                                           |          |            | For the Years Ended December 31,
|                                                    |                                           |          |            |                                 
|                                                    |                                           |          |            | 2002                             |            | 2001 |            | 2000        |            | 1999 |            | 1998       
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |            
|Interest income                                     |                                           | $        | 45,710,526 |                                  |            | $    | 52,284,219 |             |            | $    | 55,269,464 |             |            | $ | 48,005,534 |             |            | $ | 47,577,090 |            
|Interest expense                                    |                                           |          | 10,802,422 |                                  |            |      | 19,443,569 |             |            |      | 19,172,024 |             |            |   | 15,752,467 |             |            |   | 16,075,876 |            
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Net interest income                                 |                                           |          | 34,908,104 |                                  |            |      | 32,840,650 |             |            |      | 36,097,440 |             |            |   | 32,253,067 |             |            |   | 31,501,214 |            
|Provision for loan losses                           |                                           |          | 3,492,382  |                                  |            |      | 4,216,772  |             |            |      | 3,893,585  |             |            |   | 1,862,585  |             |            |   | 4,321,740  |            
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Net interest income after
provision for loan losses |                                           |          | 31,415,722 |                                  |            |      | 28,623,878 |             |            |      | 32,203,855 |             |            |   | 30,390,482 |             |            |   | 27,179,474 |            
|Other income                                        |                                           |          | 11,397,705 |                                  |            |      | 10,140,060 |             |            |      | 8,033,680  |             |            |   | 8,209,542  |             |            |   | 8,663,553  |            
|Other expense                                       |                                           |          | 20,316,234 |                                  |            |      | 18,342,279 |             |            |      | 16,778,415 |             |            |   | 16,536,075 |             |            |   | 15,835,803 |            
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Income before income taxes                          |                                           |          | 22,497,193 |                                  |            |      | 20,421,659 |             |            |      | 23,459,120 |             |            |   | 22,063,949 |             |            |   | 20,007,224 |            
|Income taxes                                        |                                           |          | 7,394,893  |                                  |            |      | 6,613,104  |             |            |      | 7,884,537  |             |            |   | 7,327,157  |             |            |   | 6,558,789  |            
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Net income                                          |                                           | $        | 15,102,300 |                                  |            | $    | 13,808,555 |             |            | $    | 15,574,583 |             |            | $ | 14,736,792 |             |            | $ | 13,448,435 |            
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Per share                                           |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|                                                    | Net income                                |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |             |           
|                                                    |                                           | Basic*   |            | $                                | 1.11       |      |            | $           | 0.99       |      |            | $           | 1.10       |   |            | $           | 1.02       |   |            | $           | 0.94       | 
|                                                    |                                           | Diluted* |            |                                  | 1.11       |      |            |             | 0.99       |      |            |             | 1.10       |   |            |             | 1.02       |   |            |             | 0.93       | 
|                                                    | Cash dividends*                           |          |            | 0.41                             |            |      |            | 0.37        |            |      |            | 0.34        |            |   |            | 0.30        |            |   |            | 0.27        |           
|                                                    | Book value*                               |          |            | 9.56                             |            |      |            | 9.09        |            |      |            | 8.56        |            |   |            | 7.93        |            |   |            | 7.36        |           
|                                                    | Share price                               |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |             |           
|                                                    |                                           | High*    |            |                                  | 21.59      |      |            |             | 19.12      |      |            |             | 19.60      |   |            |             | 25.90      |   |            |             | 37.60      | 
|                                                    |                                           | Low*     |            |                                  | 15.56      |      |            |             | 15.09      |      |            |             | 12.90      |   |            |             | 14.80      |   |            |             | 19.20      | 
|                                                    |                                           | Close*   |            |                                  | 17.50      |      |            |             | 15.82      |      |            |             | 18.60      |   |            |             | 17.20      |   |            |             | 22.10      | 
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Average shares outstanding                          |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|                                                    |                                           | Basic*   |            |                                  | 13,547,299 |      |            |             | 13,897,764 |      |            |             | 14,161,633 |   |            |             | 14,386,194 |   |            |             | 14,367,100 | 
|                                                    |                                           | Diluted* |            |                                  | 13,552,569 |      |            |             | 13,900,127 |      |            |             | 14,174,268 |   |            |             | 14,413,128 |   |            |             | 14,427,003 | 
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Performance ratios                                  |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|                                                    | Return on average assets                  |          |            | 2.13                             | %          |      |            | 2.00        | %          |      |            | 2.45        | %          |   |            | 2.46        | %          |   |            | 2.39        | %         
|                                                    | Return on average equity                  |          |            | 11.98                            | %          |      |            | 11.29       | %          |      |            | 13.41       | %          |   |            | 13.42       | %          |   |            | 13.35       | %         
|                                                    | Average equity to
average assets          |          |            | 17.80                            | %          |      |            | 17.70       | %          |      |            | 18.31       | %          |   |            | 18.35       | %          |   |            | 17.90       | %         
|                                                    | Dividend payout                           |          |            | 37.05                            | %          |      |            | 37.01       | %          |      |            | 30.54       | %          |   |            | 29.60       | %          |   |            | 28.81       | %         
|                                                    | Efficiency ratio                          |          |            | 42.29                            | %          |      |            | 40.96       | %          |      |            | 36.52       | %          |   |            | 39.04       | %          |   |            | 37.70       | %         
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Balances at year end                                |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|                                                    | Assets                                    |          | $          | 742,014,674                      |            |      | $          | 715,389,907 |            |      | $          | 661,622,812 |            |   | $          | 610,726,599 |            |   | $          | 606,175,042 |           
|                                                    | Investment securities                     |          |            | 124,924,296                      |            |      |            | 159,185,159 |            |      |            | 167,505,220 |            |   |            | 155,345,479 |            |   |            | 149,008,531 |           
|                                                    | Loans (gross)                             |          |            | 565,374,099                      |            |      |            | 510,410,948 |            |      |            | 450,398,252 |            |   |            | 390,189,234 |            |   |            | 385,590,204 |           
|                                                    | Allowance for loan losses                 |          |            | 8,834,611                        |            |      |            | 6,426,477   |            |      |            | 6,351,756   |            |   |            | 4,746,692   |            |   |            | 4,619,586   |           
|                                                    | Liabilities                               |          |            | 614,571,832                      |            |      |            | 590,608,591 |            |      |            | 542,307,475 |            |   |            | 497,275,490 |            |   |            | 500,733,071 |           
|                                                    | Deposits                                  |          |            | 547,249,315                      |            |      |            | 522,782,719 |            |      |            | 517,281,500 |            |   |            | 471,659,198 |            |   |            | 458,697,169 |           
|                                                    | Shareholders equity                      |          |            | 127,442,842                      |            |      |            | 124,781,316 |            |      |            | 119,315,337 |            |   |            | 113,451,109 |            |   |            | 105,441,971 |           
|                                                    |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|Asset quality ratios                                |                                           |          |            |                                  |            |      |            |             |            |      |            |             |            |   |            |             |            |   |            |            
|                                                    | Net charge-offs
to average loans          |          |            | 0.21                             | %          |      |            | 0.86        | %          |      |            | 0.54        | %          |   |            | 0.46        | %          |   |            | 1.31        | %         
|                                                    | Nonperforming assets
to total assets      |          |            | 0.76                             | %          |      |            | 0.70        | %          |      |            | 0.55        | %          |   |            | 0.35        | %          |   |            | 0.64        | %         
|                                                    | Allowance coverage of
nonperforming loans |          |            | 199.98                           | %          |      |            | 136.35      | %          |      |            | 182.26      | %          |   |            | 230.38      | %          |   |            | 128.53      | %         

* Amounts for periods prior to May 31, 2002 have been restated to reflect the 5-for-4 stock split paid May 31, 2002.

9



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ITEMS
7 AND 7A - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


MANAGEMENTS DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW

Managements Discussion and Analysis is provided to assist in understanding and evaluating the Companys
results of operations and financial condition. The following discussion should be read in conjunction with the
consolidated financial statements and related notes included elsewhere herein. In 1987, Bank of Granite
Corporation (the Company) was formed under a plan whereby all previously issued shares of Bank of Granite
(the Bank) stock were exchanged for shares of the Companys stock. The Bank then became a wholly-owned
subsidiary of the Company. In 1997, the Company acquired GLL & Associates, Inc. (GLL), a mortgage bank,
through a merger, which was accounted for as a pooling of interests. All information presented is consolidated
data unless otherwise specified.

In addition, amounts per share have been adjusted to reflect the 5-for-4 stock split paid May 31, 2002.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting
principles generally accepted in the United States and conform to general practices within the banking industry.
The more critical accounting and reporting policies include the Companys accounting for securities, loans, the
allowance for loan losses and income taxes. In particular, the Companys accounting policies relating to the
allowance for loan losses and income taxes involve the use of estimates and require significant judgments to be
made by management. Different assumptions in the application of these policies could result in material changes in
the Companys consolidated financial position or consolidated results of operations. Please see the discussions
below under the captions Loans, Provisions and Allowance for Loan Losses and Investment Securities.
Also, please refer to Note 1 in the Notes to Consolidated Financial Statements under Item 8, Financial
Statements & Supplementary Data for additional information regarding all of the Companys critical and
significant accounting policies.

LOANS - Loans that management has the intent and ability to hold for the foreseeable future are reported
at their outstanding principal balances adjusted for any deferred fees or costs. Substantially all loans earn
interest on the level yield method based on the daily outstanding balance.

Loans that are deemed to be impaired (i.e., probable that the Company will be unable to collect all amounts due
according to the terms of the loan agreement) are measured based on the present value of expected future cash
flows discounted at the loans effective interest rate or, as a practical matter, at the loans observable market
value or fair value of the collateral if the loan is collateral dependent. A valuation reserve is established to
record the difference between the stated loan amount and the present value or market value of the impaired loan.
Impaired loans may be valued on a loan-by-loan basis (e.g., loans with risk characteristics unique to an
individual borrower) or on an aggregate basis (e.g., loans with similar risk characteristics). The Companys
policy for recognition of interest income on impaired loans is the same as its interest income recognition policy
for non-impaired loans. The Company discontinues the accrual of interest when the collectibility of such
interest becomes doubtful.

PROVISIONS AND ALLOWANCE FOR LOAN
LOSSES - The provision for loan losses charged to
operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered
adequate to absorb potential losses in the portfolio. Managements determination of the adequacy of the allowance
is based on an evaluation of the portfolio, current economic conditions, historical loan loss experience and other
risk factors. Recovery of the carrying value of loans is dependent to some extent on future economic, operating
and other conditions that may be beyond the Companys control. Unanticipated future adverse changes in such
conditions could result in material adjustments to the allowance for loan losses.

10



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##### 



INVESTMENT SECURITIES -  Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included in consolidated earnings. Debt
securities not classified as either held to maturity securities or trading securities, and equity securities not
classified as trading securities, are classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate component of consolidated
shareholders equity and as an item of other comprehensive income. The fair values of marketable securities is
based on quoted market prices, dealer quotes and prices obtained from independent pricing services. Gains and
losses on held for investment securities are recognized at the time of sale based upon the specific identification
method. Declines in the fair value of individual held to maturity and available for sale securities below their cost
that are other than temporary result in write-downs of the individual securities to their fair value. The related
write-downs are included in consolidated earnings as realized losses. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity. Transfers of securities between
classifications are accounted for at fair value. No securities have been classified as trading securities.

PENDING ACQUISITION

On December 18, 2002, the Company announced a definitive agreement to acquire First Commerce Corporation
(First Commerce) of Charlotte, North Carolina. As of December 31, 2002, First Commerce had total assets of
$172,172,000 and operated three banking offices in the Charlotte-Gastonia-Rock Hill metropolitan statistical area.
Under the terms of the merger agreement, as amended on January 22, 2003, the Company will issue 529,301
shares and $9,562,611 cash to First Commerce shareholders. For each share owned, First Commerce
shareholders may select either (i) $18.73 cash; (ii) a combination of cash and stock; or (iii) 100% stock, subject to
the pro rata allocations described in the agreement. The transaction, which will be accounted for as a purchase, is
expected to close in the second quarter of 2003, subject to approval by the First Commerce shareholders and bank
regulators.

11



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##### 



RESULTS OF OPERATIONS

The following discussion relates to operations for the year ended December 31, 2002 compared to the year ended
December 31, 2001, the year ended December 31, 2001 compared to the year ended December 31, 2000, and
the year ended December 31, 2000 compared to the year ended December 31, 1999.

2002 COMPARED TO 2001

In 2002, the Company earned $15,102,300, or $1.11 per share, compared to $13,808,555, or $0.99 per share, in 2001.
The earnings provided returns on average assets of 2.13% in 2002 compared to 2.00% in 2001 and returns on
average equity of 11.98% in 2002 compared to 11.29% in 2001. The earnings increase was primarily attributable
to higher net interest income, lower loan loss provisions and increased income from mortgage originations,
partially offset by increases in operating costs.

Net interest income, the Companys largest source of revenues, increased 6.3% to $34,908,104 in 2002 from
$32,840,650 in 2001. Interest income was $45,710,526 in 2002, down 12.6% from $52,284,219 in 2001,
primarily due to lower interest rates from the previous year. The average yield on interest-earning assets
was 7.12% in 2002 compared with 8.27% in 2001. Average interest-earning assets grew by $12,288,466,
or 1.9%, primarily because average loans, the highest yielding asset category, grew by $47,027,071, or 9.8%.
Interest expense decreased 44.4% to $10,802,422 in 2002 compared to $19,443,569 in 2001. The average cost
of funds was 2.23% in 2001 compared with 4.11% in 2001. Lower rates on time deposits resulted in the
significantly lower interest expense. Average balances in transaction accounts, such as noninterest-bearing demand
accounts and interest-bearing savings, NOW and money market accounts, increased $30,090,980, or 13.3%, to
$256,945,371 in 2002 from $226,854,391 in 2001. Average balances in time deposits decreased $35,338,224,
or 11.7%, to $266,835,606 in 2002 from $302,173,830 in 2001. Average overnight borrowings, principally
commercial account balances which are swept into the Companys commercial paper overnight, grew by
$19,238,103, or 135.6%, to $33,426,013 in 2002 from $14,187,910 in 2001. Average other borrowings, which
are principally used to fund mortgage banking activities, increased $1,276,667, or 6.6%, to $20,554,913 in 2002
from $16,278,246 in 2001. Such other borrowings had maturities of less than one year.

Primarily because of a recessionary economy, which was particularly severe in the Companys local banking
markets, the Company provided $3,492,382 for possible loan losses in 2002 compared with $4,216,772 in 2001.
Although the 2002 provision was lower than the 2001 provision, it increased the Companys allowance or reserve
for loan losses to 1.59% of net loans outstanding at December 31, 2002 compared to 1.28% at December 31,
2001. Charge-offs, net of recoveries totaled $1,084,248 for 2002 compared with $4,142,051 for 2001.
Nonperforming loans totaled $4,417,845 at the end of 2002 compared with $4,713,204 at the end of 2001.

Other income was $11,397,705 in 2002, an increase of $1,257,645, or 12.4%, from such revenues of
$10,140,060 in 2001. Continued low interest rates resulted in increases in fees from both mortgage originations
and annuity sales. Fee income from mortgage originations increased $827,202, or 26.5%, to $3,949,354 in 2002
from $3,122,152 in 2001. Also contributing to the increase in fee income was an increase of $214,140 in deposit
fees. Mortgage origination activities have a tendency to increase during periods of sustained low interest rates, as
was the case during 2002.

Other expenses, or overhead, increased $1,973,955, or 10.8%, to $20,316,234 in 2002 from $18,342,279 in
2001, primarily due to increased costs associated with higher mortgage origination activity. Personnel expenses,
the largest component of overhead, increased to $12,900,749 in 2002 from $11,408,477 in 2001, primarily due
to increases in expenses related to profit sharing, healthcare and increased mortgage origination activity.

12



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##### 



2001 COMPARED TO 2000

In 2001, the Company earned $13,808,555, or $0.99 per share, compared to $15,574,583, or $1.10 per share,
in 2000. The earnings provided returns on average assets of 2.00% in 2001 compared to 2.45% in 2000 and
returns on average equity of 11.29% in 2001 compared to 13.41% in 2000. The earnings decrease was primarily
attributable to lower net interest income, which resulted from 11 successive short-term interest rate reductions by
the Federal Reserve Bank.

Net interest income, the Companys largest source of revenues, decreased 9% to $32,840,650 in 2001 from
$36,097,440 in 2000. Interest income was $52,284,219 in 2001, down 5.4% from $55,269,464 in 2000,
primarily due to 11 successive reductions in short-term interest rates. The average yield on interest-earning assets
was 8.27% in 2001 compared with 9.51% in 2000. Average interest-earning assets grew by $54,275,383, or
9%, primarily because average loans, the highest yielding asset category, grew by $58,478,916, or 13.9%.
Interest expense increased 1.4% to $19,443,569 in 2001 compared to $19,172,024 in 2000. The average cost of
funds was 4.11% in 2001 compared with 4.57% in 2000. Higher volumes in time deposits resulted in the slightly
higher interest expense. Average balances in transaction accounts, such as noninterest-bearing demand accounts
and interest-bearing savings, NOW and money market accounts, decreased $1,594,954, or 0.7%, to
$226,854,391 in 2001 from $228,449,345 in 2000. Average balances in time deposits grew $38,650,985, or
14.7%, to $302,173,830 in 2001 from $263,522,845 in 2000. Average overnight borrowings, principally
commercial account balances which are swept into the Companys commercial paper overnight, grew by
$1,658,656, or 13.2%, to $14,187,910 in 2001 from $12,529,254 in 2000. Average other borrowings, which
are used to fund mortgage banking activities, increased $10,255,661, or 113.7%, due to significantly higher
mortgage originations resulting from lower mortgage interest rates.

Because of both the growth in loans and higher levels of charge-offs and nonperforming loans, the Company
provided $4,216,772 for possible loan losses in 2001 compared with $3,893,585 in 2000. Charge-offs, net of
recoveries totaled $4,142,051 for 2001 compared with $2,288,521 for 2000. Nonperforming loans totaled
$4,713,204 at the end of 2001 compared with $3,484,945 at the end of 2000.

Other income was $10,140,060 in 2001, an increase of $2,106,380, or 26.2%, from such revenues of $8,033,680
in 2000. Lower interest rates resulted in increase in fees from both mortgage originations and annuity sales. Fee
income from mortgage originations increased $1,061,123, or 51.5%, to $3,122,152 in 2001 from $2,061,029 in
2000. Also contributing to the increase in fee income were increases of $362,996 in deposit fees and $246,633 in
fees from annuity sales. Mortgage origination and annuity activity have a tendency to increase during periods of
lower interest rates, as was the case during 2001.

Other expenses, or overhead, increased $1,563,864, or 9.3%, to $18,342,279 in 2001 from $16,778,415 in
2000, primarily due to increased costs associated with higher mortgage origination activity. Personnel expenses,
the largest component of overhead, increased to $11,408,477 in 2001 from $9,914,791 in 2000. There were very
slight increases in the other categories of overhead expenses.

13



---



##### 



2000 COMPARED TO 1999

In 2000, the Company earned $15,574,583, or $1.10 per share, compared to $14,736,792, or $1.02 per share,
in 1999. The earnings provided returns on average assets of 2.45% in 2000 compared to 2.46% in 1999 and
returns on average equity of 13.41% in 2000 compared to 13.42% in 1999. The earnings increase was primarily
attributable to higher net interest income, which resulted from loan growth that out-paced the growth in both
deposits and the costs of deposits.

Net interest income, the Companys largest source of revenues, increased 11.9% to $36,097,440 in 2000 from
$32,253,067 in 1999. Interest income was $55,269,464 in 2000, up 15.1% from $48,005,534 in 1999,
primarily due to increases in loan volumes and further boosted by higher loan interest rates. Average
interest-earning assets grew by $38,182,783, or 6.8%, primarily because average loans, the highest yielding
asset category, grew by $40,559,606, or 10.7%. Interest expense increased 21.7% to $19,172,024 in 2000
compared to $15,752,467 in 1999. Higher interest rates and volumes in time deposits resulted in the higher
interest expense. Average balances in transaction accounts, such as noninterest-bearing demand accounts and
interest-bearing savings, NOW and money market accounts, grew $10,305,910, or 4.7%, to $228,449,345 in
2000 from $218,143,435 in 1999. Average balances in time deposits grew $23,311,462, or 9.7%, to
$263,522,845 in 2000 from $240,211,383 in 1999. Average overnight borrowings, principally commercial
account balances which are swept into the Companys commercial paper overnight, grew by $1,238,677, or
11%, to $12,529,254 in 2000 from $11,290,577 in 1999. Average other borrowings, which are used to fund
mortgage banking activities, decreased $5,979,688, or 39.9%, due to fewer mortgage originations resulting from
higher mortgage interest rates.

Because of both the growth in loans and higher levels of charge-offs and nonperforming loans, the Company
provided $3,893,585 for possible loan losses in 2000 compared with $1,862,585 in 1999.

Other income was $8,033,680 in 2000, a decrease of $175,862, or 2.1%, from such revenues of $8,209,542 in
1999. In April of 2000, the Bank introduced a new demand deposit overdraft program designed for retail
customers. The new program increased the Banks fee income from overdrafts by $1,222,897. This increase in
deposit fees was offset by declines in fees from mortgage originations and sales of the guaranteed portions of
small business administration (SBA) loans. Higher mortgage interest rates resulted in a decrease of
$1,029,791, or 33.3%, in fees from mortgage originations to $2,061,029 in 2000 from $3,090,820 in 1999. In
addition, management decided to retain the guaranteed portions of SBA loans, which lowered fee income from
such activity by $312,502, but contributed to the increase in interest income from loans. Both mortgage and
SBA lending activities often decline during periods of rising rates.

Other expenses, or overhead, increased $242,340, or 1.5%, to $16,778,415 in 2000 from $16,536,075 in 1999.
Personnel expenses, the largest component of overhead, increased slightly to $9,914,791 in 2000 from
$9,904,199 in 1999. Occupancy and equipment expenses increased $174,670, or 8.3% to $2,280,903 in 2000
compared with $2,106,233 in 1999. In addition, other noninterest expenses increased 1.3%.

14



---



##### 



NET INTEREST INCOME

Net interest income (the difference between interest earned on interest-earning assets and interest paid on
interest-bearing liabilities, primarily deposits in the Bank) represents the most significant portion of the Companys
earnings. It is managements on-going policy to optimize net interest income. Net interest income totaled
$34,908,104, $32,840,650, and $36,097,440 for 2002, 2001 and 2000 respectively, representing an increase of
6.3% for 2002 over 2001, a decrease of 9% for 2001 from 2000, and an increase of 11.9% for 2000 over 1999.
Interest rate spreads have been at least 4.00% over the last three years, and the Company continues efforts to
maximize these favorable spreads by managing both loan and deposit rates in order to support the overall earnings
growth. The following table presents the daily average balances, interest income and expense and average rates
earned and paid on interest-earning assets and interest-bearing liabilities of the Company for the last three years.

AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
for the years ended December 31,



|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|---------------------------------------------------------- |  | ------- | ------- | ------ |  | ------- | ---- | -------- |  | ------ | ------ | ------- |  | ------- | ------- | -------- |  |  | ---- | - |  | - | ------ | 
|                                                           |  | 2002    |         | 2001  
|                                                           |  |         |         |       
|                                                           |  |         |         |        |  | Average |      | Interest |  |        |        |         |  | Average |         | Interest
|                                                           |  | Average |         | Yield/ |  | Income/ |      | Average  |  | Yield/ |        | Income/
|dollars in thousands                                       |  | Balance |         | Cost   |  | Expense |      | Balance  |  | Cost   |        | Expense
|Assets                                                     |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Loans (1)                                                  |  | $       | 526,759 |        |  |         | 7.34 | %        |  | $      | 38,674 |         |  | $       | 479,732 |          |  |  | 8.95 | % |  | $ | 42,931 | 
|Taxable securities                                         |  |         | 68,746  |        |  |         | 5.54 | %        |  |        | 3,811  |         |  |         | 86,309  |          |  |  | 6.18 | % |  |   | 5,334  | 
|Nontaxable securities (2)                                  |  |         | 70,271  |        |  |         | 7.04 | %        |  |        | 4,946  |         |  |         | 72,964  |          |  |  | 7.06 | % |  |   | 5,148  | 
|Federal funds sold                                         |  |         | 910     |        |  |         | 1.10 | %        |  |        | 10     |         |  |         | 15,392  |          |  |  | 4.38 | % |  |   | 674    | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Total interest-earning assets                              |  |         | 666,686 |        |  |         | 7.12 | %        |  |        | 47,441 |         |  |         | 654,397 |          |  |  | 8.27 | % |  |   | 54,087 | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Cash and due from banks                                    |  |         | 22,045  |        |  |         |      |          |  |        |        |         |  |         | 21,068  |          |  |  |      |   |  |   |        | 
|All other assets                                           |  |         | 19,508  |        |  |         |      |          |  |        |        |         |  |         | 15,755  |          |  |  |      |   |  |   |        | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Total assets                                               |  | $       | 708,239 |        |  |         |      |          |  |        |        |         |  | $       | 691,220 |          |  |  |      |   |  |   |        | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Liabilities and
shareholders equity                       |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|NOW deposits                                               |  | $       | 83,761  |        |  |         | 0.53 | %        |  |        | 442    |         |  | $       | 77,575  |          |  |  | 1.05 | % |  |   | 813    | 
|Money market deposits                                      |  |         | 53,108  |        |  |         | 2.07 | %        |  |        | 1,097  |         |  |         | 34,733  |          |  |  | 2.89 | % |  |   | 1,004  | 
|Savings deposits                                           |  |         | 26,229  |        |  |         | 0.43 | %        |  |        | 112    |         |  |         | 24,625  |          |  |  | 1.16 | % |  |   | 285    | 
|Time deposits of $100,000
or more                          |  |         | 121,644 |        |  |         | 2.91 | %        |  |        | 3,536  |         |  |         | 133,055 |          |  |  | 5.36 | % |  |   | 7,128  | 
|Other time deposits                                        |  |         | 145,192 |        |  |         | 3.12 | %        |  |        | 4,530  |         |  |         | 169,119 |          |  |  | 5.40 | % |  |   | 9,130  | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Interest-bearing deposits                                  |  |         | 429,934 |        |  |         | 2.26 | %        |  |        | 9,718  |         |  |         | 439,107 |          |  |  | 4.18 | % |  |   | 18,360 | 
|Overnight borrowings                                       |  |         | 33,426  |        |  |         | 1.91 | %        |  |        | 638    |         |  |         | 14,188  |          |  |  | 3.28 | % |  |   | 466    | 
|Other borrowings                                           |  |         | 20,555  |        |  |         | 2.17 | %        |  |        | 446    |         |  |         | 19,278  |          |  |  | 3.21 | % |  |   | 618    | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Total interest-bearing liabilities                         |  |         | 483,915 |        |  |         | 2.23 | %        |  |        | 10,802 |         |  |         | 472,573 |          |  |  | 4.11 | % |  |   | 19,444 | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Noninterest-bearing deposits                               |  |         | 93,848  |        |  |         |      |          |  |        |        |         |  |         | 89,921  |          |  |  |      |   |  |   |        | 
|Other liabilities                                          |  |         | 4,429   |        |  |         |      |          |  |        |        |         |  |         | 6,382   |          |  |  |      |   |  |   |        | 
|Shareholders equity                                       |  |         | 126,047 |        |  |         |      |          |  |        |        |         |  |         | 122,344 |          |  |  |      |   |  |   |        | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Total liabilities and
shareholders equity                 |  | $       | 708,239 |        |  |         |      |          |  |        |        |         |  | $       | 691,220 |          |  |  |      |   |  |   |        | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Net yield on earning assets and
net interest income (2)(3) |  |         |         |        |  |         | 5.50 | %        |  | $      | 36,639 |         |  |         |         |          |  |  | 5.29 | % |  | $ | 34,643 | 
|                                                           |  |         |         |        |  |         |      |          |  |        |        |         |  |         |         |          |  |  |      |   |  |   |        | 
|Interest rate spread (4)                                   |  |         |         |        |  |         | 4.89 | %        |  |        |        |         |  |         |         |          |  |  | 4.16 | % |  |   |        | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|---------------------------------------------------------- |  | ------- | ------- | ------ |  | ------- | ----- | -------- |  | - | ------ | 
|                                                           |  | 2000   
|                                                           |  |        
|                                                           |  |         |         |        |  | Average |       | Interest
|                                                           |  | Average |         | Yield/ |  | Income/
|dollars in thousands                                       |  | Balance |         | Cost   |  | Expense
|Assets                                                     |  |         |         |        |  |         |       |          |  |   |        | 
|Loans (1)                                                  |  | $       | 421,253 |        |  |         | 10.68 | %        |  | $ | 44,996 | 
|Taxable securities                                         |  |         | 93,641  |        |  |         | 6.55  | %        |  |   | 6,134  | 
|Nontaxable securities (2)                                  |  |         | 72,076  |        |  |         | 7.16  | %        |  |   | 5,163  | 
|Federal funds sold                                         |  |         | 13,152  |        |  |         | 5.95  | %        |  |   | 783    | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Total interest-earning assets                              |  |         | 600,122 |        |  |         | 9.51  | %        |  |   | 57,076 | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Cash and due from banks                                    |  |         | 21,619  |        |  |         |       |          |  |   |        | 
|All other assets                                           |  |         | 12,708  |        |  |         |       |          |  |   |        | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Total assets                                               |  | $       | 634,449 |        |  |         |       |          |  |   |        | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Liabilities and
shareholders equity                       |  |         |         |        |  |         |       |          |  |   |        | 
|NOW deposits                                               |  | $       | 76,147  |        |  |         | 1.52  | %        |  |   | 1,156  | 
|Money market deposits                                      |  |         | 33,182  |        |  |         | 3.34  | %        |  |   | 1,109  | 
|Savings deposits                                           |  |         | 25,249  |        |  |         | 1.73  | %        |  |   | 438    | 
|Time deposits of $100,000
or more                          |  |         | 113,714 |        |  |         | 6.15  | %        |  |   | 6,991  | 
|Other time deposits                                        |  |         | 149,809 |        |  |         | 5.64  | %        |  |   | 8,446  | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Interest-bearing deposits                                  |  |         | 398,101 |        |  |         | 4.56  | %        |  |   | 18,140 | 
|Overnight borrowings                                       |  |         | 12,529  |        |  |         | 4.67  | %        |  |   | 585    | 
|Other borrowings                                           |  |         | 9,023   |        |  |         | 4.95  | %        |  |   | 447    | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Total interest-bearing liabilities                         |  |         | 419,653 |        |  |         | 4.57  | %        |  |   | 19,172 | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Noninterest-bearing deposits                               |  |         | 93,871  |        |  |         |       |          |  |   |        | 
|Other liabilities                                          |  |         | 4,759   |        |  |         |       |          |  |   |        | 
|Shareholders equity                                       |  |         | 116,166 |        |  |         |       |          |  |   |        | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Total liabilities and
shareholders equity                 |  | $       | 634,449 |        |  |         |       |          |  |   |        | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Net yield on earning assets and
net interest income (2)(3) |  |         |         |        |  |         | 6.32  | %        |  | $ | 37,904 | 
|                                                           |  |         |         |        |  |         |       |          |  |   |        | 
|Interest rate spread (4)                                   |  |         |         |        |  |         | 4.94  | %        |  |   |        | 



---

|(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 2002, 2001 and 2000.
|   
|(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.                          

15



---



##### 



Changes in interest income and interest expense can result from changes in both volume and rates. The following
table sets forth the dollar amount of increase (decrease) in interest income and interest expense resulting from
changes in the volume of interest earning assets and interest bearing liabilities and from changes in yields and
rates.

INTEREST RATE AND VOLUME VARIANCE ANALYSIS
for the years ended December 31,

|                                  |  |                       |        |                       |  |       |        |                 |  |         |        |       |  |   |       |   |  |   |        |   |  |   |        |  
|--------------------------------- |  | --------------------- | ------ | --------------------- |  | ----- | ------ | --------------- |  | ------- | ------ | ----- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                  |  | 2002 compared to 2001 |        | 2001 compared to 2000
|                                  |  |                       |        |                      
|                                  |  | Change                |        |                       |  |       |        | Change          |  |         |        |      
|                                  |  | Attributable to       |        |                       |  |       |        | Attributable to |  |         |        |      
|                                  |  |                       |        |                       |  |       |        |                 |  |         |        |      
|dollars in thousands              |  | Volume(1)             |        | Rate(1)               |  | Total |        | Volume(1)       |  | Rate(1) |        | Total
|Loans                             |  | $                     | 3,831  |                       |  | $     | (8,088 | )               |  | $       | (4,257 | )     |  | $ | 5,740 |   |  | $ | (7,805 | ) |  | $ | (2,065 | )
|Taxable securities                |  |                       | (1,030 | )                     |  |       | (493   | )               |  |         | (1,523 | )     |  |   | (467  | ) |  |   | (333   | ) |  |   | (800   | )
|Nontaxable securities             |  |                       | (190   | )                     |  |       | (12    | )               |  |         | (202   | )     |  |   | 63    |   |  |   | (78    | ) |  |   | (15    | )
|Federal funds sold                |  |                       | (397   | )                     |  |       | (267   | )               |  |         | (664   | )     |  |   | 116   |   |  |   | (225   | ) |  |   | (109   | )
|Interest-earning assets           |  |                       | 945    |                       |  |       | (7,591 | )               |  |         | (6,646 | )     |  |   | 4,824 |   |  |   | (7,813 | ) |  |   | (2,989 | )
|NOW deposits                      |  |                       | 49     |                       |  |       | (420   | )               |  |         | (371   | )     |  |   | 18    |   |  |   | (361   | ) |  |   | (343   | )
|Money market deposits             |  |                       | 455    |                       |  |       | (362   | )               |  |         | 93     |       |  |   | 48    |   |  |   | (153   | ) |  |   | (105   | )
|Savings deposits                  |  |                       | 13     |                       |  |       | (186   | )               |  |         | (173   | )     |  |   | (9    | ) |  |   | (144   | ) |  |   | (153   | )
|Time deposits of $100,000
or more |  |                       | (472   | )                     |  |       | (3,120 | )               |  |         | (3,592 | )     |  |   | 1,113 |   |  |   | (976   | ) |  |   | 137    |  
|Other time deposits               |  |                       | (1,019 | )                     |  |       | (3,581 | )               |  |         | (4,600 | )     |  |   | 1,066 |   |  |   | (382   | ) |  |   | 684    |  
|Interest-bearing deposits         |  |                       | (295   | )                     |  |       | (8,347 | )               |  |         | (8,642 | )     |  |   | 1,792 |   |  |   | (1,572 | ) |  |   | 220    |  
|Overnight borrowings              |  |                       | 500    |                       |  |       | (328   | )               |  |         | 172    |       |  |   | 66    |   |  |   | (185   | ) |  |   | (119   | )
|Other borrowings                  |  |                       | 34     |                       |  |       | (206   | )               |  |         | (172   | )     |  |   | 418   |   |  |   | (247   | ) |  |   | 171    |  
|Interest-bearing liabilities      |  |                       | 360    |                       |  |       | (9,002 | )               |  |         | (8,642 | )     |  |   | 2,298 |   |  |   | (2,026 | ) |  |   | 272    |  



---

|(1) |  | The rate/volume variance for each category has been allocated equally on a consistent basis between rate and
volume variances.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISKS
(INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS)

The objectives of the Companys liquidity management policy include providing adequate funds to meet the cash
needs of both depositors and borrowers, as well as providing funds to meet the basic needs for on-going
operations of the Company and regulatory requirements. Depositor cash needs, particularly those of commercial
depositors, can fluctuate significantly depending on both business and economic cycles, while both retail and
commercial deposits can fluctuate significantly based on the yields and returns available from alternative
investment opportunities. Borrower cash needs are also often dependent upon business and economic cycles. In
addition, the Companys liquidity is affected by off-balance sheet commitments to lend in the forms of unfunded
commitments to extend credit and standby letters of credit. As of December 31, 2002 such unfunded commitments
to extend credit were $87,675,231, while commitments in the form of standby letters of credit totaled $6,664,731.

In late September 2002, GLL changed the method in which it manages its mortgage loans in process. Prior to the
change, as GLL committed to or locked in a mortgage rate with a customer, GLL would concurrently obtain a
commitment from a institutional buyer to buy the mortgage upon its closing 30 to 45 days thereafter. Effective in
late September, GLL began waiting until the mortgage loan closes to arrange for the sale of the mortgage loan.
This method allows GLL to bundle mortgage loans and obtain better pricing compared with the sale of individual
mortgage loans, however this method also introduces interest rate risk to GLLs loans in process since rates may
fluctuate subsequent to GLLs rate commitment to the mortgage customer. In order to minimize the risk that
interest rates may move against GLL subsequent to the rate commitment, GLL began entering into forward
commitments and options to sell mortgage-backed securities coincident to the rate commitment. When the
mortgage loan is ultimately sold, GLL then buys the mortgage-backed security, thereby completing the hedge
contract. As of December 31, 2002, GLL held $19,542,319 in open mortgage loan commitments with an
estimated market value of $19,816,301, and an unrealized gain of $273,982. Also, as of December 31, 2002,
GLL held $17,763,251 in open forward commitments and options to sell mortgage-backed securities with an
estimated market value of approximately $17,763,251, and an unrealized loss of approximately $0. For
2002, gains of $140,470 on mortgage loans were realized and losses of $148,965 on forward commitments and
options to sell mortgage-backed securities were realized, resulting in a net loss of $8,495 on the hedging strategy
as a whole. In addition to the improved spreads resulting from more advantageous pricing from bundling
mortgage loans for sale, GLL production also believes that this management method increases production
efficiencies.

16



---



##### 



Except for the hedging strategy discussed above, neither the Company nor its subsidiaries have historically
incurred off-balance sheet obligations through the use of or investment in off-balance sheet derivative financial
instruments or structured finance or special purpose entities organized as corporations, partnerships or limited
liability companies or trusts. However, the Bank and GLL both had contractual off-balance sheet obligations in
the form of noncancelable operating leases with unrelated vendors. As of December 31, 2002, payments due
under such operating lease arrangements were $247,682 in 2003, $364,099 in the years 2004 through 2005,
$131,396 in the years 2006 through 2007 and $344,300 in the years 2008 and thereafter.

Liquidity requirements of the Bank are primarily met through two categories of funding. The first is core
deposits, which includes demand deposits, savings accounts and certificates of deposits. The Bank considers these
to be a stable portion of the Banks liability mix and the result of on-going stable consumer and commercial
banking relationships. As of December 31, 2002, the Banks core deposits, defined as total deposits excluding
time deposits of $100,000 or more, totaled $432,552,493, or 79.0%, of the Banks total deposits.

The other principal method of funding used by the Bank is through large denomination certificates of deposit,
federal funds purchased, repurchase agreements and other short and intermediate term borrowings. The Banks
policy is to emphasize core deposit growth rather than growth through purchased or brokered time deposits as the
cost of purchased or brokered time deposits is greater. During periods of weak demand for its deposit products,
the Bank maintains several credit facilities under which it may borrow on a short-term basis. As of December 31,
2002, the Bank had three unsecured lines of overnight borrowing capacity with its correspondent banks, which
totaled $21,000,000. In addition the Bank uses its capacity to pledge assets to serve as collateral to borrow on a
secured basis. As of December 31, 2002, the Bank had investment securities pledged to secure overnight funding
lines in the approximate amounts of $11,225,000 with the Federal Reserve Bank and $29,200,000 with the
Federal Home Loan Bank. The Bank also has pledged its loans secured by first liens on residential and
commercial real estate as collateral for additional borrowings from the Federal Home Loan Bank during periods
when loan demand exceeds deposit growth or when the interest rates on such borrowings compare favorably to
interest rates on deposit products. As of December 31, 2002, the Bank had the capacity to borrow approximately
$26,257,000 from the Federal Home Loan Bank against its pledged residential and commercial real estate loans.

GLL temporarily funds its mortgages, from the time of origination until the time of sale, through the use
of a warehouse line of credit from one of the Companys correspondent financial institutions. For the years
ended December 31, 2002 and 2001, this line of credit was $30,000,000 and $25,000,000, of which
respectively. GLL requests this line of credit based on its estimated funding needs for the year. The line
is secured by the mortgage loans originated and the Company serves as guarantor on this
borrowing.

The majority of the Companys deposits are rate-sensitive instruments with rates which tend to fluctuate with
market rates. These deposits, coupled with the Companys short-term certificates of deposit, have increased the
opportunities for deposit repricing. The Company places great significance on monitoring and managing the
Companys asset/liability position. The Companys policy of managing its interest margin (or net yield on
interest-earning assets) is to maximize net interest income while maintaining a stable deposit base. The Companys
deposit base is not generally subject to volatility experienced in national financial markets in recent years;
however, the Company does realize the importance of minimizing such volatility while at the same time
maintaining and improving earnings. A common method used to manage interest rate sensitivity is to measure,
over various time periods, the difference or gap between the volume of interest-earning assets and interest-bearing
liabilities repricing over a specific time period. However, this method addresses only the magnitude of funding
mismatches and does not address the magnitude or relative timing of rate changes. Therefore, management
prepares on a regular basis earnings projections based on a range of interest rate scenarios of rising, flat and
declining rates in order to more accurately measure interest rate risk.

17



---



##### 



Interest-bearing liabilities and the loan portfolio are generally repriced to current market rates. The Companys
balance sheet is asset-sensitive, meaning that in a given period there will be more assets than liabilities subject to
immediate repricing as the market rates change. Because most of the Companys loans are at variable rates, they
reprice more rapidly than rate sensitive interest-bearing deposits. During periods of rising rates, this results in
increased net interest income. The opposite occurs during periods of declining rates.

INTEREST RATE SENSITIVITY (GAP ANALYSIS)
As of December 31, 2002

|                                                                        |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |         | 
|----------------------------------------------------------------------- | -------------------------------------- | ------- | ------------------------- | -------- | ----- | -------- | ------------ | ------ | ------------- | ------ | ------- | ------ |  | - | ------- | ------- |  | - | ------- | ------ |  | - | ------- | ------- | 
|                                                                        |                                        |         | Interest Sensitive Within |          |       |          |              |        | Non-sensitive |        |         |        | 
|                                                                        |                                        |         |                           |          | Total |          | or Sensitive |        |               |        |        
|                                                                        |                                        |         | 1 to                      |          | 91 to |          | 181 to       |        | Within        |        | Beyond  |        |  |   |        
|dollars in thousands                                                    |                                        | 90 Days |                           | 180 Days |       | 365 Days |              | 1 Year |               | 1 Year |         | Total 
|Interest-earning Assets                                                 |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|Interest-bearing due from banks                                         |                                        | $       | 2,655                     |          |       |          |              |        |               |        |         |        |  | $ | 2,655   |         |  |   |         |        |  | $ | 2,655   |        
|Federal funds sold                                                      |                                        |         | 5,900                     |          |       |          |              |        |               |        |         |        |  |   | 5,900   |         |  |   |         |        |  |   | 5,900   |        
|Securities (at amortized cost) (1):                                     |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|                                                                        | U.S. Government agencies               |         |                           | 3,285    |       |          | $            | 1,999  |               |        |         |        |  |   |         | 5,284   |  |   | $       | 43,811 |  |   |         | 49,095  | 
|                                                                        | States and political subdivisions      |         |                           | 1,786    |       |          |              | 7,259  |               |        |         |        |  |   |         | 9,045   |  |   |         | 58,390 |  |   |         | 67,435  | 
|                                                                        | Other (including equity securities)    |         |                           |         |       |          |              |       |               |        |         |        |  |   |         |        |  |   |         | 6,739  |  |   |         | 6,739   | 
|Loans (gross):                                                          |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|                                                                        | Real estate - Construction             |         |                           | 70,180   |       |          |              | 654    |               |        | $       | 1,238  |  |   |         | 72,072  |  |   |         | 3,311  |  |   |         | 75,383  | 
|                                                                        | Real estate - Mortgage                 |         |                           | 230,128  |       |          |              | 2,101  |               |        |         | 5,234  |  |   |         | 237,463 |  |   |         | 40,485 |  |   |         | 277,948 | 
|                                                                        | Commercial, financial and agricultural |         |                           | 153,084  |       |          |              | 3,408  |               |        |         | 3,482  |  |   |         | 159,974 |  |   |         | 15,435 |  |   |         | 175,409 | 
|                                                                        | Consumer                               |         |                           | 5,018    |       |          |              | 658    |               |        |         | 1,212  |  |   |         | 6,888   |  |   |         | 30,158 |  |   |         | 37,046  | 
|                                                                        | All other                              |         |                           |         |       |          |              |       |               |        |         |       |  |   |         |        |  |   |         | 449    |  |   |         | 449     | 
|                                                                        |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|Total interest-earning assets                                           |                                        | $       | 472,036                   |          |       | $        | 16,079       |        |               | $      | 11,166  |        |  | $ | 499,281 |         |  | $ | 198,778 |        |  | $ | 698,059 |        
|                                                                        |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|Interest-bearing Liabilities                                            |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|Interest-bearing deposits:                                              |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|                                                                        | Savings and NOW accounts               |         | $                         | 114,936  |       |          |              |        |               |        |         |        |  |   | $       | 114,936 |  |   |         |        |  |   | $       | 114,936 | 
|                                                                        | Money market accounts                  |         |                           | 84,875   |       |          |              |        |               |        |         |        |  |   |         | 84,875  |  |   |         |        |  |   |         | 84,875  | 
|                                                                        | Time deposits of $100,000 or more      |         |                           | 56,042   |       |          | $            | 24,607 |               |        | $       | 14,105 |  |   |         | 94,754  |  |   | $       | 19,943 |  |   |         | 114,697 | 
|                                                                        | Other time deposits                    |         |                           | 44,528   |       |          |              | 28,719 |               |        |         | 27,098 |  |   |         | 100,345 |  |   |         | 32,115 |  |   |         | 132,460 | 
|Overnight borrowings                                                    |                                        |         | 16,720                    |          |       |          |              |        |               |        |         |        |  |   | 16,720  |         |  |   |         |        |  |   | 16,720  |        
|Other borrowings                                                        |                                        |         | 36,677                    |          |       |          | 3,000        |        |               |        | 6,000   |        |  |   | 45,677  |         |  |   |         |        |  |   | 45,677  |        
|                                                                        |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|Total interest-bearing liabilities                                      |                                        | $       | 353,778                   |          |       | $        | 56,326       |        |               | $      | 47,203  |        |  | $ | 457,307 |         |  | $ | 52,058  |        |  | $ | 509,365 |        
|                                                                        |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        
|Interest sensitivity gap                                                |                                        | $       | 118,258                   |          |       | $        | (40,247      | )      |               | $      | (36,037 | )      |  | $ | 41,974  |         |  |   |         |        |  |   |         |        
|Cumulative interest sensitivity gap                                     |                                        |         | 118,258                   |          |       |          | 78,011       |        |               |        | 41,974  |        |  |   | 41,974  |         |  |   |         |        |  |   |         |        
|Interest earning-assets as a percentage
of interest-bearing liabilities |                                        |         | 133                       | %        |       |          | 29           | %      |               |        | 24      | %      |  |   | 109     | %       |  |   |         |        |  |   |         |        
|                                                                        |                                        |         |                           |          |       |          |              |        |               |        |         |        |  |   |         |         |  |   |         |        |  |   |         |        



---

|(1) |  | Interest sensitivity periods for debt securities are based on contractual maturities.
|--- |  | -------------------------------------------------------------------------------------

The Company uses several modeling techniques to measure interest rate risk including the gap analysis previously
discussed, the simulation of net interest income under varying interest rate scenarios and the theoretical impact of
immediate and sustained rate changes referred to as rate shocks. The following table summarizes the estimated
theoretical impact on the Companys tax equivalent net interest income and market value of equity from
hypothetical rate shocks of plus and minus 1%, 2%, 3% and 4% as compared to the estimated theoretical
impact of rates remaining unchanged. The prospective effects of these hypothetical interest rate changes, is based
upon numerous assumptions including relative and estimated levels of key interest rates. Rate shock modeling is
of limited usefulness because it does not take into account the pricing strategies management would undertake in
response to the depicted sudden and sustained rate changes. Additionally, management does not believe rate
changes of the magnitude described are likely in the forecast period presented.

|                     |  |                           |     |                                    |  |                                 |          |                                 |        |  |       |          |  |   |         |  |  |  |       |  
|-------------------- |  | ------------------------- | --- | ---------------------------------- |  | ------------------------------- | -------- | ------------------------------- | ------ |  | ----- | -------- |  | - | ------- |  |  |  | ----- | -
|                     |  |                           |     |                                    |  | Estimated Resulting Theoretical |          | Estimated Resulting Theoretical
|                     |  | Hypothetical Immediate    |     | Tax Equivalent Net Interest Income |  | Market Value of Equity         
|dollars in thousands |  | and Sustained Rate Change |     | Amount                             |  |                                 | % Change |                                 | Amount |  |       | % Change
|                     |  |                           | +4  | %                                  |  | $                               | 43,770   |                                 |        |  | 19.4  | %        |  | $ | 107,745 |  |  |  | -16.1 | %
|                     |  |                           | +3  | %                                  |  |                                 | 41,978   |                                 |        |  | 14.5  | %        |  |   | 112,414 |  |  |  | -12.5 | %
|                     |  |                           | +2  | %                                  |  |                                 | 40,197   |                                 |        |  | 9.6   | %        |  |   | 117,404 |  |  |  | -8.6  | %
|                     |  |                           | +1  | %                                  |  |                                 | 38,427   |                                 |        |  | 4.8   | %        |  |   | 122,746 |  |  |  | -4.5  | %
|                     |  |                           | 0   | %                                  |  |                                 | 36,668   |                                 |        |  | 0.0   | %        |  |   | 128,475 |  |  |  | 0.0   | %
|                     |  |                           | - 1 | %                                  |  |                                 | 32,986   |                                 |        |  | -10.0 | %        |  |   | 134,632 |  |  |  | 4.8   | %
|                     |  |                           | - 2 | %                                  |  |                                 | 28,324   |                                 |        |  | -22.8 | %        |  |   | 141,833 |  |  |  | 10.4  | %
|                     |  |                           | - 3 | %                                  |  |                                 | 22,967   |                                 |        |  | -37.4 | %        |  |   | 149,869 |  |  |  | 16.7  | %
|                     |  |                           | - 4 | %                                  |  |                                 | 17,612   |                                 |        |  | -52.0 | %        |  |   | 157,973 |  |  |  | 23.0  | %

18



---



##### 



The following table presents the maturity distribution of the Companys loans by type, including fixed rate loans.

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
As of December 31, 2002

|                                                   |  |        |         |        |  |          |         |       |  |   |         |  |  |   |         | 
|-------------------------------------------------- |  | ------ | ------- | ------ |  | -------- | ------- | ----- |  | - | ------- |  |  | - | ------- | 
|                                                   |  | Within |         | One to |  | Five     |         |       |  |  
|                                                   |  | One    |         | Five   |  | Years or |         |       |  |  
|dollars in thousands                               |  | Year   |         | Years  |  | More     |         | Total
|Real estate - Construction                         |  | $      | 23,423  |        |  | $        | 32,397  |       |  | $ | 19,563  |  |  | $ | 75,383  | 
|Real estate - Mortgage                             |  |        | 72,350  |        |  |          | 110,366 |       |  |   | 95,232  |  |  |   | 277,948 | 
|Commercial, financial and agricultural             |  |        | 99,546  |        |  |          | 62,718  |       |  |   | 13,145  |  |  |   | 175,409 | 
|Consumer                                           |  |        | 5,283   |        |  |          | 27,076  |       |  |   | 4,687   |  |  |   | 37,046  | 
|All other                                          |  |        | 449     |        |  |          |        |       |  |   |        |  |  |   | 449     | 
|                                                   |  |        |         |        |  |          |         |       |  |   |         |  |  |   |         | 
|Total                                              |  | $      | 201,051 |        |  | $        | 232,557 |       |  | $ | 132,627 |  |  | $ | 566,235 | 
|                                                   |  |        |         |        |  |          |         |       |  |   |         |  |  |   |         | 
|Predetermined rate, maturity
greater than one year |  |        |         |        |  | $        | 68,793  |       |  | $ | 18,121  |  |  | $ | 86,914  | 
|Variable rate or maturing within
one year          |  |        | 201,051 |        |  |          | 163,765 |       |  |   | 114,505 |  |  |   | 479,321 | 
|                                                   |  |        |         |        |  |          |         |       |  |   |         |  |  |   |         | 
|Total                                              |  | $      | 201,051 |        |  | $        | 232,558 |       |  | $ | 132,626 |  |  | $ | 566,235 | 
|                                                   |  |        |         |        |  |          |         |       |  |   |         |  |  |   |         | 

The Companys rate paid on interest-bearing deposits declined to 2.26% in 2002 compared to 4.18% in
2001. The Companys deposit growth was primarily reflected in transaction deposits, which increased
$58,204,912. Rate sensitive consumers chose to place funds in transaction deposit accounts because of lower
interest rate differentials to time deposits. Increased customer awareness of interest rate increases the importance
of rate management by the Company. The Companys management continuously monitors market pricing,
competitor rates, and internal interest rate spreads in an effort to maintain the Companys growth and profitability.
Deposits continue to be the principal source of funds for continued growth, so the Company attempts to structure
its rates so as to promote deposit and asset growth while at the same time increasing the overall profitability of the
Company. The daily average amounts of deposits of the Bank are summarized below.

AVERAGE DEPOSITS
for the years ended December 31,

|                                     |  |      |         |      |  |      |         |  |  |   |         | 
|------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|dollars in thousands                 |  | 2002 |         | 2001 |  | 2000
|Non-interest-bearing demand deposits |  | $    | 93,848  |      |  | $    | 89,921  |  |  | $ | 93,871  | 
|Interest-bearing demand deposits     |  |      | 136,869 |      |  |      | 112,308 |  |  |   | 109,329 | 
|Savings deposits                     |  |      | 26,229  |      |  |      | 24,625  |  |  |   | 25,249  | 
|Time deposits                        |  |      | 266,836 |      |  |      | 302,174 |  |  |   | 263,523 | 
|                                     |  |      |         |      |  |      |         |  |  |   |         | 
|Total                                |  | $    | 523,782 |      |  | $    | 529,028 |  |  | $ | 491,972 | 
|                                     |  |      |         |      |  |      |         |  |  |   |         | 

The preceding table includes certificates of deposits $100,000 and over, which at December 31, 2002 totaled
approximately $114,697,000. The following table presents the maturities of these time deposits of $100,000
or more.

MATURITIES OF TIME DEPOSITS OF $100,000 OR MORE
As of December 31, 2002

|                                  |  |        |        |          |  |        |        |        |  |        |        |       |  |   |        |  |  |   |        |  |  |   |         | 
|--------------------------------- |  | ------ | ------ | -------- |  | ------ | ------ | ------ |  | ------ | ------ | ----- |  | - | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                  |  | Within |        | Three to |  | Six to |        | Within |  | One to |        |       |  |  
|                                  |  | Three  |        | Six      |  | Twelve |        | One    |  | Five   |        |       |  |  
|dollars in thousands              |  | Months |        | Months   |  | Months |        | Year   |  | Years  |        | Total
|Time deposits of $100,000 or more |  | $      | 56,042 |          |  | $      | 24,607 |        |  | $      | 14,105 |       |  | $ | 94,754 |  |  | $ | 19,943 |  |  | $ | 114,697 | 
|                                  |  |        |        |          |  |        |        |        |  |        |        |       |  |   |        |  |  |   |        |  |  |   |         | 

CAPITAL RESOURCES

Funding for the future growth and expansion of the Company is dependent upon earnings of the Companys
subsidiaries. As of December 31, 2002, the Companys ratio of total capital to risk-adjusted assets was 22.37%.
The Company is one of the soundest and most strongly capitalized in the nation, and fully expects to be able to
meet future capital needs caused by growth and expansion as well as regulatory capital requirements. The
Company is not aware of any current recommendation by regulatory authorities which if implemented would
materially affect the Companys liquidity, capital resources or operations. The Company currently plans no
significant capital expenditures. The Company does plan to continue to repurchase shares of its stock in the open
market from time to time when conditions warrant such repurchases, subject to certain legal restrictions. The
Company repurchased 399,275 shares of its common stock at an average price of $18.20 during 2002. The
Company plans to borrow $10 million to fund the cash portion of its acquisition of First Commerce Corporation.

19



---



##### 



LOANS

Historically, the Company makes loans within its market area. It makes consumer and commercial loans through
the Bank and mortgage loans through GLL. The Bank generally considers its primary markets to be Caldwell,
Catawba and Burke counties of North Carolina. GLL considers its market area to be the central and southern
Piedmont and Catawba Valley regions of North Carolina. Total loans at December 31, 2002 were $565,374,099.
This compares with $510,410,948 at December 31, 2001, an increase of $54,963,151 or 10.77%. The Company
places emphasis on consumer based installment loans and commercial loans to small and medium sized business.
The Company has a diversified loan portfolio with no concentrations to any one borrower, industry or market
region. The amounts and types of loans outstanding for the past five years ended December 31 are shown on the
following table.

LOANS
As of December 31,



|                                       |              |        |         |         |      |        |       |       |   |        |         |         |       |  |       |      |   |   |         |         |  |  |       |      |  
|-------------------------------------- | ------------ | ------ | ------- | ------- | ---- | ------ | ----- | ----- | - | ------ | ------- | ------- | ----- |  | ----- | ---- | - | - | ------- | ------- |  |  | ----- | ---- | -
|                                       |              |        | 2002    |         | 2001 |        | 2000 
|                                       |              |        |         |         |      |        |      
|                                       |              |        |         |         |      |        | % of  |       |   |        |         |         | % of  |  |       |      |   |   | % of   
|                                       |              |        |         |         |      |        | Total |       |   |        |         |         | Total |  |       |      |   |   | Total  
|dollars in thousands                   |              | Amount |         | Loans   |      | Amount |       | Loans |   | Amount |         | Loans  
|Loans                                  |              |        |         |         |      |        |       |       |   |        |         |         |       |  |       |      |   |   |         |         |  |  |       |     
|Real
estate -                          |             
|                                       | Construction |        | $       | 75,383  |      |        |       | 13.3  | % |        | $       | 72,418  |       |  |       | 14.2 | % |   | $       | 62,093  |  |  |       | 13.8 | %
|                                       | Mortgage     |        |         | 277,948 |      |        |       | 49.1  | % |        |         | 243,067 |       |  |       | 47.4 | % |   |         | 200,945 |  |  |       | 44.5 | %
|Commercial,
financial and
agricultural |              |        | 175,409 |         |      |        | 31.0  | %     |   |        | 166,980 |         |       |  | 32.7  | %    |   |   | 156,297 |         |  |  | 34.6  | %   
|Consumer                               |              |        | 37,046  |         |      |        | 6.5   | %     |   |        | 28,441  |         |       |  | 5.6   | %    |   |   | 31,501  |         |  |  | 7.0   | %   
|All other                              |              |        | 449     |         |      |        | 0.1   | %     |   |        | 282     |         |       |  | 0.1   | %    |   |   | 248     |         |  |  | 0.1   | %   
|                                       |              |        |         |         |      |        |       |       |   |        |         |         |       |  |       |      |   |   |         |         |  |  |       |     
|Total loans                            |              |        | 566,235 |         |      |        | 100.0 | %     |   |        | 511,188 |         |       |  | 100.0 | %    |   |   | 451,084 |         |  |  | 100.0 | %   
|                                       |              |        |         |         |      |        |       |       |   |        |         |         |       |  |       |      |   |   |         |         |  |  |       |     
|Deferred origination
fees, net         |              |        | (860    | )       |      |        |       |       |   |        | (777    | )       |       |  |       |      |   |   | (685    | )       |  |  |       |     
|                                       |              |        |         |         |      |        |       |       |   |        |         |         |       |  |       |      |   |   |         |         |  |  |       |     
|Total loans, net of
deferred fees      |              | $      | 565,375 |         |      |        |       |       |   | $      | 510,411 |         |       |  |       |      |   | $ | 450,399 |         |  |  |       |     
|                                       |              |        |         |         |      |        |       |       |   |        |         |         |       |  |       |      |   |   |         |         |  |  |       |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                       |              |        |         |         |      |        |       |       |   |   |         |         |       |  |       |      |  
|-------------------------------------- | ------------ | ------ | ------- | ------- | ---- | ------ | ----- | ----- | - | - | ------- | ------- | ----- |  | ----- | ---- | -
|                                       |              |        | 1999    |         | 1998
|                                       |              |        |         |         |     
|                                       |              |        |         |         |      |        | % of  |       |   |   |         |         | % of 
|                                       |              |        |         |         |      |        | Total |       |   |   |         |         | Total
|dollars in thousands                   |              | Amount |         | Loans   |      | Amount |       | Loans
|Loans                                  |              |        |         |         |      |        |       |       |   |   |         |         |       |  |       |     
|Real
estate -                          |             
|                                       | Construction |        | $       | 38,957  |      |        |       | 10.0  | % |   | $       | 32,397  |       |  |       | 8.4  | %
|                                       | Mortgage     |        |         | 177,004 |      |        |       | 45.2  | % |   |         | 188,167 |       |  |       | 48.7 | %
|Commercial,
financial and
agricultural |              |        | 141,713 |         |      |        | 36.3  | %     |   |   | 129,854 |         |       |  | 33.6  | %   
|Consumer                               |              |        | 32,331  |         |      |        | 8.3   | %     |   |   | 35,734  |         |       |  | 9.3   | %   
|All other                              |              |        | 795     |         |      |        | 0.2   | %     |   |   | 117     |         |       |  | 0.0   | %   
|                                       |              |        |         |         |      |        |       |       |   |   |         |         |       |  |       |     
|Total loans                            |              |        | 390,800 |         |      |        | 100.0 | %     |   |   | 386,269 |         |       |  | 100.0 | %   
|                                       |              |        |         |         |      |        |       |       |   |   |         |         |       |  |       |     
|Deferred origination
fees, net         |              |        | (611    | )       |      |        |       |       |   |   | (679    | )       |       |  |       |     
|                                       |              |        |         |         |      |        |       |       |   |   |         |         |       |  |       |     
|Total loans, net of
deferred fees      |              | $      | 390,189 |         |      |        |       |       |   | $ | 385,590 |         |       |  |       |     
|                                       |              |        |         |         |      |        |       |       |   |   |         |         |       |  |       |     

LOANS AND NONPERFORMING ASSETS
As of December 31,

|                                                           |  |      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|---------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|dollars in thousands                                       |  | 2002 |       | 2001 |  | 2000 |       | 1999 |  | 1998
|Nonperforming assets                                       |  |      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Nonaccrual loans                                           |  | $    | 3,265 |      |  | $    | 2,944 |      |  | $    | 1,502 |  |  | $ | 1,079 |  |  | $ | 639   | 
|Loans past due 90 days or more
and still accruing interest |  |      | 1,153 |      |  |      | 1,769 |      |  |      | 1,983 |  |  |   | 981   |  |  |   | 2,955 | 
|Foreclosed properties                                      |  |      | 1,203 |      |  |      | 323   |      |  |      | 134   |  |  |   | 54    |  |  |   | 290   | 
|                                                           |  |      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Total                                                      |  | $    | 5,621 |      |  | $    | 5,036 |      |  | $    | 3,619 |  |  | $ | 2,114 |  |  | $ | 3,884 | 
|                                                           |  |      |       |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 

Any loans classified by regulatory examiners as loss, doubtful, substandard or special mention that have not been
disclosed hereunder do not (i) represent or result from trends or uncertainties that management expects will
materially impact future operating results, liquidity or capital resources, or (ii) represent material credits about
which management is aware of any information that causes management to have serious doubts as to the ability of
such borrowers to comply with the loan repayment terms.
Real estate loans comprised 62.4% of the portfolio in 2002 compared to 61.6% in 2001. Commercial loans
comprised 31.0% of the portfolio in 2002 compared to 32.7% in 2001, while consumer loans comprised 6.5% in
2002 compared to 5.6% in 2001. Commercial loans of $175,408,637, consumer loans of $37,045,878 and real
estate mortgage loans of $277,948,238 are loans for which the principal source of repayment is derived from the
ongoing cash flow of the business. Real estate construction loans of $75,382,555 are loans for which the
principal source of repayment comes from the sale of real estate or from obtaining permanent financing.

20



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##### 



PROVISIONS AND ALLOWANCES FOR LOAN LOSSES

The risks inherent in the Companys loan portfolio, including the adequacy of the allowance or reserve for loan
losses, are significant estimates that are based on managements assumptions regarding, among other factors,
general and local economic conditions, which are difficult to predict and are beyond the Companys control. In
estimating these risks, and the related loss reserve levels, management also considers the financial conditions of
specific borrowers and credit concentrations with specific borrowers, groups of borrowers and industries.

Management uses several measures to assess and monitor the credit risks in the loan portfolio, including a loan
grading system that begins upon loan origination and continues until the loan is collected or collectibility becomes
uncertain. Upon loan origination, the Banks originating loan officer evaluates the quality of the loan and assigns
one of seven risk grades, each grade indicating a different level of loss reserves. The loan officer monitors the
loans performance and credit quality and makes changes to the credit grade as conditions warrant. When
originated or renewed, all loans over a certain dollar amounts receive in-depth reviews and risk assessments by
the Banks Credit Administration. Any issues regarding the risk assessments are addressed by the Banks senior
credit administrators and factored into managements decision to originate or renew the loan as well as the level of
reserves deemed appropriate for the loan. Furthermore, large loans and commitments made each month, as well
as all commercial loans past due 30 days or more, are reviewed monthly by the Banks Board of Directors. The
Banks Board of Directors also review monthly an analysis of the Banks reserves relative to the range of reserves
estimated by the Banks Credit Administration.

As an additional measure, the Bank engages an independent third party risk assessment group to review
the underwriting, documentation, risk grading analyses and the methodology of determining the adequacy of the
allowance for losses. This independent third party determines its own selection criteria to select loan relationships
for review and evaluation. The third partys evaluation and report is shared with management, the
Banks Audit Committee and ultimately, the Banks Board of Directors.

As part of the continual grading process, individual commercial loans are assigned a credit risk grade based on
their credit quality, which is subject to change as conditions warrant. Any changes in those risk assessments as
determined by the third party risk assessment group, regulatory examiners or the Banks Credit Administration are
also considered. Management considers certain commercial loans with weaker credit risk grades to be
individually impaired and measures such impairment based upon available cash flows and the value of the
collateral. Allowance or reserve levels are estimated for all other graded loans in the portfolio based on their
assigned credit risk grade, type of loan and other matters related to credit risk. In estimating reserve levels, the
Bank also aggregates non-graded loans into pools of similar credits and reviews the historical loss experience
associated with these pools as additional criteria to allocate the allowance to each category.

Management uses the information developed from the procedures described above in evaluating and grading the
loan portfolio. This continual grading process is used to monitor the credit quality of the loan portfolio and to
assist management in determining the appropriate levels of the allowance for loan losses.

Management considers the allowance for loan losses adequate to cover the estimated losses inherent in the Banks
loan portfolio as of the date of the financial statements. Management believes it has established the allowance in
accordance with accounting principles generally accepted in the United States of America and in consideration of
the current economic environment. While management uses the best information available to make evaluations,
future additions to the allowance may be necessary based on changes in economic and other conditions.
Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the
Banks allowances for loan losses. Such agencies may require the recognition of adjustments to the allowances
based on their judgments of information available to them at the time of their examinations.

The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the
allowance for loan losses in the accounting period in which they are determined by management to be
uncollectible. Recoveries during the period are credited to the allowance for loan losses.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loans
effective interest rate or, as a practical matter, at the loans observable market value or fair value of the collateral
if the loan is collateral dependent. Most of the loans measured by fair value of the underlying collateral are
commercial loans, while others consists of small balance homogenous loans and are measured collectively. The
Bank classifies a loan as impaired when, based on current information and events, management believes it is

21



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probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan
agreement. At December 31, 2002 and 2001, the recorded investment in loans that were considered to be
impaired, including accrued interest, was $5,338,098 ($3,392,264 of which was on a nonaccrual basis) and
$4,386,490 ($3,074,380 of which was on a nonaccrual basis), respectively. The average recorded balance of
impaired loans during 2002 and 2001 was not significantly different from the balance at December 31, 2002 and
2001. The related allowance for loan losses for these loans was $2,195,850 and $1,371,524 at December 31,
2002 and 2001, respectively. For the years ended December 31, 2002, 2001 and 2000, the Bank recognized
interest income on those impaired loans of approximately $183,405, $168,236 and $77,215, respectively.
For the years ended December 31, 2002, 2001 and 2000, management has determined that the gross interest
income that would have been recorded had the nonaccruing loans been current in accordance with their original
terms and the amount of interest income on those loans that was included in net income was not material to the
Companys earnings.

General economic trends greatly affect loan losses, and no assurances can be made that further charges to the loan
loss allowance may not be significant in relation to the amount provided during a particular period or that further
evaluation of the loan portfolio based on conditions then prevailing may not require sizable additions to the
allowance, thus necessitating similarly sizable charges to operations. The allowance for loan losses was 1.56%,
1.26% and 1.41% of loans outstanding at December 31, 2002, 2001 and 2000, respectively, which was
consistent with managements assessment of the credit quality of the loan portfolio. The ratios of net charge-offs
during the year to average loans outstanding during the period were 0.21%, 0.86% and 0.54% at December 31,
2002, 2001 and 2000, respectively. Management believes these ratios reflect managements conservative lending
and effective efforts to recover credit losses.

Primarily because of a recessionary economy, charge-offs in 2001 totaled $4,500,811, significantly higher than the
$1,555,068 charged off in 2002 and the 2,605,573 charged off in 2000. The largest two charge-offs in 2001
were to two unrelated borrowers in the amounts of $980,000 and $409,000.

The following table presents an analysis of the allowance for loan losses.

CHANGES IN THE ALLOWANCE FOR LOAN LOSSES
for the years ended December 31,

|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |       | 
|------------------------------------------------------------------------------------- | -------------------------------------- | ---- | ----- | ---- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | --- |  | - | ----- | ----- | 
|dollars in thousands                                                                  |                                        | 2002 |       | 2001 |  | 2000 |       | 1999  |  | 1998
|Balance at beginning of year                                                          |                                        | $    | 6,427 |      |  | $    | 6,353 |       |  | $    | 4,748 |       |  | $ | 4,622 |     |  | $ | 5,203 |      
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Loans charged off:                                                                    |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|                                                                                      | Real estate                            |      |       | 329  |  |      |       | 1,474 |  |      |       | 1,305 |  |   |       | 662 |  |   |       | 228   | 
|                                                                                      | Commercial, financial and agricultural |      |       | 538  |  |      |       | 2,123 |  |      |       | 613   |  |   |       | 954 |  |   |       | 4,458 | 
|                                                                                      | Credit cards and related plans         |      |       | 57   |  |      |       | 19    |  |      |       | 13    |  |   |       | 33  |  |   |       | 20    | 
|                                                                                      | Installment loans to individuals       |      |       | 260  |  |      |       | 468   |  |      |       | 280   |  |   |       | 233 |  |   |       | 381   | 
|                                                                                      | Demand deposit overdraft program       |      |       | 371  |  |      |       | 417   |  |      |       | 395   |  |   |       |    |  |   |       |      | 
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Total charge-offs                                                                     |                                        |      | 1,555 |      |  |      | 4,501 |       |  |      | 2,606 |       |  |   | 1,882 |     |  |   | 5,087 |      
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Recoveries of loans previously charged off:                                           |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|                                                                                      | Real estate                            |      |       | 78   |  |      |       | 52    |  |      |       | 89    |  |   |       | 16  |  |   |       | 5     | 
|                                                                                      | Commercial, financial and agricultural |      |       | 168  |  |      |       | 53    |  |      |       | 80    |  |   |       | 58  |  |   |       | 119   | 
|                                                                                      | Credit cards and related plans         |      |       | 2    |  |      |       | 5     |  |      |       | 3     |  |   |       | 7   |  |   |       | 5     | 
|                                                                                      | Installment loans to individuals       |      |       | 59   |  |      |       | 39    |  |      |       | 82    |  |   |       | 64  |  |   |       | 55    | 
|                                                                                      | Demand deposit overdraft program       |      |       | 164  |  |      |       | 209   |  |      |       | 63    |  |   |       |    |  |   |       |      | 
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Total recoveries                                                                      |                                        |      | 471   |      |  |      | 358   |       |  |      | 317   |       |  |   | 145   |     |  |   | 184   |      
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Net charge-offs                                                                       |                                        |      | 1,084 |      |  |      | 4,143 |       |  |      | 2,289 |       |  |   | 1,737 |     |  |   | 4,903 |      
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Additions charged to operations                                                       |                                        |      | 3,492 |      |  |      | 4,217 |       |  |      | 3,894 |       |  |   | 1,863 |     |  |   | 4,322 |      
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Balance at end of year                                                                |                                        | $    | 8,835 |      |  | $    | 6,427 |       |  | $    | 6,353 |       |  | $ | 4,748 |     |  | $ | 4,622 |      
|                                                                                      |                                        |      |       |      |  |      |       |       |  |      |       |       |  |   |       |     |  |   |       |      
|Ratio of net charge-offs during the year to
average loans outstanding during the year |                                        |      | 0.21  | %    |  |      | 0.86  | %     |  |      | 0.54  | %     |  |   | 0.46  | %   |  |   | 1.31  | %    

22



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The following table presents the allocation of the allowance for loan losses by category.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
As of December 31,

|                                       |  |        |       |       |  |        |       |       |  |        |       |       |  |        |       |       |  |        |       |       |  |  |       |       |  |   |       |  |  |       |       |   |  |   |       |  |  |  |       |  
|-------------------------------------- |  | ------ | ----- | ----- |  | ------ | ----- | ----- |  | ------ | ----- | ----- |  | ------ | ----- | ----- |  | ------ | ----- | ----- |  |  | ----- | ----- |  | - | ----- |  |  | ----- | ----- | - |  | - | ----- |  |  |  | ----- | -
|                                       |  | 2002   |       | 2001  |  | 2000   |       | 1999  |  | 1998  
|                                       |  |        |       |       |  |        |       |       |  |       
|                                       |  |        |       |       |  | % of   |       |       |  |        |       | % of  |  |        |       |       |  | % of   |       |       |  |  |       | % of  |  |   |       |  |  | % of 
|                                       |  |        |       |       |  | Total  |       |       |  |        |       | Total |  |        |       |       |  | Total  |       |       |  |  |       | Total |  |   |       |  |  | Total
|dollars in thousands                   |  | Amount |       | Loans |  | Amount |       | Loans |  | Amount |       | Loans |  | Amount |       | Loans |  | Amount |       | Loans
|Real estate                            |  | $      | 3,564 |       |  |        | 62.4  | %     |  | $      | 2,397 |       |  |        | 61.6  | %     |  | $      | 2,399 |       |  |  | 58.3  | %     |  | $ | 1,219 |  |  |       | 55.2  | % |  | $ | 914   |  |  |  | 57.1  | %
|Commercial, financial
and agricultural |  |        | 4,410 |       |  |        | 31.0  | %     |  |        | 3,307 |       |  |        | 32.7  | %     |  |        | 3,145 |       |  |  | 34.6  | %     |  |   | 2,910 |  |  |       | 36.3  | % |  |   | 3,059 |  |  |  | 33.6  | %
|Consumer                               |  |        | 649   |       |  |        | 6.5   | %     |  |        | 540   |       |  |        | 5.6   | %     |  |        | 626   |       |  |  | 7.0   | %     |  |   | 447   |  |  |       | 8.3   | % |  |   | 451   |  |  |  | 9.3   | %
|All other loans                        |  |        |      |       |  |        | 0.1   | %     |  |        |      |       |  |        | 0.1   | %     |  |        |      |       |  |  | 0.1   | %     |  |   |      |  |  |       | 0.2   | % |  |   |      |  |  |  | 0.0   | %
|Unallocated                            |  |        | 212   |       |  |        | n/a   |       |  |        | 183   |       |  |        | n/a   |       |  |        | 183   |       |  |  | n/a   |       |  |   | 172   |  |  |       | n/a   |   |  |   | 198   |  |  |  | n/a   |  
|                                       |  |        |       |       |  |        |       |       |  |        |       |       |  |        |       |       |  |        |       |       |  |  |       |       |  |   |       |  |  |       |       |   |  |   |       |  |  |  |       |  
|Total loans                            |  | $      | 8,835 |       |  |        | 100.0 | %     |  | $      | 6,427 |       |  |        | 100.0 | %     |  | $      | 6,353 |       |  |  | 100.0 | %     |  | $ | 4,748 |  |  |       | 100.0 | % |  | $ | 4,622 |  |  |  | 100.0 | %
|                                       |  |        |       |       |  |        |       |       |  |        |       |       |  |        |       |       |  |        |       |       |  |  |       |       |  |   |       |  |  |       |       |   |  |   |       |  |  |  |       |  

INVESTMENT SECURITIES

At December 31, 2002, the securities classified as available for sale, carried at market value, totaled $52,264,131,
with an amortized cost of $50,608,309. Securities available for sale are securities which will be held for an
indefinite period of time, including securities that management intends to use as a part of its asset/liability strategy,
or that may be sold in response to changes in interest rates, changes in prepayment risk or the need to increase
regulatory capital or other similar factors. Securities available for sale consist of U.S. Government Agencies
with an average life of 3.4 years and other bonds, notes and debentures with an average life of 19.8 years.

There have been no transfers or sales of securities classified as held to maturity. Securities classified as held to
maturity totaled $72,660,165, with a market value of $76,468,664 at December 31, 2002. Management
determined that it has both the ability and intent to hold those securities classified as investment securities until
maturity. Securities held to maturity consist of U.S. Government Agencies with an average life of 1.7 years
and municipal bonds with an average life of 4.9 years. During 2002, $45,270,625 in securities matured and
$918,899 in proceeds were collected from securities sold. The proceeds from maturities were reinvested along
with funds in excess of loan demand.

CONTRACTUAL MATURITIES AND YIELDS OF DEBT SECURITIES
As of December 31, 2002

|                       |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |      |  
|---------------------- | ------------------------------------ | ------ | --------------- | ----- | ----------------- | ------ | ---------------- | ----- | --------------- | ------ | ------------------ | ------ | -------------------- | ------ |  | ----- | - |  | - | ------ |  |  |  | ---- | - |  | - | ----- |  |  |  | ---- | -
|                       |                                      |        |                 |       |                   |        |                  |       |                 |        | After One Year but |        | After Five Years but |        |  |       |   |  |   |        | 
|                       |                                      |        | Within One Year |       | Within Five Years |        | Within Ten Years |       | After Ten Years
|                       |                                      |        |                 |       |                   |        |                  |       |                
|dollars in thousands   |                                      | Amount |                 | Yield |                   | Amount |                  | Yield |                 | Amount |                    | Yield  |                      | Amount |  | Yield
|Available for sale:(1) |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |     
|                       | U.S. government agency               |        | $               | 5,284 |                   |        |                  | 5.77  | %               |        | $                  | 28,586 |                      |        |  | 4.58  | % |  | $ | 10,000 |  |  |  | 5.64 | % |  |   |       |  |  |  |      |  
|                       | Other                                |        |                 |       |                   |        |                  |       |                 |        |                    | 199    |                      |        |  | 7.13  | % |  |   |        |  |  |  |      |   |  | $ | 1,735 |  |  |  | 7.82 | %
|                       |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |     
|                       | Total                                |        | $               | 5,284 |                   |        |                  | 5.77  | %               |        | $                  | 28,785 |                      |        |  | 4.60  | % |  | $ | 10,000 |  |  |  | 5.64 | % |  | $ | 1,735 |  |  |  | 7.82 | %
|                       |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |     
|Held to maturity:      |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |     
|                       | U.S. government agency               |        |                 |       |                   |        |                  |       |                 |        | $                  | 5,225  |                      |        |  | 6.03  | % |  |   |        |  |  |  |      |   |  |   |       |  |  |  |      |  
|                       | State and political subdivisions (2) |        | $               | 9,045 |                   |        |                  | 6.75  | %               |        |                    | 27,431 |                      |        |  | 7.01  | % |  | $ | 25,003 |  |  |  | 6.63 | % |  | $ | 5,956 |  |  |  | 7.22 | %
|                       |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |     
|                       | Total                                |        | $               | 9,045 |                   |        |                  | 6.75  | %               |        | $                  | 32,656 |                      |        |  | 6.85  | % |  | $ | 25,003 |  |  |  | 6.63 | % |  | $ | 5,956 |  |  |  | 7.22 | %
|                       |                                      |        |                 |       |                   |        |                  |       |                 |        |                    |        |                      |        |  |       |   |  |   |        |  |  |  |      |   |  |   |       |  |  |  |     



---

|(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 2002.

23



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##### 



The following table provided information regarding the composition of the Companys investment securities
portfolio at the end of each of the past three years.

COMPOSITION OF INVESTMENT SECURITIES PORTFOLIO
As of December 31,

|                                              |                                  |      |   |        |  |      |   |        |  |  |   |        | 
|--------------------------------------------- | -------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|dollars in thousands                          |                                  | 2002 |   | 2001   |  | 2000
|Available for sale (at estimated fair value): |                                  |      |   |        |  |      |   |        |  |  |   |       
|                                              | U.S. Treasury                    |      |   |        |  |      | $ | 1,029  |  |  | $ | 6,030  | 
|                                              | U.S. government agency           |      | $ | 45,281 |  |      |   | 62,391 |  |  |   | 70,443 | 
|                                              | Other                            |      |   | 6,983  |  |      |   | 9,245  |  |  |   | 8,824  | 
|                                              |                                  |      |   |        |  |      |   |        |  |  |   |        | 
|                                              | Total                            |      |   | 52,264 |  |      |   | 72,665 |  |  |   | 85,297 | 
|                                              |                                  |      |   |        |  |      |   |        |  |  |   |        | 
|Held to maturity (at amortized cost):         |                                  |      |   |        |  |      |   |        |  |  |   |       
|                                              | U.S. Treasury                    |      |   |        |  |      | $ | 1,002  |  |  | $ | 1,506  | 
|                                              | U.S. government agency           |      | $ | 5,225  |  |      |   | 8,736  |  |  |   | 8,745  | 
|                                              | State and political subdivisions |      |   | 67,435 |  |      |   | 76,782 |  |  |   | 71,958 | 
|                                              |                                  |      |   |        |  |      |   |        |  |  |   |        | 
|                                              | Total                            |      |   | 72,660 |  |      |   | 86,520 |  |  |   | 82,209 | 
|                                              |                                  |      |   |        |  |      |   |        |  |  |   |        | 

NEW ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinationsand SFAS No. 142, Goodwill and Other Intangible
Assets.SFAS No. 141 requires the purchase method of accounting for business combinations initiated after
June 30, 2001 and eliminates the pooling-of-interests method. SFAS No. 142 requires that goodwill and other
intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least
annually. The Company currently has no goodwill recorded within its financial statements. On January 1, 2002,
the Company adopted SFAS No. 141 and SFAS No. 142. The adoption did not have a significant impact on the
Companys financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of.SFAS No. 144 retains the fundamental provisions of SFAS No. 121
for (a) recognition and measurement of the impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by sale. The Company adopted the provisions of SFAS
No. 144 on January 1, 2002. The adoption did not have a significant impact on the Companys financial
position and results of operations.

In July 2001, the Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin (SAB)
No. 102 Selected Loan Loss Allowance Methodology and Documentation Issues.SAB No. 102 sets forth
guidelines for determining the allowance for loan losses under generally accepted accounting principals. In
addition, SAB 102 sets forth guidelines for documentation by registrants in support of the allowance for loan
losses. The Company has a detailed loan classification and estimated loss calculation methodology in effect,
which is the basis for the determination of the allowance for loan losses. This methodology and related
documentation thereof has been in effect for the past several years. The adoption of SAB No. 102 did not
have a significant impact on the Companys financial position and results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities.The objective of this interpretation is to provide guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE
need to be included in a companys consolidated financial statements. A company that holds variable interests in
an entity will need to consolidate the entity if the companys interest in the VIE is such that the company will
absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected residual
returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant
variable interest holders. The provisions of this interpretation became effective upon issuance. The Company
has not yet determined the impact, if any, the adoption of FIN 46 will have on the Companys financial position
and results of operations.

24



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##### 



In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.This
interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations
under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation
assumed under a guarantee. FIN 45 clarifies the requirements of SFAS 5, Accounting for Contingencies,
relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded
from both the disclosure and recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in a special purpose entity, and guarantees
of a companys own future performance. Other guarantees are subject to the disclosure requirements of FIN 45
but not to the recognition provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS 133, a parents guarantee of debt owed to a third party by its subsidiary or vice versa,
and a guarantee which is based on performance and not price. The disclosure requirements of FIN 45 are
effective for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the
maximum potential amount of future payments that the guarantor could be required to make under the guarantee,
and the current amount of the liability, if any, for the guarantors obligations under the guarantee. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31, 2002.
Significant guarantees that have been entered into by the Company are disclosed in Note 13. The Company does
not expect the requirements of FIN 45 to have a material impact on results of operations or financial position.

In December 2002, the FASB issued SFAS
148, Accounting for Stock-Based Compensation - Transition and
Disclosure,which amends SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123). SFAS
148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123
to require more prominent and more frequent disclosures in financial statements of the effects of stock-based
compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing
condensed financial statements for interim periods beginning after December 15, 2002. The adoption of SFAS 148
is not expected to have a material impact on the Companys consolidated balance sheet or results of operations.
The Company currently plans to continue to account for stock options using the intrinsic value method in
accordance with Accounting Principles Board No. 25, Accounting for Stock Issued to Employees.

In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions,which provides
guidance on the accounting for the acquisition of a financial institution and supersedes the specialized accounting
guidance provided in SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions.SFAS
147 became effective upon issuance and requires companies to cease amortization of unidentified intangible
assets associated with certain branch acquisitions and reclassify these assets to goodwill. SFAS 147 also
modifies SFAS 144 to include in its scope long-term customer- relationship intangible assets and thus subject
those intangible assets to the same undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions required for other long- lived assets.

While SFAS 147 may affect how future business combinations, if undertaken, are accounted for and disclosed
in the financial statements, the issuance of the new guidance had no effect on the Companys results of operations
or financial position because the Company does not have any assets subject to the specialized accounting guidance
provided in SFAS 72 or SFAS 147.

INFLATION

Since the assets and liabilities of a bank are primarily monetary in nature (payable in fixed, determinable amounts),
the performance of a bank is affected more by changes in interest rates than by inflation. Interest rates generally
increase as the rate of inflation increases, but the magnitude of the change in rates may not be the same.

While the effect of inflation is normally not as significant as is the influence on those businesses which have large
investments in plant and inventories, it does have an effect on the Companys operations. In times of higher
inflation, there are normally corresponding increases in the money supply, and banks will normally experience
above average growth in assets, loans and deposits. Also, general increases in the prices of goods and services
will result in increased operating expenses.

25



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##### 



FORWARD LOOKING STATEMENTS

The discussions presented in this annual report contain statements that could be deemed forward looking
statements within the meaning of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform
Act of 1995, which statements are inherently subject to risks and uncertainties. Forward looking statements are
statements that include projections, predictions, expectations or beliefs about future events or results or otherwise
are not statements of historical fact. Such statements are often characterized by the use of qualifying words (and
their derivatives) such as expects, anticipates, believes, estimates, plans, projects, or other
statements concerning opinions or judgments of the Company and its management about future events. Factors that
could influence the accuracy of such forward looking statements include, but are not limited to, the financial
success or changing strategies of the Companys customers or vendors, the Companys level of success in
integrating acquisitions, actions of government regulators, the level of market interest rates, and general economic
conditions.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information responsive to this item is contained in Item 7 above under the caption Liquidity, Interest Rate
Sensitivity and Market Risks.

26



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##### 



ITEM 8 - FINANCIAL STATEMENTS & SUPPLEMENTARY DATA

Index to Consolidated Financial Statements and Supplementary Financial Data

|                                       |                                                                                                         |  |           |    | 
|-------------------------------------- | ------------------------------------------------------------------------------------------------------- |  | --------- | -- | 
|                                       |                                                                                                         |  | Begins on
|                                       |                                                                                                         |  | Page     
|                                       |                                                                                                         |  |          
|Independent Auditors Report           |                                                                                                         |  | 28        |   
|Statement Of Management Responsibility |                                                                                                         |  | 28        |   
|Financial Statements:                  |                                                                                                         |  |           |   
|                                       | Consolidated Balance Sheets December 31, 2002 and 2001                                                  |  |           | 29 | 
|                                       | Consolidated Statements Of Income Years Ended December 31, 2002, 2001 and 2000                          |  |           | 30 | 
|                                       | Consolidated Statements Of Comprehensive Income Years Ended December 31, 2002, 2001 and 2000            |  |           | 31 | 
|                                       | Consolidated Statements Of Changes In Shareholders Equity Years Ended December 31, 2002, 2001 and 2000 |  |           | 32 | 
|                                       | Consolidated Statements Of Cash Flows Years Ended December 31, 2002, 2001 and 2000                      |  |           | 33 | 
|                                       | Notes To Consolidated Financial Statements Years Ended December 31, 2002, 2001 and 2000                 |  |           | 35 | 
|Supplementary Financial Data:          |                                                                                                         |  |           |   
|                                       | Selected Quarterly Financial Data (Unaudited) Years Ended December 31, 2002 and 2001                    |  |           | 56 | 

27



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##### 



INDEPENDENT AUDITORS REPORT

Board of Directors and Shareholders of Bank of Granite Corporation:

We have audited the accompanying consolidated balance sheets of Bank of Granite Corporation and its
subsidiaries (the Company) as of December 31, 2002 and 2001, and the related consolidated statements
of income, comprehensive income, changes in shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2002. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Deloitte & Touch LLPDELOITTE & TOUCHE LLP
Hickory, North Carolina
January 24, 2003

STATEMENT OF MANAGEMENT RESPONSIBILITY

Management of Bank of Granite Corporation and its subsidiaries has prepared the consolidated financial
statements and other information contained herein in accordance with generally accepted accounting
principles and is responsible for its accuracy.

In meeting its responsibility, management relies on internal accounting and related control systems, which
include selection and training of qualified personnel, establishment and communication of accounting and
administrative policies and procedures, appropriate segregation of responsibilities and programs of internal
audits. These systems are designed to provide reasonable assurance that financial records are reliable for
preparing financial statements and maintaining accountability for assets, and that assets are safeguarded
against unauthorized use or disposition. Such assurance cannot be absolute because of inherent limitations
in any internal control system.

Management also recognizes its responsibility to foster a climate in which corporate affairs are conducted
with the highest ethical standards. Bank of Granite Corporations policies, furnished to each employee and
director, address the importance of open internal communications, potential conflicts of interest, compliance
with applicable laws, including those related to financial disclosure, the confidentiality of proprietary
information and other items. There is an ongoing program to assess compliance with these policies.

The Audit Committee of Bank of Granite Corporations Board of Directors consists solely of outside
directors. The Audit Committee meets periodically with management and the independent auditors to
discuss audit, financial reporting and related matters. Deloitte & Touche LLP and Bank of Granite
Corporations internal auditors have direct access to the Audit Committee.

|                                                                                                     |  |                                                                              
|---------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|/s/ John A. Forlines, Jr.JOHN A. FORLINES, JR.
Chairman and Chief Executive Officer
January 24, 2003 |  | /s/ Kirby A. TyndallKIRBY A. TYNDALL
Chief Financial Officer
January 24, 2003

28



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##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2002 AND
2001


|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | - | ----------- | ----------- | ---- | - | ----------- | ----------- | 
|                                                                                                                                                                                                       |                                                                                                                               |   | 2002        |             | 2001
|ASSETS:                                                                                                                                                                                                |                                                                                                                               |   |             |             |      |   |             |            
|Cash and cash equivalents (Notes 1 and 19):                                                                                                                                                            |                                                                                                                               |   |             |             |      |   |             |            
|                                                                                                                                                                                                       | Cash and due from banks                                                                                                       |   | $           | 24,829,541  |      |   | $           | 26,272,410  | 
|                                                                                                                                                                                                       | Interest-bearing deposits                                                                                                     |   |             | 2,655,071   |      |   |             | 785,603     | 
|                                                                                                                                                                                                       | Federal funds sold                                                                                                            |   |             | 5,900,000   |      |   |             |            | 
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|                                                                                                                                                                                                       | Total cash and cash equivalents                                                                                               |   |             | 33,384,612  |      |   |             | 27,058,013  | 
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Investment securities (Notes 1, 3 and 19):                                                                                                                                                             |                                                                                                                               |   |             |             |      |   |             |            
|                                                                                                                                                                                                       | Available for sale, at fair value (amortized cost of $50,608,309 and
$71,739,060 at December 31, 2002 and 2001, respectively) |   |             | 52,264,131  |      |   |             | 72,664,934  | 
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|                                                                                                                                                                                                       | Held to maturity, at amortized cost (fair value of $76,468,664 and
$87,691,573 at December 31, 2002 and 2001, respectively)   |   |             | 72,660,165  |      |   |             | 86,520,225  | 
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Loans (Notes 4 and 19)                                                                                                                                                                                 |                                                                                                                               |   | 565,374,099 |             |      |   | 510,410,948 |            
|Allowance for loan losses (Notes 1 and 5)                                                                                                                                                              |                                                                                                                               |   | (8,834,611  | )           |      |   | (6,426,477  | )          
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Net loans                                                                                                                                                                                              |                                                                                                                               |   | 556,539,488 |             |      |   | 503,984,471 |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Premises and equipment, net (Notes 1, 6 and 11)                                                                                                                                                        |                                                                                                                               |   | 8,170,150   |             |      |   | 8,417,070   |            
|Accrued interest receivable                                                                                                                                                                            |                                                                                                                               |   | 4,791,422   |             |      |   | 5,185,018   |            
|Investment in bank owned life insurance (Notes 1 and 10)                                                                                                                                               |                                                                                                                               |   | 9,106,748   |             |      |   | 8,202,255   |            
|Other assets                                                                                                                                                                                           |                                                                                                                               |   | 5,097,958   |             |      |   | 3,357,921   |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Total assets                                                                                                                                                                                           |                                                                                                                               | $ | 742,014,674 |             |      | $ | 715,389,907 |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|LIABILITIES AND SHAREHOLDERS EQUITY:                                                                                                                                                                  |                                                                                                                               |   |             |             |      |   |             |            
|Deposits (Notes 14 and 19):                                                                                                                                                                            |                                                                                                                               |   |             |             |      |   |             |            
|                                                                                                                                                                                                       | Demand                                                                                                                        |   | $           | 100,281,675 |      |   | $           | 93,335,500  | 
|                                                                                                                                                                                                       | NOW accounts                                                                                                                  |   |             | 89,142,366  |      |   |             | 84,230,541  | 
|                                                                                                                                                                                                       | Money market accounts                                                                                                         |   |             | 84,874,514  |      |   |             | 40,205,618  | 
|                                                                                                                                                                                                       | Savings                                                                                                                       |   |             | 25,793,477  |      |   |             | 24,115,461  | 
|                                                                                                                                                                                                       | Time deposits of $100,000 or more                                                                                             |   |             | 114,696,822 |      |   |             | 124,212,611 | 
|                                                                                                                                                                                                       | Other time deposits                                                                                                           |   |             | 132,460,461 |      |   |             | 156,682,988 | 
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|                                                                                                                                                                                                       | Total deposits                                                                                                                |   |             | 547,249,315 |      |   |             | 522,782,719 | 
|Overnight borrowings (Notes 12 and 19)                                                                                                                                                                 |                                                                                                                               |   | 16,720,407  |             |      |   | 40,576,330  |            
|Other borrowings (Notes 13 and 19)                                                                                                                                                                     |                                                                                                                               |   | 45,677,313  |             |      |   | 23,257,111  |            
|Accrued interest payable                                                                                                                                                                               |                                                                                                                               |   | 1,189,364   |             |      |   | 1,846,493   |            
|Other liabilities                                                                                                                                                                                      |                                                                                                                               |   | 3,735,433   |             |      |   | 2,145,938   |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Total liabilities                                                                                                                                                                                      |                                                                                                                               |   | 614,571,832 |             |      |   | 590,608,591 |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|COMMITMENTS AND CONTINGENCIES (Notes 11 and 18)                                                                                                                                                        |                                                                                                                               |   |             |             |      |   |             |            
|SHAREHOLDERS EQUITY (Notes 1, 8, 9 and 16):                                                                                                                                                           |                                                                                                                               |   |             |             |      |   |             |            
|Common stock, $1.00 par value, authorized - 25,000,000 shares;
issued - 14,420,986 shares in 2002 and 11,537,515 shares in 2001;
outstanding - 13,333,674 shares in 2002 and 10,987,085 shares in 2001 |                                                                                                                               |   | 14,420,986  |             |      |   | 11,537,515  |            
|Additional paid-in capital                                                                                                                                                                             |                                                                                                                               |   | 20,694,133  |             |      |   | 23,577,604  |            
|Retained earnings                                                                                                                                                                                      |                                                                                                                               |   | 109,982,826 |             |      |   | 100,492,853 |            
|Accumulated other comprehensive income, net of
deferred income taxes of $660,282 and $369,226 at
December 31, 2002 and 2001, respectively                                                              |                                                                                                                               |   | 995,539     |             |      |   | 556,648     |            
|Less: Cost of common stock in treasury;
1,087,312 shares in 2002 and 550,430 shares in 2001                                                                                                            |                                                                                                                               |   | (18,650,642 | )           |      |   | (11,383,304 | )          
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Total shareholders equity                                                                                                                                                                             |                                                                                                                               |   | 127,442,842 |             |      |   | 124,781,316 |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 
|Total liabilities and shareholders equity                                                                                                                                                             |                                                                                                                               | $ | 742,014,674 |             |      | $ | 715,389,907 |            
|                                                                                                                                                                                                       |                                                                                                                               |   |             |             |      |   |             |             | 

See notes to consolidated financial
statements.

29



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##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |            |  | 
|--------------------------------------------------------------- | --------------------------------- | - | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | ---------- |  | 
|                                                                |                                   |   |            | 2002       |  | 2001 |            | 2000      
|INTEREST INCOME:                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|Interest and fees on loans                                      |                                   | $ | 38,674,282 |            |  | $    | 42,930,557 |            |  | $ | 44,996,356 |           
|Federal funds sold                                              |                                   |   | 10,453     |            |  |      | 674,341    |            |  |   | 782,528    |           
|Interest-bearing deposits                                       |                                   |   | 39,175     |            |  |      | 87,516     |            |  |   | 27,955     |           
|Investments:                                                    |                                   |   |            |            |  |      |            |            |  |   |            |           
|                                                                | U.S. Treasury                     |   |            | 77,513     |  |      |            | 239,075    |  |   |            | 496,464    | 
|                                                                | U.S. Government agencies          |   |            | 3,167,345  |  |      |            | 4,344,189  |  |   |            | 4,949,551  | 
|                                                                | States and political subdivisions |   |            | 3,215,203  |  |      |            | 3,345,973  |  |   |            | 3,356,490  | 
|                                                                | Other                             |   |            | 526,555    |  |      |            | 662,568    |  |   |            | 660,120    | 
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|                                                                | Total interest income             |   |            | 45,710,526 |  |      |            | 52,284,219 |  |   |            | 55,269,464 | 
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|INTEREST EXPENSE:                                               |                                   |   |            |            |  |      |            |            |  |   |            |           
|Time deposits of $100,000 or more                               |                                   |   | 3,535,887  |            |  |      | 7,127,789  |            |  |   | 6,991,476  |           
|Other time and savings deposits                                 |                                   |   | 6,181,936  |            |  |      | 11,231,917 |            |  |   | 11,148,557 |           
|Overnight borrowings                                            |                                   |   | 638,327    |            |  |      | 466,313    |            |  |   | 584,920    |           
|Other borrowed funds                                            |                                   |   | 446,272    |            |  |      | 617,550    |            |  |   | 447,071    |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|Total interest expense                                          |                                   |   | 10,802,422 |            |  |      | 19,443,569 |            |  |   | 19,172,024 |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|NET INTEREST INCOME                                             |                                   |   | 34,908,104 |            |  |      | 32,840,650 |            |  |   | 36,097,440 |           
|PROVISION FOR LOAN LOSSES (Notes 1 and 5)                       |                                   |   | 3,492,382  |            |  |      | 4,216,772  |            |  |   | 3,893,585  |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES             |                                   |   | 31,415,722 |            |  |      | 28,623,878 |            |  |   | 32,203,855 |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|OTHER INCOME:                                                   |                                   |   |            |            |  |      |            |            |  |   |            |           
|Service charges on deposit accounts (Note 7)                    |                                   |   | 5,402,290  |            |  |      | 5,188,150  |            |  |   | 4,825,154  |           
|Other service charges, fees and commissions                     |                                   |   | 4,969,292  |            |  |      | 4,104,766  |            |  |   | 2,825,034  |           
|Securities gains (Note 3)                                       |                                   |   | 3,170      |            |  |      | 140,849    |            |  |   |           |           
|Other                                                           |                                   |   | 1,022,953  |            |  |      | 706,295    |            |  |   | 383,492    |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|Total other income                                              |                                   |   | 11,397,705 |            |  |      | 10,140,060 |            |  |   | 8,033,680  |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|OTHER EXPENSES:                                                 |                                   |   |            |            |  |      |            |            |  |   |            |           
|Salaries and wages                                              |                                   |   | 10,338,438 |            |  |      | 9,585,915  |            |  |   | 8,164,938  |           
|Employee benefits (Note 10)                                     |                                   |   | 2,562,311  |            |  |      | 1,822,562  |            |  |   | 1,749,853  |           
|Occupancy expense, net                                          |                                   |   | 910,228    |            |  |      | 848,739    |            |  |   | 846,851    |           
|Equipment rentals, depreciation and
maintenance (Notes 1 and 6) |                                   |   | 1,388,672  |            |  |      | 1,518,345  |            |  |   | 1,434,052  |           
|Other (Note 7)                                                  |                                   |   | 5,116,585  |            |  |      | 4,566,718  |            |  |   | 4,582,721  |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|Total other expenses                                            |                                   |   | 20,316,234 |            |  |      | 18,342,279 |            |  |   | 16,778,415 |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|INCOME BEFORE INCOME TAXES                                      |                                   |   | 22,497,193 |            |  |      | 20,421,659 |            |  |   | 23,459,120 |           
|INCOME TAXES (Note 1 and 8)                                     |                                   |   | 7,394,893  |            |  |      | 6,613,104  |            |  |   | 7,884,537  |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|NET INCOME                                                      |                                   | $ | 15,102,300 |            |  | $    | 13,808,555 |            |  | $ | 15,574,583 |           
|                                                                |                                   |   |            |            |  |      |            |            |  |   |            |           
|PER SHARE AMOUNTS (Notes 1 and 15):                             |                                   |   |            |            |  |      |            |            |  |   |            |           
|Net income - Basic                                              |                                   | $ | 1.11       |            |  | $    | 0.99       |            |  | $ | 1.10       |           
|- Diluted                                                       |                                   |   | 1.11       |            |  |      | 0.99       |            |  |   | 1.10       |           
|Cash dividends                                                  |                                   |   | 0.41       |            |  |      | 0.37       |            |  |   | 0.34       |           
|Book value                                                      |                                   |   | 9.56       |            |  |      | 9.09       |            |  |   | 8.56       |           

See notes to consolidated financial statements.

30



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##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                                  |                                                                    |   |            |         |      |   |            |         |  |   |            |           | 
|----------------------------------------------------------------- | ------------------------------------------------------------------ | - | ---------- | ------- | ---- | - | ---------- | ------- |  | - | ---------- | --------- | 
|                                                                  |                                                                    |   | 2002       |         | 2001 |   | 2000      
|NET INCOME                                                        |                                                                    | $ | 15,102,300 |         |      | $ | 13,808,555 |         |  | $ | 15,574,583 |          
|                                                                  |                                                                    |   |            |         |      |   |            |         |  |   |            |          
|ITEMS OF OTHER COMPREHENSIVE INCOME:                              |                                                                    |   |            |         |      |   |            |         |  |   |            |          
|Items of other comprehensive income,
before tax:                  |                                                                    |   |            |         |      |   |            |         |  |   |            |          
|                                                                  | Unrealized gains on securities
available for sale                  |   |            | 733,118 |      |   |            | 469,701 |  |   |            | 1,839,302 | 
|                                                                  | Less: Reclassification adjustment for
gains included in net income |   |            | 3,170   |      |   |            | 140,849 |  |   |            |          | 
|                                                                  |                                                                    |   |            |         |      |   |            |         |  |   |            |          
|Other comprehensive income,
before tax                            |                                                                    |   | 729,948    |         |      |   | 328,852    |         |  |   | 1,839,302  |          
|Less: Income taxes related to items
of other comprehensive income |                                                                    |   | 291,057    |         |      |   | 131,127    |         |  |   | 733,431    |          
|                                                                  |                                                                    |   |            |         |      |   |            |         |  |   |            |          
|Other comprehensive income,
net of tax                            |                                                                    |   | 438,891    |         |      |   | 197,725    |         |  |   | 1,105,871  |          
|                                                                  |                                                                    |   |            |         |      |   |            |         |  |   |            |          
|COMPREHENSIVE INCOME                                              |                                                                    | $ | 15,541,191 |         |      | $ | 14,006,280 |         |  | $ | 16,680,454 |          
|                                                                  |                                                                    |   |            |         |      |   |            |         |  |   |            |          

See notes to consolidated financial statements.

31



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##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                                        |  | 2002 |             | 2001 |  | 2000
|COMMON STOCK, $1.00 par value                                                                           |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of year                                                                                    |  | $    | 11,537,515  |      |  | $    | 11,517,084  |   |  | $ | 11,495,897  |  
|Shares issued under stock option plan                                                                   |  |      |            |      |  |      | 20,431      |   |  |   | 21,187      |  
|Transfer from surplus to common stock due to split                                                      |  |      | 2,883,471   |      |  |      |            |   |  |   |            |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of year                                                                                          |  |      | 14,420,986  |      |  |      | 11,537,515  |   |  |   | 11,517,084  |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|ADDITIONAL PAID-IN CAPITAL                                                                              |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of year                                                                                    |  |      | 23,577,604  |      |  |      | 23,260,188  |   |  |   | 22,987,562  |  
|Shares issued under stock option plan                                                                   |  |      |            |      |  |      | 317,416     |   |  |   | 272,626     |  
|Transfer from surplus to common stock due to split                                                      |  |      | (2,883,471  | )    |  |      |            |   |  |   |            |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of year                                                                                          |  |      | 20,694,133  |      |  |      | 23,577,604  |   |  |   | 23,260,188  |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|RETAINED EARNINGS                                                                                       |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of year                                                                                    |  |      | 100,492,853 |      |  |      | 91,794,837  |   |  |   | 80,976,641  |  
|Net income                                                                                              |  |      | 15,102,300  |      |  |      | 13,808,555  |   |  |   | 15,574,583  |  
|Cash dividends                                                                                          |  |      | (5,594,799  | )    |  |      | (5,110,539  | ) |  |   | (4,756,387  | )
|Cash paid for fractional shares                                                                         |  |      | (17,528     | )    |  |      |            |   |  |   |            |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of year                                                                                          |  |      | 109,982,826 |      |  |      | 100,492,853 |   |  |   | 91,794,837  |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES                                    |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of year                                                                                    |  |      | 556,648     |      |  |      | 358,923     |   |  |   | (746,948    | )
|Net change in unrealized gains or losses
on securities available for sale,
net of deferred income taxes |  |      | 438,891     |      |  |      | 197,725     |   |  |   | 1,105,871   |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of year                                                                                          |  |      | 995,539     |      |  |      | 556,648     |   |  |   | 358,923     |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|COST OF COMMON STOCK
IN TREASURY                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of year                                                                                    |  |      | (11,383,304 | )    |  |      | (7,615,695  | ) |  |   | (1,262,043  | )
|Cost of common stock repurchased                                                                        |  |      | (7,267,338  | )    |  |      | (3,767,609  | ) |  |   | (6,353,652  | )
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of year                                                                                          |  |      | (18,650,642 | )    |  |      | (11,383,304 | ) |  |   | (7,615,695  | )
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|Total shareholders equity (Notes 1, 8 and 16)                                                          |  | $    | 127,442,842 |      |  | $    | 124,781,316 |   |  | $ | 119,315,337 |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|Shares issued                                                                                           |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of period                                                                                  |  |      | 11,537,515  |      |  |      | 11,517,084  |   |  |   | 11,495,897  |  
|Shares issued under incentive stock option plans                                                        |  |      |            |      |  |      | 20,431      |   |  |   | 21,187      |  
|Shares issued due to stock splits                                                                       |  |      | 2,883,471   |      |  |      |            |   |  |   |            |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of period                                                                                        |  |      | 14,420,986  |      |  |      | 11,537,515  |   |  |   | 11,517,084  |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|Common shares in treasury                                                                               |  |      |             |      |  |      |             |   |  |   |             |  
|At beginning of period                                                                                  |  |      | (550,430    | )    |  |      | (364,135    | ) |  |   | (56,696     | )
|Common shares repurchased                                                                               |  |      | (368,737    | )    |  |      | (48,688     | ) |  |   | (216,406    | )
|Shares issued due to stock splits                                                                       |  |      | (168,145    | )    |  |      | (137,607    | ) |  |   | (91,033     | )
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|At end of period                                                                                        |  |      | (1,087,312  | )    |  |      | (550,430    | ) |  |   | (364,135    | )
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  
|Total shares outstanding                                                                                |  |      | 13,333,674  |      |  |      | 10,987,085  |   |  |   | 11,152,949  |  
|                                                                                                        |  |      |             |      |  |      |             |   |  |   |             |  

See notes to consolidated financial statements.

32



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##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|------------------------------------------------- | ------------------------------------------------------------------------ | - | ---------- | ----------- | ---- | - | ---------- | ----------- | - | - | ----------- | ----------- | -
|                                                  |                                                                          |   | 2002       |             | 2001 |   | 2000      
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: |                                                                          |   |            |             |      |   |            |             |   |   |             |            
|Cash flows from operating activities:             |                                                                          |   |            |             |      |   |            |             |   |   |             |            
|                                                  | Interest received                                                        |   | $          | 46,260,388  |      |   | $          | 53,522,744  |   |   | $           | 54,646,952  |  
|                                                  | Fees and commissions received                                            |   |            | 11,004,042  |      |   |            | 9,781,456   |   |   |             | 8,033,680   |  
|                                                  | Interest paid                                                            |   |            | (11,459,551 | )    |   |            | (20,393,887 | ) |   |             | (18,406,818 | )
|                                                  | Cash paid to suppliers and employees                                     |   |            | (19,173,469 | )    |   |            | (16,376,724 | ) |   |             | (16,051,035 | )
|                                                  | Income taxes paid                                                        |   |            | (8,379,273  | )    |   |            | (6,589,122  | ) |   |             | (8,564,098  | )
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|                                                  | Net cash provided by operating activities                                |   |            | 18,252,137  |      |   |            | 19,944,467  |   |   |             | 19,658,681  |  
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:             |                                                                          |   |            |             |      |   |            |             |   |   |             |            
|                                                  | Proceeds from maturities and/or calls of
securities available for sale   |   |            | 31,522,750  |      |   |            | 70,876,226  |   |   |             | 13,895,000  |  
|                                                  | Proceeds from maturities and/or calls of
securities held to maturity     |   |            | 13,747,875  |      |   |            | 9,370,225   |   |   |             | 8,166,750   |  
|                                                  | Proceeds from sales of securities
available for sale                     |   |            | 918,899     |      |   |            | 130,755     |   |   |             |            |  
|                                                  | Purchases of securities available for sale                               |   |            | (11,351,809 | )    |   |            | (57,920,807 | ) |   |             | (27,164,096 | )
|                                                  | Purchases of securities held to maturity                                 |   |            |            |      |   |            | (13,821,336 | ) |   |             | (5,407,858  | )
|                                                  | Net increase in loans                                                    |   |            | (55,773,417 | )    |   |            | (64,154,747 | ) |   |             | (62,497,539 | )
|                                                  | Unrealized gains on hedged mortgage
loan commitments                     |   |            | (273,982    | )    |   |            |            |   |   |             |            |  
|                                                  | Unrealized hedging gains on contracts
to sell mortgage-backed securities |   |            | 218,084     |      |   |            |            |   |   |             |            |  
|                                                  | Investment in bank owned life insurance                                  |   |            | (514,000    | )    |   |            | (7,984,500  | ) |   |             |            |  
|                                                  | Capital expenditures                                                     |   |            | (737,018    | )    |   |            | (307,070    | ) |   |             | (637,484    | )
|                                                  | Proceeds from sales of fixed assets                                      |   |            | 1,399       |      |   |            | 125         |   |   |             | 6,600       |  
|                                                  | Proceeds from sales of other real estate                                 |   |            | 164,471     |      |   |            | 111,945     |   |   |             | 142,000     |  
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|                                                  | Net cash used by investing activities                                    |   |            | (22,076,748 | )    |   |            | (63,699,184 | ) |   |             | (73,496,627 | )
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:             |                                                                          |   |            |             |      |   |            |             |   |   |             |            
|                                                  | Net increase in demand deposits, NOW
accounts and savings accounts       |   |            | 58,204,912  |      |   |            | 13,566,540  |   |   |             | 5,249,774   |  
|                                                  | Net increase (decrease) in time deposits                                 |   |            | (33,738,316 | )    |   |            | (8,065,321  | ) |   |             | 40,372,528  |  
|                                                  | Net increase (decrease) in overnight borrowings                          |   |            | (23,855,923 | )    |   |            | 27,807,888  |   |   |             | (693,332    | )
|                                                  | Net increase (decrease) in other borrowings                              |   |            | 22,420,202  |      |   |            | 15,416,844  |   |   |             | (786,214    | )
|                                                  | Net proceeds from issuance of common stock                               |   |            |            |      |   |            | 337,847     |   |   |             | 293,813     |  
|                                                  | Cash paid for fractional shares                                          |   |            | (17,528     | )    |   |            |            |   |   |             |            |  
|                                                  | Dividends paid                                                           |   |            | (5,594,799  | )    |   |            | (5,110,539  | ) |   |             | (4,756,387  | )
|                                                  | Purchases of common stock for treasury                                   |   |            | (7,267,338  | )    |   |            | (3,767,609  | ) |   |             | (6,353,652  | )
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|                                                  | Net cash provided by financing activities                                |   |            | 10,151,210  |      |   |            | 40,185,650  |   |   |             | 33,326,530  |  
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|NET INCREASE (DECREASE) IN
CASH EQUIVALENTS       |                                                                          |   | 6,326,599  |             |      |   | (3,569,067 | )           |   |   | (20,511,416 | )          
|CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR    |                                                                          |   | 27,058,013 |             |      |   | 30,627,080 |             |   |   | 51,138,496  |            
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  
|CASH AND CASH EQUIVALENTS
AT END OF YEAR          |                                                                          | $ | 33,384,612 |             |      | $ | 27,058,013 |             |   | $ | 30,627,080  |            
|                                                  |                                                                          |   |            |             |      |   |            |             |   |   |             |             |  

See notes to consolidated financial statements.

(continued on next page)

33



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##### 



|                                                                                   |  |                               
|---------------------------------------------------------------------------------- |  | ------------------------------
|BANK OF GRANITE CORPORATION AND SUBSIDIARIES                                       |  |                               
|                                                                                  
|CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 |  | (concluded from previous page)

|                                                                           |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |            |           |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | - | ---------- | ---------- | ---- | - | ---------- | --------- | - | - | ---------- | --------- | -
|                                                                           |                                                                                                  |                                                                                      |   | 2002       |            | 2001 |   | 2000      
|RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES: |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |           
|                                                                           | Net Income                                                                                       |                                                                                      | $ | 15,102,300 |            |      | $ | 13,808,555 |           |   | $ | 15,574,583 |          
|                                                                           |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |            |          
|                                                                           | Adjustments to reconcile net income
to net cash provided by operating
activities:                |                                                                                      |   |            |            |      |   |            |           |   |   |            |          
|                                                                           |                                                                                                  | Depreciation                                                                         |   |            | 984,695    |      |   |            | 1,125,510 |   |   |            | 1,067,178 |  
|                                                                           |                                                                                                  | Provision for loan loss                                                              |   |            | 3,492,382  |      |   |            | 4,216,772 |   |   |            | 3,893,585 |  
|                                                                           |                                                                                                  | Premium amortization, net                                                            |   |            | 156,266    |      |   |            | 154,699   |   |   |            | 189,765   |  
|                                                                           |                                                                                                  | Deferred income taxes                                                                |   |            | (1,159,425 | )    |   |            | (109,271  | ) |   |            | (695,823  | )
|                                                                           |                                                                                                  | Gains on sales or calls of
securities available for sale                             |   |            | (3,170     | )    |   |            | (137,549  | ) |   |            |          |  
|                                                                           |                                                                                                  | Gains on calls of securities
held to maturity                                        |   |            |           |      |   |            | (3,300    | ) |   |            |          |  
|                                                                           |                                                                                                  | Losses (gains) on disposal or sale
of equipment                                      |   |            | (2,157     | )    |   |            | 4,201     |   |   |            | (3,120    | )
|                                                                           |                                                                                                  | Loss on sale of other real estate                                                    |   |            | 5,513      |      |   |            |          |   |   |            |          |  
|                                                                           |                                                                                                  | Increase in taxes payable                                                            |   |            | 175,045    |      |   |            | 133,253   |   |   |            | 16,262    |  
|                                                                           |                                                                                                  | Decrease (increase) in interest receivable                                           |   |            | 393,596    |      |   |            | 1,083,826 |   |   |            | (812,277  | )
|                                                                           |                                                                                                  | Increase (decrease) in interest payable                                              |   |            | (657,129   | )    |   |            | (950,318  | ) |   |            | 765,206   |  
|                                                                           |                                                                                                  | Increase in cash surrender value of
bank owned life insurance                        |   |            | (390,493   | )    |   |            | (217,755  | ) |   |            |          |  
|                                                                           |                                                                                                  | Decrease (increase) in other assets                                                  |   |            | (1,041,652 | )    |   |            | 443,614   |   |   |            | (444,439  | )
|                                                                           |                                                                                                  | Increase in other liabilities                                                        |   |            | 1,196,366  |      |   |            | 392,230   |   |   |            | 107,761   |  
|                                                                           |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |            |          
|                                                                           |                                                                                                  | Net adjustments to reconcile net
income to net cash provided by
operating activities |   |            | 3,149,837  |      |   |            | 6,135,912 |   |   |            | 4,084,098 |  
|                                                                           |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |            |          
|                                                                           | Net cash provided by
operating activities                                                        |                                                                                      | $ | 18,252,137 |            |      | $ | 19,944,467 |           |   | $ | 19,658,681 |          
|                                                                           |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |            |          
|SUPPLEMENTAL DISCLOSURE OF
NONCASH TRANSACTIONS:                           |                                                                                                  |                                                                                      |   |            |            |      |   |            |           |   |   |           
|                                                                           | Increase in unrealized
gains or losses on securities
available for sale                          |                                                                                      | $ | 729,948    |            |      | $ | 328,852    |           |   | $ | 1,839,302  |          
|                                                                           | Increase in deferred income
taxes on unrealized gains or losses
on securities available for sale |                                                                                      |   | 291,057    |            |      |   | 131,127    |           |   |   | 733,431    |          
|                                                                           | Transfer from surplus to common
stock due to stock split                                         |                                                                                      |   | 2,883,471  |            |      |   |           |           |   |   |           |          
|                                                                           | Transfer from loans to other real
estate owned                                                   |                                                                                      |   | 1,023,005  |            |      |   | 420,499    |           |   |   | 221,767    |          

See notes to consolidated financial statements.

34



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##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000



|1. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------

ORGANIZATION - Bank of Granite Corporation is a bank holding company with two subsidiaries, Bank of
Granite (the Bank), a state chartered commercial bank incorporated in North Carolina on August 2, 1906 and
GLL & Associates, Inc. (GLL), a mortgage banking company incorporated in North Carolina on June 24,
1985. The Bank is headquartered in Granite Falls, North Carolina and provides consumer and commercial
banking services in the Blue Ridge foothills and Catawba River Valley areas of North Carolina through fourteen
banking offices. GLL is headquartered in Winston-Salem, North Carolina and provides mortgage origination
services in the Central and Southern Piedmont areas of North Carolina through seven mortgage offices. GLL
was acquired by Bank of Granite Corporation on November 5, 1997.

BASIS OF PRESENTATION - The consolidated financial statements include the accounts of Bank of Granite
Corporation and its wholly owned subsidiaries, Bank of Granite and GLL & Associates, Inc. (referred to herein
collectively as the Company). All significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.

CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand, amounts due from
banks, short-term interest bearing deposits, and federal funds sold. Generally, federal funds are purchased and
sold for one-day periods.

INVESTMENT SECURITIES - Debt securities that the Company has the positive intent and ability to hold to
maturity are classified as held to maturity securities and reported at amortized cost. Debt and equity securities
that are bought and held principally for the purpose of selling in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included in consolidated earnings. Debt
securities not classified as either held to maturity securities or trading securities, and equity securities not
classified as trading securities, are classified as available for sale securities and reported at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate component of consolidated
shareholders equity and as an item of other comprehensive income. Gains and losses on held for investment
securities are recognized at the time of sale based upon the specific identification method. Declines in the fair
value of individual held to maturity and available for sale securities below their cost that are other than
temporary result in write-downs of the individual securities to their fair value. The related write-downs are
included in consolidated earnings as realized losses. Premiums and discounts are recognized in interest income
using the interest method over the period to maturity. Transfers of securities between classifications are
accounted for at fair value. No securities have been classified as trading securities.

LOANS - Loans that management has the intent and ability to hold for the foreseeable future are reported
at their outstanding principal balances adjusted for any deferred fees or costs. Substantially all loans earn
interest on the level yield method based on the daily outstanding balance.

Loans that are deemed to be impaired (i.e., probable that the Company will be unable to collect all amounts due
according to the terms of the loan agreement) are measured based on the present value of expected future cash
flows discounted at the loans effective interest rate or, as a practical matter, at the loans observable market
value or fair value of the collateral if the loan is collateral dependent. A valuation reserve is established to
record the difference between the stated loan amount and the present value or market value of the impaired loan.
Impaired loans may be valued on a loan-by-loan basis (e.g., loans with risk characteristics unique to an
individual borrower) or on an aggregate basis (e.g., loans with similar risk characteristics). The Companys
policy for recognition of interest income on impaired loans is the same as its interest income recognition policy
for non-impaired loans. The Company discontinues the accrual of interest when the collectibility of such
interest becomes doubtful. The total of impaired loans, impaired loans on a nonaccrual basis, the related
allowance for loan losses and interest income recognized on impaired loans is disclosed in Note 5.

35



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ALLOWANCE FOR LOAN LOSSES - The provision for loan losses charged to operations is an amount
sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb potential
losses in the portfolio. Managements determination of the adequacy of the allowance is based on an evaluation
of the portfolio, current economic conditions, historical loan loss experience and other risk factors. Recovery
of the carrying value of loans is dependent to some extent on future economic, operating and other conditions
that may be beyond the Companys control. Unanticipated future adverse changes in such conditions could
result in material adjustments to the allowance for loan losses.

REAL ESTATE ACQUIRED BY FORECLOSURE - Real estate acquired by foreclosure is stated at the lower
of cost or fair value. Any initial losses at the time of foreclosure are charged against the allowance for loan
losses with any subsequent losses or write-downs included in the consolidated statements of income as a
component of other expenses.

PREMISES AND EQUIPMENT AND OTHER LONG-LIVED ASSETS - Premises and equipment are stated
at cost less accumulated depreciation and amortization. Depreciation and amortization, computed by the
straight-line method, are charged to operations over the properties estimated useful lives, which range from 25
to 50 years for buildings and 5 to 15 years for furniture and equipment or, in the case of leasehold
improvements, the term of the lease if shorter. Maintenance and repairs are charged to operations in the year
incurred. Gains and losses on dispositions are included in current operations.

The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amounts of such assets may not be recoverable. If the sum of the expected cash flows is less
than the stated amount of the asset, an impairment loss is recognized.

INCOME TAXES - Provisions for income taxes are based on amounts reported in the consolidated statements
of income (after exclusion of non-taxable income such as interest on state and municipal securities) and include
changes in deferred income taxes. Deferred taxes are computed using the asset and liability approach. The tax
effects of differences between the tax and financial accounting basis of assets and liabilities are reflected in the
balance sheets at the tax rates expected to be in effect when the differences reverse.

INCOME AND EXPENSES - The Company uses the accrual method of accounting, except for immaterial
amounts of loan income and other fees which are recorded as income when collected. The recognition of
certain loan origination fee income and certain loan origination costs is deferred when such loans are originated
and amortized over the life of the loan.

PER SHARE AMOUNTS - Per share amounts have been computed using both the weighted average number of
shares outstanding of common stock for the purposes of computing basic earnings per share and the weighted
average number of shares outstanding of common stock plus dilutive common stock equivalents for the purpose
of computing diluted earnings per share. See Note 15 for further information regarding the computation of
earnings per share. Dividends per share represent amounts declared by the Board of Directors.

During 2002, the Company declared a 5-for-4 stock split effected in the form of a stock dividend payable
May 31, 2002 to shareholders of record on May 10, 2002. All share and per share amounts reflect the
split.

STOCK-BASED COMPENSATION - The Company measures compensation costs related to employee
incentive stock options using the intrinsic value of the equity instrument granted (i.e., the excess of the market
price of the stock to be issued over the exercise price of the equity instrument at the date of grant) rather than
the fair value of the equity instrument.

PRO FORMA NET INCOME WITH STOCK OPTION COMPENSATION COSTS DETERMINED
USING FAIR VALUE METHOD - The Company accounts for compensation costs related to the Companys
employee stock option plan using the intrinsic value method. Therefore, no compensation cost has been
recognized for stock option awards because the options are granted at exercise prices based on the market
value of the Companys stock on the date of grant. Had compensation cost for the Companys employee stock
option plan been determined using the fair value method, the Companys pro forma net income and earnings
per share for the years ended December 31, 2002, 2001 and 2000 would have been as follows:

36



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|                                                                                                                                            |           |   |            |      |      |   |            |      |  |   |            |      | 
|------------------------------------------------------------------------------------------------------------------------------------------- | --------- | - | ---------- | ---- | ---- | - | ---------- | ---- |  | - | ---------- | ---- | 
|                                                                                                                                            |           |   | 2002       |      | 2001 |   | 2000      
|Net income as reported                                                                                                                      |           | $ | 15,102,300 |      |      | $ | 13,808,555 |      |  | $ | 15,574,583 |     
|Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects |           |   | (48,981    | )    |      |   | (88,512    | )    |  |   | (99,433    | )   
|                                                                                                                                            |           |   |            |      |      |   |            |      |  |   |            |     
|Pro forma net income                                                                                                                        |           | $ | 15,053,319 |      |      | $ | 13,720,043 |      |  | $ | 15,475,150 |     
|                                                                                                                                            |           |   |            |      |      |   |            |      |  |   |            |     
|Net income per share as reported  - Basic                                                                                                   |           | $ | 1.11       |      |      | $ | 0.99       |      |  | $ | 1.10       |     
|                                                                                                                                            | - Diluted |   |            | 1.11 |      |   |            | 0.99 |  |   |            | 1.10 | 
|Pro forma net income per share - Basic                                                                                                      |           |   | 1.11       |      |      |   | 0.99       |      |  |   | 1.09       |     
|                                                                                                                                            | - Diluted |   |            | 1.11 |      |   |            | 0.99 |  |   |            | 1.09 | 

DERIVATIVE FINANCIAL INSTRUMENTS -  The Companys mortgage banking subsidiary, GLL, uses
two types of financial instruments to manage interest rate risk. These instruments, commonly referred to as
derivatives, consists of contracts to forward sell mortgage-backed securities and options to forward sell
securities. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference
to an underlying instrument. GLL uses derivatives primarily to hedge against changes in the market values
of the mortgage loans it generates and sells.

Derivative contracts are written in
amounts referred to as notional amounts. Notional amounts only provide
the basis for calculating payments between counterparties and do not represent amounts to be exchanged
between the parties or a measure of financial risk. As required by Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, GLL classifies its
derivative financial instruments as a hedge of an exposure to changes in the value of a recorded asset or
liability (fair value hedge). For a qualifying fair value hedge, changes in the value of the derivatives that have
been highly effective as hedges are recognized in current period earnings along with the corresponding changes
in the value of the designated hedged item attributable to the risk being hedged. For fair value hedges, net
income may be affected to the extent that changes in the value of the derivative instruments do not perfectly
offset changes in the value of the hedged asset or liability. See Notes 18, 19 and 20 for further information
regarding derivative financial instruments.

NEW ACCOUNTING STANDARDS - In June 2001, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinationsand SFAS
No. 142, Goodwill and Other Intangible Assets.SFAS No. 141 requires the purchase method of accounting
for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. SFAS
No. 142 requires that goodwill and other intangible assets with indefinite useful lives no longer be amortized,
but instead be tested for impairment at least annually. The Company currently has no goodwill recorded
within its financial statements. On January 1, 2002, the Company adopted SFAS No. 141 and SFAS No. 142.
The adoption did not have a significant impact on the Companys financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets.This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of.SFAS No. 144 retains the fundamental provisions of SFAS No. 121
for (a) recognition and measurement of the impairment of long-lived assets to be held and used and
(b) measurement of long-lived assets to be disposed of by sale. The Company adopted the provisions of SFAS
No. 144 on January 1, 2002. The adoption did not have a significant impact on the Companys financial
position and results of operations.

In July 2001, the Securities and Exchange Commission (the SEC) issued Staff Accounting Bulletin (SAB)
No. 102 Selected Loan Loss Allowance Methodology and Documentation Issues.SAB No. 102 sets forth
guidelines for determining the allowance for loan losses under generally accepted accounting principals. In
addition, SAB 102 sets forth guidelines for documentation by registrants in support of the allowance for loan
losses. The Company has a detailed loan classification and estimated loss calculation methodology in effect,
which is the basis for the determination of the allowance for loan losses. This methodology and related
documentation thereof has been in effect for the past several years. The adoption of SAB No. 102 did not
have a significant impact on the Companys financial position and results of operations.

37



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In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities.The objective of this interpretation is to provide guidance on how to identify a variable interest entity
(VIE) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE
need to be included in a companys consolidated financial statements. A company that holds variable interests in
an entity will need to consolidate the entity if the companys interest in the VIE is such that the company will
absorb a majority of the VIEs expected losses and/or receive a majority of the entitys expected residual
returns, if they occur. FIN 46 also requires additional disclosures by primary beneficiaries and other significant
variable interest holders. The provisions of this interpretation became effective upon issuance. The Company
has not yet determined the impact, if any, the adoption of FIN 46 will have on the Companys financial position
and results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.This
interpretation expands the disclosures to be made by a guarantor in its financial statements about its obligations
under certain guarantees and requires the guarantor to recognize a liability for the fair value of an obligation
assumed under a guarantee. FIN 45 clarifies the requirements of SFAS 5, Accounting for Contingencies,
relating to guarantees. In general, FIN 45 applies to contracts or indemnification agreements that contingently
require the guarantor to make payments to the guaranteed party based on changes in an underlying that is
related to an asset, liability, or equity security of the guaranteed party. Certain guarantee contracts are excluded
from both the disclosure and recognition requirements of this interpretation, including, among others,
guarantees relating to employee compensation, residual value guarantees under capital lease arrangements,
commercial letters of credit, loan commitments, subordinated interests in an SPE, and guarantees of a
companys own future performance. Other guarantees are subject to the disclosure requirements of FIN 45 but
not to the recognition provisions and include, among others, a guarantee accounted for as a derivative
instrument under SFAS 133, a parents guarantee of debt owed to a third party by its subsidiary or vice versa,
and a guarantee which is based on performance not price. The disclosure requirements of FIN 45 are effective
for the Company as of December 31, 2002, and require disclosure of the nature of the guarantee, the maximum
potential amount of future payments that the guarantor could be required to make under the guarantee, and the
current amount of the liability, if any, for the guarantors obligations under the guarantee. The recognition
requirements of FIN 45 are to be applied prospectively to guarantees issued or modified after December 31,
2002. Significant guarantees that have been entered into by the Company are disclosed in Note 13. The
Company does not expect the requirements of FIN 45 to have a material impact on results of operations or
financial position.

In December 2002, the FASB issued SFAS
148, Accounting for Stock-Based Compensation -  Transition and
Disclosure,which amends SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123).
SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 amends the disclosure requirements
of SFAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of
stock-based compensation. The transition guidance and annual disclosure provisions of SFAS 148 are effective
for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial
reports containing condensed financial statements for interim periods beginning after December 15, 2002. The
adoption of SFAS 148 is not expected to have a material impact on the Companys consolidated balance sheet
or results of operations. The Company currently plans to continue to account for stock options using the
intrinsic value method in accordance with Accounting Principles Board No. 25, Accounting for Stock Issued
to Employees.

In October 2002, the FASB issued SFAS 147, Acquisitions of Certain Financial Institutions,which provides
guidance on the accounting for the acquisition of a financial institution and supersedes the specialized accounting
guidance provided in SFAS 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions.SFAS
147 became effective upon issuance and requires companies to cease amortization of unidentified intangible
assets associated with certain branch acquisitions and reclassify these assets to goodwill. SFAS 147 also
modifies SFAS 144 to include in its scope long-term customer- relationship intangible assets and thus subject
those intangible assets to the same undiscounted cash flow recoverability test and impairment loss recognition
and measurement provisions required for other long- lived assets.

While SFAS 147 may affect how future business combinations, if undertaken, are accounted for and disclosed
in the financial statements, the issuance of the new guidance had no effect on the Companys results of
operations or financial position because the Company does not have any assets subject to the specialized
accounting guidance provided in SFAS 72 or SFAS 147.

38



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|2. |  | PENDING ACQUISITION (unaudited)
|-- |  | -------------------------------

On December 18, 2002, the Company announced a definitive agreement to acquire First Commerce
Corporation (First Commerce) of Charlotte, North Carolina. As of December 31, 2002, First Commerce had
total assets of $172,172,000 and operated three banking offices in the Charlotte-Gastonia-Rock Hill
metropolitan statistical area. Under the terms of the merger agreement, as amended on January 22, 2003, the
Company will issue 529,301 shares and $9,562,611 cash to First Commerce shareholders. For each share
owned, First Commerce shareholders may select either (i) $18.73 cash; (ii) a combination of cash and stock; or
(iii) 100% stock, subject to the pro rata allocations described in the agreement. The transaction, which will be
accounted for as a purchase, is expected to close in the second quarter of 2003, subject to approval by the First
Commerce shareholders and bank regulators.

39



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##### 





|3. |  | INVESTMENT SECURITIES
|-- |  | ---------------------

The amortized cost, gross unrealized gains and losses and fair values of investment securities at December 31,
2002 and 2001 are as follows:

|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |            | 
|------------------------------ | --------------------------------- | ---- | ---------- | ---------- |  | ------ | ---------------- | --------- |  | - | ------ | ------ |  | - | ---------- | ---------- | 
|                               |                                   |      |            |            |  |        | Gross Unrealized |           |  |   |       
|                               |                                   |      | Amortized  |            |  |        | Fair            
|Type and Contractual Maturity  |                                   | Cost |            | Gains      |  | Losses |                  | Value    
|AVAILABLE FOR SALE             |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|At December 31, 2002:          |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|U. S. Government agencies due: |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|                               | Within 1 year                     |      | $          | 5,283,855  |  |        | $                | 44,450    |  |   | $      |       |  |   | $          | 5,328,305  | 
|                               | After 1 year but within 5 years   |      |            | 28,585,962 |  |        |                  | 813,983   |  |   |        |       |  |   |            | 29,399,945 | 
|                               | After 5 years but within 10 years |      |            | 10,000,000 |  |        |                  | 553,100   |  |   |        |       |  |   |            | 10,553,100 | 
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Total U.S. Government agencies |                                   |      | 3,869,817  |            |  |        | 1,411,533        |           |  |   |       |        |  |   | 45,281,350 |           
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Others due:                    |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|                               | After 1 year but within 5 years   |      |            | 199,432    |  |        |                  | 24,266    |  |   |        |       |  |   |            | 223,698    | 
|                               | After 10 years                    |      |            | 1,734,335  |  |        |                  | 71,836    |  |   |        | 5,374  |  |   |            | 1,800,797  | 
|                               | Equity securities                 |      |            | 4,804,725  |  |        |                  | 222,515   |  |   |        | 68,954 |  |   |            | 4,958,286  | 
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Total others                   |                                   |      | 6,738,492  |            |  |        | 318,617          |           |  |   | 74,328 |        |  |   | 6,982,781  |           
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Total available for sale       |                                   | $    | 50,608,309 |            |  | $      | 1,730,150        |           |  | $ | 74,328 |        |  | $ | 52,264,131 |           
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |            | 
|HELD TO MATURITY               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|At December 31, 2002:          |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|U. S. Government agencies due: |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|                               | After 1 year but within 5 years   |      | $          | 5,224,786  |  |        | $                | 363,101   |  |   | $      |       |  |   | $          | 5,587,887  | 
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Total U.S. Government agencies |                                   |      | 5,224,786  |            |  |        | 363,101          |           |  |   |       |        |  |   | 5,587,887  |           
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|State and local due:           |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|                               | Within 1 year                     |      |            | 9,044,978  |  |        |                  | 94,270    |  |   |        |       |  |   |            | 9,139,248  | 
|                               | After 1 year but within 5 years   |      |            | 27,431,163 |  |        |                  | 1,566,044 |  |   |        |       |  |   |            | 28,997,207 | 
|                               | After 5 years but within 10 years |      |            | 25,002,569 |  |        |                  | 1,473,513 |  |   |        |       |  |   |            | 26,476,082 | 
|                               | After 10 years                    |      |            | 5,956,669  |  |        |                  | 311,571   |  |   |        |       |  |   |            | 6,268,240  | 
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Total state and local          |                                   |      | 67,435,379 |            |  |        | 3,445,398        |           |  |   |       |        |  |   | 70,880,777 |           
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |           
|Total held to maturity         |                                   | $    | 72,660,165 |            |  | $      | 3,808,499        |           |  | $ |       |        |  | $ | 76,468,664 |           
|                               |                                   |      |            |            |  |        |                  |           |  |   |        |        |  |   |            |            | 

Sales of securities available for sale for the year ended December 31, 2002 resulted in realized gross gains of
$3,170 and no gross losses. Calls of securities did not result in any gains or losses in 2002.

40



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##### 



|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |            | 
|------------------------------ | --------------------------------- | ---- | ---------- | ---------- |  | ------ | ---------------- | ------- |  | - | ------- | ------- |  | - | ---------- | ---------- | 
|                               |                                   |      |            |            |  |        | Gross Unrealized |         |  |   |        
|                               |                                   |      | Amortized  |            |  |        | Fair            
|Type and Contractual Maturity  |                                   | Cost |            | Gains      |  | Losses |                  | Value  
|AVAILABLE FOR SALE             |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|At December 31, 2001:          |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|U. S. Treasury due:            |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|                               | Within 1 year                     |      | $          | 1,002,666  |  |        | $                | 26,397  |  |   | $       |        |  |   | $          | 1,029,063  | 
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total U.S. Treasury            |                                   |      | 1,002,666  |            |  |        | 26,397           |         |  |   |        |         |  |   | 1,029,063  |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|U. S. Government agencies due: |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|                               | Within 1 year                     |      |            | 9,504,377  |  |        |                  | 210,311 |  |   |         |        |  |   |            | 9,714,688  | 
|                               | After 1 year but within 5 years   |      |            | 36,068,697 |  |        |                  | 663,708 |  |   |         | 243,439 |  |   |            | 36,488,966 | 
|                               | After 5 years but within 10 years |      |            | 16,000,000 |  |        |                  | 253,438 |  |   |         | 66,563  |  |   |            | 16,186,875 | 
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total U.S. Government agencies |                                   |      | 61,573,074 |            |  |        | 1,127,457        |         |  |   | 310,002 |         |  |   | 62,390,529 |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Others due:                    |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|                               | Within 1 year                     |      |            | 1,706,684  |  |        |                  | 43,116  |  |   |         |        |  |   |            | 1,749,800  | 
|                               | After 1 year but within 5 years   |      |            | 476,780    |  |        |                  | 15,617  |  |   |         |        |  |   |            | 492,397    | 
|                               | After 10 years                    |      |            | 2,032,735  |  |        |                  | 58,525  |  |   |         | 20,513  |  |   |            | 2,070,747  | 
|                               | Equity securities                 |      |            | 4,947,121  |  |        |                  | 138,332 |  |   |         | 153,055 |  |   |            | 4,932,398  | 
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total others                   |                                   |      | 9,163,320  |            |  |        | 255,590          |         |  |   | 173,568 |         |  |   | 9,245,342  |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total available for sale       |                                   | $    | 71,739,060 |            |  | $      | 1,409,444        |         |  | $ | 483,570 |         |  | $ | 72,664,934 |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|HELD TO MATURITY               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|At December 31, 2001:          |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|U. S. Treasury due:            |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|                               | Within 1 year                     |      | $          | 1,002,349  |  |        | $                | 26,714  |  |   | $       |        |  |   | $          | 1,029,063  | 
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total U.S. Treasury            |                                   |      | 1,002,349  |            |  |        | 26,714           |         |  |   |        |         |  |   | 1,029,063  |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|U. S. Government agencies due: |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|                               | Within 1 year                     |      |            | 3,498,649  |  |        |                  | 23,062  |  |   |         |        |  |   |            | 3,521,711  | 
|                               | After 1 year but within 5 years   |      |            | 5,237,449  |  |        |                  | 264,679 |  |   |         |        |  |   |            | 5,502,128  | 
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total U.S. Government agencies |                                   |      | 8,736,098  |            |  |        | 287,741          |         |  |   |        |         |  |   | 9,023,839  |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|State and local due:           |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|                               | Within 1 year                     |      |            | 6,383,686  |  |        |                  | 43,234  |  |   |         |        |  |   |            | 6,426,920  | 
|                               | After 1 year but within 5 years   |      |            | 30,390,473 |  |        |                  | 894,629 |  |   |         | 14,949  |  |   |            | 31,270,153 | 
|                               | After 5 years but within 10 years |      |            | 32,205,471 |  |        |                  | 398,700 |  |   |         | 317,271 |  |   |            | 32,286,900 | 
|                               | After 10 years                    |      |            | 7,802,148  |  |        |                  | 90,762  |  |   |         | 238,212 |  |   |            | 7,654,698  | 
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total state and local          |                                   |      | 76,781,778 |            |  |        | 1,427,325        |         |  |   | 570,432 |         |  |   | 77,638,671 |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           
|Total held to maturity         |                                   | $    | 86,520,225 |            |  | $      | 1,741,780        |         |  | $ | 570,432 |         |  | $ | 87,691,573 |           
|                               |                                   |      |            |            |  |        |                  |         |  |   |         |         |  |   |            |           

Sales of securities available for sale for the year ended December 31, 2001 resulted in realized gross gains of
$137,549 and no gross losses. Calls of securities held to maturity resulted in gross gains of $3,300 and no
gross losses in 2001.

For the year ended December 31, 2000, there were no sales of securities. Calls of securities did not result in
any gains or losses in 2000.

Securities with an amortized cost of $86,359,688 and $69,140,118 were pledged as collateral for public
deposits and for other purposes as required by law at
December 31, 2002 and 2001, respectively.

41



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##### 





|4. |  | LOANS
|-- |  | -----

Loans are made primarily to customers in the Companys market area. Loans at December 31, 2002 and 2001,
classified by type, are as follows:

|                                       |              |   |             |             |      |   |             |             | 
|-------------------------------------- | ------------ | - | ----------- | ----------- | ---- | - | ----------- | ----------- | 
|                                       |              |   | 2002        |             | 2001
|Real estate:                           |              |   |             |             |      |   |             |            
|                                       | Construction |   | $           | 75,382,555  |      |   | $           | 72,417,986  | 
|                                       | Mortgage     |   |             | 277,948,238 |      |   |             | 243,067,278 | 
|Commercial, financial and agricultural |              |   | 175,408,637 |             |      |   | 166,980,167 |            
|Consumer                               |              |   | 37,045,878  |             |      |   | 28,440,910  |            
|All other loans                        |              |   | 449,251     |             |      |   | 282,082     |            
|                                       |              |   |             |             |      |   |             |            
|                                       |              |   | 566,234,559 |             |      |   | 511,188,423 |            
|Deferred origination fees, net         |              |   | (860,460    | )           |      |   | (777,475    | )          
|                                       |              |   |             |             |      |   |             |            
|Total                                  |              | $ | 565,374,099 |             |      | $ | 510,410,948 |            
|                                       |              |   |             |             |      |   |             |            

Nonperforming assets at December 31, 2002 and 2001 are as follows:

|                                                  |  |      |           |      |  |   |           | 
|------------------------------------------------- |  | ---- | --------- | ---- |  | - | --------- | 
|                                                  |  | 2002 |           | 2001
|Nonaccrual loans                                  |  | $    | 3,264,847 |      |  | $ | 2,943,863 | 
|Loans 90 days or more and still
accruing interest |  |      | 1,152,998 |      |  |   | 1,769,341 | 
|Foreclosed properties                             |  |      | 1,202,603 |      |  |   | 322,982   | 
|                                                  |  |      |           |      |  |   |           | 
|Total                                             |  | $    | 5,620,448 |      |  | $ | 5,036,186 | 
|                                                  |  |      |           |      |  |   |           | 

If interest from restructured loans, foreclosed properties and nonaccrual loans had been recognized in
accordance with the original terms of the loans, net income for 2002, 2001 and 2000 would not have been
materially different from the amounts reported.

Directors and officers of the Company and companies with which they are affiliated are customers of and
borrowers from the Bank in the ordinary course of business. At December 31, 2002 and 2001, directors and
principal officers direct and indirect indebtedness to the Bank aggregated $4,768,515 and $4,265,702,
respectively. During 2002, additions to such loans were $1,742,434 and repayments totaled $1,239,621. In
the opinion of management, these loans do not involve more than normal risk of collectibility, nor do they
present other unfavorable features.

42



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##### 





|5. |  | ALLOWANCE FOR LOAN LOSSES
|-- |  | -------------------------

Changes in the allowance for loan losses for the years ended December 31, 2002, 2001 and 2000 are as
follows:

|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |           | 
|------------------------------------------------------------------------------------- | -------------------------------------- | - | --------- | ------- | ---- | - | --------- | --------- |  | - | --------- | --------- | 
|                                                                                      |                                        |   | 2002      |         | 2001 |   | 2000     
|Balance at beginning of year                                                          |                                        | $ | 6,426,477 |         |      | $ | 6,351,756 |           |  | $ | 4,746,692 |          
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Loans charged off:                                                                    |                                        |   |           |         |      |   |           |           |  |   |           |          
|                                                                                      | Real estate                            |   |           | 328,731 |      |   |           | 1,473,527 |  |   |           | 1,304,768 | 
|                                                                                      | Commercial, financial and agricultural |   |           | 538,069 |      |   |           | 2,123,286 |  |   |           | 613,058   | 
|                                                                                      | Credit cards and related plans         |   |           | 56,607  |      |   |           | 19,044    |  |   |           | 13,381    | 
|                                                                                      | Installment loans to individuals       |   |           | 260,198 |      |   |           | 467,942   |  |   |           | 279,556   | 
|                                                                                      | Demand deposit overdraft program       |   |           | 371,463 |      |   |           | 417,012   |  |   |           | 394,810   | 
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Total charge-offs                                                                     |                                        |   | 1,555,068 |         |      |   | 4,500,811 |           |  |   | 2,605,573 |          
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Recoveries of loans previously charged off:                                           |                                        |   |           |         |      |   |           |           |  |   |           |          
|                                                                                      | Real estate                            |   |           | 77,612  |      |   |           | 52,490    |  |   |           | 89,012    | 
|                                                                                      | Commercial, financial and agricultural |   |           | 168,349 |      |   |           | 52,979    |  |   |           | 80,331    | 
|                                                                                      | Credit cards and related plans         |   |           | 2,321   |      |   |           | 4,871     |  |   |           | 3,469     | 
|                                                                                      | Installment loans to individuals       |   |           | 58,642  |      |   |           | 39,472    |  |   |           | 81,616    | 
|                                                                                      | Demand deposit overdraft program       |   |           | 163,896 |      |   |           | 208,948   |  |   |           | 62,624    | 
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Total recoveries                                                                      |                                        |   | 470,820   |         |      |   | 358,760   |           |  |   | 317,052   |          
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Net charge-offs                                                                       |                                        |   | 1,084,248 |         |      |   | 4,142,051 |           |  |   | 2,288,521 |          
|Additions charged to operations                                                       |                                        |   | 3,492,382 |         |      |   | 4,216,772 |           |  |   | 3,893,585 |          
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Balance at end of year                                                                |                                        | $ | 8,834,611 |         |      | $ | 6,426,477 |           |  | $ | 6,351,756 |          
|                                                                                      |                                        |   |           |         |      |   |           |           |  |   |           |          
|Ratio of net charge-offs during the year to
average loans outstanding during the year |                                        |   | 0.21      | %       |      |   | 0.86      | %         |  |   | 0.54      | %        

At December 31, 2002 and 2001, the recorded investment in loans that are considered to be impaired,
including accrued interest, was $5,338,098 ($3,392,264 of which is on a nonaccrual basis) and $4,386,490
($3,074,380 of which is on a nonaccrual basis), respectively. The average recorded balance of impaired loans
during 2002 and 2001 is not significantly different from the balance at December 31, 2002 and 2001. The
related allowance for loan losses for these loans was $2,195,850 and $1,371,524 at December 31, 2002 and 2001,
respectively. For the years ended December 31, 2002, 2001 and 2000, the Bank recognized interest income
on those impaired loans of $183,405, $168,236 and $77,215, respectively.

Primarily because of a recessionary economy, charge-offs in 2001 totaled $4,500,811, significantly higher
than the $2,605,573 charged off in 2000. The largest two charge-offs were to two unrelated borrowers in the
amounts of $980,000 and $409,000. The average charge-off for 2001 was less than $25,000.

43



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##### 





|6. |  | PREMISES AND EQUIPMENT
|-- |  | ----------------------

Summaries of premises and equipment at December 31, 2002 and 2001 follow:

|                                  |  |      |            |              |  |             |            |            |  |              |           | 
|--------------------------------- |  | ---- | ---------- | ------------ |  | ----------- | ---------- | ---------- |  | ------------ | --------- | 
|                                  |  |      |            |              |  |             |            |            |  | Premises and
|                                  |  |      |            |              |  | Accumulated |            | Equipment,
|                                  |  | Cost |            | Depreciation |  | Net        
|At December 31, 2002:             |  |      |            |              |  |             |            |            |  |              |           | 
|Land                              |  | $    | 1,903,616  |              |  |             |            |            |  | $            | 1,903,616 | 
|Buildings                         |  |      | 7,790,351  |              |  | $           | 3,055,002  |            |  |              | 4,735,349 | 
|Leasehold improvements            |  |      | 29,242     |              |  |             | 15,347     |            |  |              | 13,895    | 
|Furniture, equipment and vehicles |  |      | 8,513,016  |              |  |             | 7,094,309  |            |  |              | 1,418,707 | 
|Construction in progress          |  |      | 98,583     |              |  |             |            |            |  |              | 98,583    | 
|                                  |  |      |            |              |  |             |            |            |  |              |           | 
|Total                             |  | $    | 18,334,808 |              |  | $           | 10,164,658 |            |  | $            | 8,170,150 | 
|                                  |  |      |            |              |  |             |            |            |  |              |           | 
|At December 31, 2001:             |  |      |            |              |  |             |            |            |  |              |           | 
|Land                              |  | $    | 1,753,559  |              |  |             |            |            |  | $            | 1,753,559 | 
|Buildings                         |  |      | 7,718,721  |              |  | $           | 2,821,784  |            |  |              | 4,896,937 | 
|Leasehold improvements            |  |      | 25,280     |              |  |             | 10,093     |            |  |              | 15,187    | 
|Furniture, equipment and vehicles |  |      | 8,124,058  |              |  |             | 6,372,671  |            |  |              | 1,751,387 | 
|                                  |  |      |            |              |  |             |            |            |  |              |           | 
|Total                             |  | $    | 17,621,618 |              |  | $           | 9,204,548  |            |  | $            | 8,417,070 | 
|                                  |  |      |            |              |  |             |            |            |  |              |           | 



|7. |  | OTHER INCOME AND EXPENSES
|-- |  | -------------------------

For the years ended December 31, 2002, 2001 and 2000, items included in other income that exceeded 1% of
total revenues are set forth below. There were no items included in other expenses that exceeded 1% of total
revenues for the years indicated.

|                                    |  |      |           |      |  |      |           |  |  |   |           | 
|----------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                                    |  | 2002 |           | 2001 |  | 2000
|Items included in other income     
|Fees from demand deposit overdrafts |  | $    | 3,688,116 |      |  | $    | 3,447,906 |  |  | $ | 3,096,245 | 



|8. |  | INCOME TAXES
|-- |  | ------------

The components of the income tax provision for the years ended December 31, 2002, 2001 and 2000 follow.

|                     |          |  |      |            |      |  |      |           |   |  |   |           |  
|-------------------- | -------- |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|                     |          |  | 2002 |            | 2001 |  | 2000
|Income tax provision |          |  |      |            |      |  |      |           |   |  |   |          
|                     | Current  |  | $    | 8,554,318  |      |  | $    | 6,722,375 |   |  | $ | 8,580,360 |  
|                     | Deferred |  |      | (1,159,425 | )    |  |      | (109,271  | ) |  |   | (695,823  | )
|                     |          |  |      |            |      |  |      |           |   |  |   |          
|                     | Total    |  | $    | 7,394,893  |      |  | $    | 6,613,104 |   |  | $ | 7,884,537 |  
|                     |          |  |      |            |      |  |      |           |   |  |   |          

Changes in deferred taxes of $291,057, $131,127 and $733,431 related to unrealized gains and losses on
securities available for sale during 2002, 2001 and 2000, respectively, were allocated to shareholders equity
in the respective years.

44



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##### 



A reconciliation of reported income tax expense for the years ended December 31, 2002, 2001 and 2000 to the
amount of tax expense computed by multiplying income before income taxes by the statutory federal income tax
rate follows.

|                                                    |                                               |   |           |            |      |   |           |            |   |   |           |            |  
|--------------------------------------------------- | --------------------------------------------- | - | --------- | ---------- | ---- | - | --------- | ---------- | - | - | --------- | ---------- | -
|                                                    |                                               |   | 2002      |            | 2001 |   | 2000     
|Statutory federal income tax rate                   |                                               |   | 35%       |            |      |   | 35%       |            |   |   | 35%       |           
|                                                    |                                               |   |           |            |      |   |           |            |   |   |           |           
|Tax provision at statutory rate                     |                                               | $ | 7,874,018 |            |      | $ | 7,147,581 |            |   | $ | 8,210,692 |           
|Increase (decrease) in income taxes
resulting from: |                                               |   |           |            |      |   |           |            |   |   |           |           
|                                                    | Tax-exempt interest income                    |   |           | (1,139,942 | )    |   |           | (1,190,225 | ) |   |           | (1,184,199 | )
|                                                    | State income taxes net of federal tax benefit |   |           | 728,299    |      |   |           | 599,528    |   |   |           | 707,427    |  
|                                                    | Other                                         |   |           | (67,482    | )    |   |           | 56,220     |   |   |           | 150,617    |  
|                                                    |                                               |   |           |            |      |   |           |            |   |   |           |           
|Income tax provision                                |                                               | $ | 7,394,893 |            |      | $ | 6,613,104 |            |   | $ | 7,884,537 |           
|                                                    |                                               |   |           |            |      |   |           |            |   |   |           |           

The tax effect of the cumulative temporary differences and carryforwards that gave rise to the deferred tax
assets and liabilities at December 31, 2002 and 2001 are as follows:

|                                                  |  |                   |           |             |  |       |            |   |  |   |           |  
|------------------------------------------------- |  | ----------------- | --------- | ----------- |  | ----- | ---------- | - |  | - | --------- | -
|                                                  |  | December 31, 2002
|                                                  |  |                  
|                                                  |  | Assets            |           | Liabilities |  | Total
|Excess book over tax bad debt expense             |  | $                 | 3,481,848 |             |  | $     |           |   |  | $ | 3,481,848 |  
|Excess tax over book depreciation                 |  |                   |          |             |  |       | (358,018   | ) |  |   | (358,018  | )
|Unrealized gains on securities
available for sale |  |                   |          |             |  |       | (660,282   | ) |  |   | (660,282  | )
|Other, net                                        |  |                   | 696,024   |             |  |       | (573,570   | ) |  |   | 122,454   |  
|                                                  |  |                   |           |             |  |       |            |   |  |   |           |  
|Total                                             |  | $                 | 4,177,872 |             |  | $     | (1,591,870 | ) |  | $ | 2,586,002 |  
|                                                  |  |                   |           |             |  |       |            |   |  |   |           |  

|                                                  |  |                   |           |             |  |       |            |   |  |   |           |  
|------------------------------------------------- |  | ----------------- | --------- | ----------- |  | ----- | ---------- | - |  | - | --------- | -
|                                                  |  | December 31, 2001
|                                                  |  |                  
|                                                  |  | Assets            |           | Liabilities |  | Total
|Excess book over tax bad debt expense             |  | $                 | 2,524,442 |             |  | $     |           |   |  | $ | 2,524,442 |  
|Excess tax over book depreciation                 |  |                   |          |             |  |       | (397,631   | ) |  |   | (397,631  | )
|Unrealized gains on securities
available for sale |  |                   |          |             |  |       | (369,226   | ) |  |   | (369,226  | )
|Other, net                                        |  |                   | 351,327   |             |  |       | (391,279   | ) |  |   | (39,952   | )
|                                                  |  |                   |           |             |  |       |            |   |  |   |           |  
|Total                                             |  | $                 | 2,875,769 |             |  | $     | (1,158,136 | ) |  | $ | 1,717,633 |  
|                                                  |  |                   |           |             |  |       |            |   |  |   |           |  

The net deferred tax asset is included in other assets on the balance sheet.

Although realization of the deferred tax assets is not assured, management believes it is more likely than not that
all of the deferred tax assets will be realized.



|9. |  | STOCK OPTIONS
|-- |  | -------------

At December 31, 2002, 2001 and 2000, 189,017, 179,221 and 180,750 shares of common stock, respectively,
were reserved for stock options outstanding under the Companys stock option plans. Shares available for
grants under the Companys stock option plans were 215,498 shares at December 31, 2002, 225,294 shares
at December 31, 2001, and no shares at December 31, 2000. Option prices are established at market value
on the dates granted by the Board of Directors. Option shares and option prices have been restated for
the 5-for-4 stock split effected in the form of a stock dividend payable May 31, 2002 to shareholders of
record on May 10, 2002.

45



---



##### 



A summary of the status of the Companys incentive stock option plans at December 31, 2002, 2001 and 2000
and changes during the years then ended are presented below:

|                                   |  |        |         |       |  |           |       |       |  |        |         |           |  |   |       |  |  |           |         |  |  |   |       | 
|---------------------------------- |  | ------ | ------- | ----- |  | --------- | ----- | ----- |  | ------ | ------- | --------- |  | - | ----- |  |  | --------- | ------- |  |  | - | ----- | 
|                                   |  | 2002   |         | 2001  |  | 2000     
|                                   |  |        |         |       |  |          
|                                   |  |        |         |       |  | Wtd. Avg. |       |       |  |        |         | Wtd. Avg. |  |   |       |  |  | Wtd. Avg.
|                                   |  |        |         |       |  | Exercise  |       |       |  |        |         | Exercise  |  |   |       |  |  | Exercise 
|                                   |  | Shares |         | Price |  | Shares    |       | Price |  | Shares |         | Price    
|Outstanding at beginning of year   |  |        | 179,221 |       |  | $         | 19.15 |       |  |        | 180,750 |           |  | $ | 18.77 |  |  |           | 180,423 |  |  | $ | 17.74 | 
|Granted                            |  |        | 13,000  |       |  |           | 18.37 |       |  |        | 26,250  |           |  |   | 15.92 |  |  |           | 26,813  |  |  |   | 18.10 | 
|Exercised                          |  |        |        |       |  |           |      |       |  |        | 25,545  |           |  |   | 13.23 |  |  |           | 26,486  |  |  |   | 11.09 | 
|Expired or canceled                |  |        | 3,204   |       |  |           | 18.78 |       |  |        | 2,234   |           |  |   | 17.42 |  |  |           |        |  |  |   |      | 
|                                   |  |        |         |       |  |           |       |       |  |        |         |           |  |   |       |  |  |           |         |  |  |   |       | 
|Outstanding at end of year         |  |        | 189,017 |       |  | $         | 19.11 |       |  |        | 179,221 |           |  | $ | 19.15 |  |  |           | 180,750 |  |  | $ | 18.77 | 
|                                   |  |        |         |       |  |           |       |       |  |        |         |           |  |   |       |  |  |           |         |  |  |   |       | 
|Options exercisable at end of year |  |        | 121,688 |       |  | $         | 19.49 |       |  |        | 96,106  |           |  | $ | 19.43 |  |  |           | 86,318  |  |  | $ | 17.66 | 
|                                   |  |        |         |       |  |           |       |       |  |        |         |           |  |   |       |  |  |           |         |  |  |   |       | 

For various price ranges, weighted average characteristics of outstanding stock options at December 31, 2002
follow.

|                |               |        |                     |              |                     |               |  |          |  |               |   |       |  |          |  |         |  |  |   |       | 
|--------------- | ------------- | ------ | ------------------- | ------------ | ------------------- | ------------- |  | -------- |  | ------------- | - | ----- |  | -------- |  | ------- |  |  | - | ----- | 
|                |               |        | Outstanding Options |              | Exercisable Options
|                |               |        |                     |              |                    
|Range of        |               |        |                     |              |                     | Remaining     |  | Weighted |  |               |   |       |  | Weighted
|Exercise Prices |               | Shares |                     | Life (years) |                     | Average Price |  | Shares   |  | Average Price
|$               | 15.50 - 16.99 |        |                     | 26,250       |                     |               |  | 3.4      |  |               | $ | 15.92 |  |          |  | 10,500  |  |  | $ | 15.92 | 
|                | 17.00 - 17.49 |        |                     | 34,994       |                     |               |  | 4.2      |  |               |   | 17.28 |  |          |  | 34,994  |  |  |   | 17.28 | 
|                | 17.50 - 17.99 |        |                     | 35,509       |                     |               |  | 1.6      |  |               |   | 17.67 |  |          |  | 21,365  |  |  |   | 17.77 | 
|                | 18.00 - 18.39 |        |                     | 37,437       |                     |               |  | 3.4      |  |               |   | 18.19 |  |          |  | 9,996   |  |  |   | 18.10 | 
|                | 18.40 - 22.99 |        |                     | 5,062        |                     |               |  | 4.4      |  |               |   | 18.85 |  |          |  | 4,912   |  |  |   | 18.75 | 
|                | 23.00 - 26.49 |        |                     | 49,765       |                     |               |  | 5.3      |  |               |   | 23.74 |  |          |  | 39,921  |  |  |   | 23.74 | 
|                |               |        |                     |              |                     |               |  |          |  |               |   |       |  |          |  |         |  |  |   |      
|                | 15.50 - 26.49 |        |                     | 189,017      |                     |               |  | 3.7      |  |               |   | 19.09 |  |          |  | 121,688 |  |  |   | 19.49 | 
|                |               |        |                     |              |                     |               |  |          |  |               |   |       |  |          |  |         |  |  |   |      

Options granted become exercisable in accordance with the vesting schedule specified by the Board of Directors
in the grant. Options granted prior to January 1, 1997 and after December 31, 1997 become exercisable over a
five-year period at the rate of 20% per year beginning one-year from the date of grant. Options granted during
1997 become exercisable over a four-year period at the rate of 20% after six-months from the date of grant and
20% per year beginning one-year from the date of grant. No option may be exercisable more than five-years
after the date of grant, unless the exercise date is extended by the Board of Directors. The Board of
Directors extended the exercise period to ten years for options granted during 1997 and 1998 because the
exercise prices of such grants exceeded the market price resulting in no value to the Company or the optionee.

The Company estimated aggregate option values of $6.68, $5.91 and $6.77 for 2002, 2001 and 2000,
respectively, in order to compute its estimation of option compensation expense associated with the fair value
method, using The Black Scholes Model. The following assumptions were used:

|                              |  |           |       |           |  |           |       |   |  |  |       |  
|----------------------------- |  | --------- | ----- | --------- |  | --------- | ----- | - |  |  | ----- | -
|                              |  | 2002      |       | 2001      |  | 2000     
|Risk-free rate                |  |           | 2.92  | %         |  |           | 4.37  | % |  |  | 5.09  | %
|Average expected term (years) |  | 5.6 years |       | 4.8 years |  | 4.3 years
|Expected volatility           |  |           | 44.63 | %         |  |           | 45.26 | % |  |  | 45.96 | %
|Expected dividend yield       |  |           | 2.28  | %         |  |           | 2.20  | % |  |  | 2.02  | %
|Expected turnover             |  |           | 2.07  | %         |  |           | 2.39  | % |  |  | 2.85  | %

46



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##### 





|10. |  | EMPLOYEE BENEFIT PLANS
|--- |  | ----------------------

The Bank sponsors a tax-qualified profit-sharing retirement plan covering substantially all employees.
Contributions to the plan are made at the discretion of the Board of Directors but may not exceed the maximum
amount allowable for federal income tax purposes. Contributions totaled $855,767, $449,487 and $793,030
for the years ended December 31, 2002, 2001 and 2000, respectively.

The Bank sponsors non-tax qualified supplemental executive retirement plans for both its chairman and chief
executive officer, which allow the Bank to supplement the level of the two executive officers retirement
incomes over that which is obtainable through the tax-qualified profit sharing retirement plan sponsored by the
Bank. Contributions totaled $24,930, $16,627 and $27,946 for the years ended December 31, 2002, 2001 and
2000, respectively.

During 2001, the Bank replaced its split-dollar life insurance arrangements with its officers by adopting a
non-tax qualified Supplemental Executive Retirement Plan for its officers (Officers SERP) to supplement
the benefit each officer can receive under the Banks tax-qualified profit sharing retirement plan. Once the
officer has completed 7 full years of service with the Bank, the Officers SERP is designed to provide a benefit
to the officer at the normal retirement age of 65, or thereafter, or an early retirement age of 50. Benefits are
payable for 10 years for certain officers or life for certain officers. Actual retirement benefits payable under
the Officers SERP are dependent on an indexed retirement benefit formula, which accrues benefits equal to
the excess of the aggregate annual after-tax income from informally associated life insurance contracts over the
Banks opportunity costs related to the Officers SERP. Because retirement benefits payable under the
Officers SERP are dependent on the performance of insurance contracts, the performance of such contracts is
not guaranteed by the Bank. In the event of an officers termination of employment for any reason, other than
for cause, the officer is 100% vested after 7 or more full years of service with the Bank after the officer has
attained the age of 18. In the event of the officers termination of employment due to disability or change of
control of the Company or the Bank, payments from the plan would begin at the officers normal or early
retirement age and the officer shall be 100% vested in the entire retirement benefit amount.

In connection with the Officers SERP, the Bank has also entered into Life Insurance Endorsement Method
Split Dollar Agreements (the Agreements) with the participants covered under the Officers SERP. Under
the Agreements, in the event of the officers death, the officers beneficiary will receive the lesser of 2 times
the officers salary at the time of death or 100% of the net-at-risk life insurance of the policy, which is defined
as the death benefit in excess of cash value, together with any remaining balance in the liability reserve
account.

In 2001, the Bank purchased bank-owned life insurance (BOLI), which may be used, at the Banks sole
discretion, to fund the benefits payable under the Officers SERP. In the third quarter of 2001, the Bank
invested $7,984,500 in BOLI policies that, if the Bank so elects, may be used to fund the death and/or
retirement benefits payable under the Officers SERP. During 2002, an additional $514,000 was invested
in BOLI for four participants added during the year. As of December 31, 2002 and 2001, cash values from
the BOLI policies equaled $9,106,748 and $8,202,255, respectively. For 2002 and 2001, $420,943 and
$134,320, respectively, was accrued in retirement benefits and plan related costs. As of December 31, 2002,
the Officers SERP had 39 participants.

GLL sponsors a retirement plan for its employees under Section 401(k) of the Internal Revenue Code. The plan
covers all employees over 21 years of age who have completed 1,000 hours of service. At its discretion, GLL
may make matching contributions to the plan. Contributions totaled $97,518, $89,709 and $75,644 for the
years ended December 31, 2002, 2001 and 2000, respectively.

47



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##### 





|11. |  | LEASES
|--- |  | ------

LESSEE - OPERATING - The Companys subsidiaries lease certain premises and equipment under operating
lease agreements. As of December 31, 2002, future minimum lease payments under noncancelable operating
leases are as follows:

|                    |  |          |           | 
|------------------- |  | -------- | --------- | 
|Year                |  | Payments
|2003                |  | $        | 247,682   | 
|2004                |  |          | 247,477   | 
|2005                |  |          | 116,622   | 
|2006                |  |          | 65,496    | 
|2007                |  |          | 65,900    | 
|2008 and thereafter |  |          | 344,300   | 
|                    |  |          |           | 
|Total               |  | $        | 1,087,477 | 
|                    |  |          |           | 

Rental expense charged to operations under all operating lease agreements was $291,771, $285,041 and
$274,313 for the years ended December 31, 2002, 2001 and 2000, respectively.



|12. |  | SHORT-TERM BORROWINGS
|--- |  | ---------------------

Federal funds purchased generally represent overnight borrowings by the Bank for temporary funding
requirements. Securities sold under agreements to repurchase represent short-term borrowings by the Bank
collateralized by U.S. Treasury and U.S. Government agency securities. The Bank also borrows funds on an
overnight basis from the Federal Home Loan Bank. Following is a summary of these borrowings:

|                                                            |  |      |            |      |  |   |            |  
|----------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                            |  | 2002 |            | 2001
|Federal funds purchased:                                    |  |      |            |      |  |   |            |  
|Balance at end of year                                      |  | $    |           |      |  | $ | 12,500,000 |  
|Weighted average interest rate at end of year               |  |      |           |      |  |   | 1.81       | %
|Maximum amount outstanding at any month-end during the year |  | $    | 15,000,000 |      |  | $ | 12,500,000 |  
|Average daily balance outstanding during the year           |  | $    | 4,256,849  |      |  | $ | 1,439,931  |  
|Average annual interest rate paid during the year           |  |      | 1.87       | %    |  |   | 2.30       | %
|Securities sold under agreements to repurchase:             |  |      |            |      |  |   |            |  
|Balance at end of year                                      |  | $    | 1,704,715  |      |  | $ | 1,884,843  |  
|Weighted average interest rate at end of year               |  |      | 0.63       | %    |  |   | 5.98       | %
|Maximum amount outstanding at any month-end during the year |  | $    | 2,328,818  |      |  | $ | 2,449,243  |  
|Average daily balance outstanding during the year           |  | $    | 1,920,852  |      |  | $ | 1,902,841  |  
|Average annual interest rate paid during the year           |  |      | 1.17       | %    |  |   | 3.42       | %

48



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##### 



|                                                            |  |      |            |      |  |   |            |  
|----------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                            |  | 2002 |            | 2001
|Overnight borrowings from the Federal Home Loan Bank:       |  |      |            |      |  |   |            |  
|Balance at end of year                                      |  | $    |           |      |  | $ | 12,900,000 |  
|Weighted average interest rate at end of year               |  |      |           |      |  |   | 2.00       | %
|Maximum amount outstanding at any month-end during the year |  | $    | 28,700,000 |      |  | $ | 12,900,000 |  
|Average daily balance outstanding during the year           |  | $    | 13,884,384 |      |  | $ | 176,712    |  
|Average annual interest rate paid during the year           |  |      | 1.97       | %    |  |   | 2.03       | %

The Bank offers a commercial sweep product whereby qualifying amounts are swept overnight from a
commercial deposit account into commercial paper issued by the Company.

|                                                            |  |      |            |      |  |   |            |  
|----------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                                            |  | 2002 |            | 2001
|Commercial deposits swept into commercial paper:            |  |      |            |      |  |   |            |  
|Balance at end of year                                      |  | $    | 15,015,692 |      |  | $ | 13,291,487 |  
|Weighted average interest rate at end of year               |  |      | 1.50       | %    |  |   | 2.00       | %
|Maximum amount outstanding at any month-end during the year |  | $    | 15,524,583 |      |  | $ | 14,865,776 |  
|Average daily balance outstanding during the year           |  | $    | 13,363,928 |      |  | $ | 10,668,425 |  
|Average annual interest rate paid during the year           |  |      | 1.96       | %    |  |   | 3.42       | %



|13. |  | OTHER BORROWINGS
|--- |  | ----------------

The Bank also borrows funds with maturities of one year or less from the Federal Home Loan Bank. There
were no such borrowings in 2001 or 2000. Following is a summary of these borrowings:

|                                                                      |  |      |            |  
|--------------------------------------------------------------------- |  | ---- | ---------- | -
|                                                                      |  | 2002
|Federal Home Loan Bank borrowings with
maturities of one year or less |  |      |            |  
|Balance at end of year                                                |  | $    | 12,000,000 |  
|Weighted average interest rate at end of year                         |  |      | 1.60       | %
|Maximum amount outstanding at any month-end during the year           |  | $    | 12,000,000 |  
|Average daily balance outstanding during the year                     |  | $    | 1,808,219  |  
|Average annual interest rate paid during the year                     |  |      | 1.60       | %

GLL temporarily funds its mortgages, from the time of origination until the time of sale, through the use
of a warehouse line of credit from one of the Companys correspondent financial institutions. For the years
ended December 31, 2002 and 2001, this line of credit was $30,000,000 and $25,000,000, of which
$28,198,129 and $21,063,834, respectively, were outstanding at year end. GLL requests the line of credit
based on its estimated funding needs for the year. Outstanding balances under this line of credit accrue interest
at a rate of the 30-day LIBOR plus 115 basis points to fund mortgages originated and sold and construction
loans. The line is secured by the mortgage loans originated and the Company serves as guarantor on GLLs
borrowings under this arrangement. Under the terms of the loan agreement, GLL is required to meet certain
financial conditions regarding adjusted tangible net worth and interest coverage. GLL was not in compliance
with the adjusted tangible net worth requirement, however, the correspondent financial institution issued a
waiver of the requirement for the year ended December 31, 2002.



|14. |  | MATURITIES OF TIME DEPOSITS
|--- |  | ---------------------------

Principal maturities of the Banks time deposits as of December 31, 2002 are as follows:

|                    |  |          |             | 
|------------------- |  | -------- | ----------- | 
|Year                |  | Payments
|2003                |  | $        | 194,791,960 | 
|2004                |  |          | 19,201,423  | 
|2005                |  |          | 12,877,340  | 
|2006                |  |          | 20,279,301  | 
|2008 and thereafter |  |          | 7,259       | 
|                    |  |          |             | 
|Total               |  | $        | 247,157,283 | 
|                    |  |          |             | 

49



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##### 





|15. |  | RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
|--- |  | ------------------------------------------------------

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of
common shares outstanding for the period. Basic EPS excludes the dilutive effect that could occur if any
securities or other contracts to issue common stock were exercised or converted into or resulted in the issuance
of common stock. Diluted EPS is computed by dividing net income by the sum of the weighted average
number of common shares outstanding for the period plus the number of additional common shares that would
have been outstanding if the potentially dilutive common shares had been issued. Options to purchase 80,081,
152,971 and 135,904 common shares were excluded from the computation of diluted net income per share for
the years ended December 31, 2002, 2001 and 2000, respectively, because the options exercise prices were
greater than the average market price of common shares. Following is the reconciliation of EPS for the years
ended December 31, 2002, 2001 and 2000.

Basic and diluted earnings per share and weighted average shares outstanding for 2001 and 2000 have been
restated to reflect the 5-for-4 stock split effected in the form of a stock dividend paid May 31, 2002 to
shareholders of record on May 10, 2002.

|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |            |        | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------- | ---------- | ----- | ---- | ---------- | ---------- | ----- | - | ---------- | ---------- | ------ | 
|                                               |                                                                                             |                                              |            | 2002       |       | 2001 |            | 2000      
|BASIC EARNINGS PER SHARE                       |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|Net income                                     |                                                                                             | $                                            | 15,102,300 |            |       | $    | 13,808,555 |            |       | $ | 15,574,583 |           
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|Divide by: Weighted average shares outstanding |                                                                                             |                                              | 13,547,299 |            |       |      | 13,897,764 |            |       |   | 14,161,633 |           
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|Basic earnings per share                       |                                                                                             | $                                            | 1.11       |            |       | $    | 0.99       |            |       | $ | 1.10       |           
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|DILUTED EARNINGS PER SHARE                     |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|Net income                                     |                                                                                             | $                                            | 15,102,300 |            |       | $    | 13,808,555 |            |       | $ | 15,574,583 |           
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|Divide by: Weighted average shares outstanding |                                                                                             |                                              | 13,547,299 |            |       |      | 13,897,764 |            |       |   | 14,161,633 |           
|                                               |                                                                                             | Potentially dilutive effect of
stock options |            |            | 5,270 |      |            |            | 2,363 |   |            |            | 12,635 | 
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|                                               | Weighted average shares outstanding,
including potentially dilutive effect
of stock options |                                              |            | 13,552,569 |       |      |            | 13,900,127 |       |   |            | 14,174,268 |       
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           
|Diluted earnings per share                     |                                                                                             | $                                            | 1.11       |            |       | $    | 0.99       |            |       | $ | 1.10       |           
|                                               |                                                                                             |                                              |            |            |       |      |            |            |       |   |            |           



|16. |  | REGULATION AND REGULATORY RESTRICTIONS
|--- |  | --------------------------------------

The Company is regulated by the Board of Governors of the Federal Reserve System (FRB) and is subject to
securities registration and public reporting regulations of the Securities and Exchange Commission. The Bank is
regulated by the Federal Deposit Insurance Corporation (FDIC), the North Carolina State Banking
Commission and the FRB.

The primary source of funds for the payment of dividends by the Company is dividends received from its
subsidiaries, the Bank and GLL. The Bank, as a North Carolina banking corporation, may pay dividends only
out of undivided profits as determined pursuant to North Carolina General Statutes Section 53-87. As of
December 31, 2002, the Bank had undivided profits, as defined, of $105,467,200.

50



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##### 



The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Banks assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. The Banks
capital amounts and classification are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company (set forth in the
table below) and the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2002, that the Company and the Bank meet all capital adequacy
requirements to which it is subject.

As of December 31, 2002, the most recent regulatory notifications categorized both the Company and the Bank
as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the table. Management is not aware of conditions or events subsequent to such
notifications that would cause a change in the Companys or the Banks capital categories.

The Companys actual capital amounts and ratios are also presented in the table:

|                        |                                        |        |        |         |          |        |            |       |   |        |             |        |            |  |  |      |   |  |              |        |  |  |  |       |  
|----------------------- | -------------------------------------- | ------ | ------ | ------- | -------- | ------ | ---------- | ----- | - | ------ | ----------- | ------ | ---------- |  |  | ---- | - |  | ------------ | ------ |  |  |  | ----- | -
|                        |                                        |        |        |         |          |        |            |       |   |        |             |        |            |  |  |      |   |  | To Be Well  
|                        |                                        |        |        |         |          |        |            |       |   |        |             |        |            |  |  |      |   |  | Capitalized 
|                        |                                        |        |        |         |          |        |            |       |   |        |             |        |            |  |  |      |   |  | Under Prompt
|                        |                                        |        |        |         |          |        |            |       |   |        | For Capital |        | Corrective
|                        |                                        |        |        |         |          |        |            |       |   |        | Adequacy    |        | Action    
|                        |                                        |        | Actual |         | Purposes |        | Provisions
|                        |                                        |        |        |         |          |        |           
|(dollars in thousands)  |                                        | Amount |        | Ratio   |          | Amount |            | Ratio |   | Amount |             | Ratio 
|As of December 31, 2002 |                                        |        |        |         |          |        |            |       |   |        |             |        |            |  |  |      |   |  |              |        |  |  |  |      
|                        | Total capital to risk weighted assets  |        | $      | 134,020 |          |        |            | 22.37 | % |        | $           | 47,921 |            |  |  | 8.00 | % |  | $            | 59,901 |  |  |  | 10.00 | %
|                        | Tier I capital to risk weighted assets |        |        | 126,447 |          |        |            | 21.11 | % |        |             | 23,960 |            |  |  | 4.00 | % |  |              | 35,940 |  |  |  | 6.00  | %
|                        | Tier I capital to average assets       |        |        | 126,447 |          |        |            | 17.52 | % |        |             | 28,876 |            |  |  | 4.00 | % |  |              | 36,095 |  |  |  | 5.00  | %
|As of December 31, 2001 |                                        |        |        |         |          |        |            |       |   |        |             |        |            |  |  |      |   |  |              |        |  |  |  |      
|                        | Total capital to risk weighted assets  |        | $      | 130,641 |          |        |            | 24.09 | % |        | $           | 43,388 |            |  |  | 8.00 | % |  | $            | 54,235 |  |  |  | 10.00 | %
|                        | Tier I capital to risk weighted assets |        |        | 124,215 |          |        |            | 22.90 | % |        |             | 21,694 |            |  |  | 4.00 | % |  |              | 32,541 |  |  |  | 6.00  | %
|                        | Tier I capital to average assets       |        |        | 124,215 |          |        |            | 17.80 | % |        |             | 27,910 |            |  |  | 4.00 | % |  |              | 34,887 |  |  |  | 5.00  | %

The average reserve balance required to be maintained under the requirements of the Federal Reserve was
approximately $3,624,000 for the year ended December 31, 2002. The Bank maintained average reserve
balances in excess of the requirements.



|17. |  | PARENT COMPANY CONDENSED FINANCIAL INFORMATION
|--- |  | ----------------------------------------------

Condensed financial data for Bank of Granite Corporation (parent company only) follows:

|                                      |                                                  |      |              |             |  |  |   |             | 
|------------------------------------- | ------------------------------------------------ | ---- | ------------ | ----------- |  |  | - | ----------- | 
|                                      |                                                  |      | December 31,
|                                      |                                                  |      |             
|Condensed Balance Sheets              |                                                  | 2002 |              | 2001       
|Assets:                               |                                                  |      |              |             |  |  |   |            
|                                      | Cash on deposit with bank subsidiary             |      | $            | 15,891,441  |  |  | $ | 18,257,334  | 
|                                      | Investment in subsidiary bank at equity          |      |              | 117,907,574 |  |  |   | 111,995,087 | 
|                                      | Investment in subsidiary mortgage bank at equity |      |              | 4,459,814   |  |  |   | 3,582,842   | 
|                                      | Other investments                                |      |              | 4,438,658   |  |  |   | 4,110,143   | 
|                                      | Other assets                                     |      |              | 86,208      |  |  |   | 228,374     | 
|                                      |                                                  |      |              |             |  |  |   |            
|                                      | Total                                            |      | $            | 142,783,695 |  |  | $ | 138,173,780 | 
|                                      |                                                  |      |              |             |  |  |   |            
|Liabilities and Shareholders Equity: |                                                  |      |              |             |  |  |   |            
|                                      | Other borrowings                                 |      | $            | 15,015,692  |  |  | $ | 13,291,487  | 
|                                      | Other liabilities                                |      |              | 325,161     |  |  |   | 100,977     | 
|                                      | Shareholders equity                             |      |              | 127,442,842 |  |  |   | 124,781,316 | 
|                                      |                                                  |      |              |             |  |  |   |            
|                                      | Total                                            |      | $            | 142,783,695 |  |  | $ | 138,173,780 | 
|                                      |                                                  |      |              |             |  |  |   |            

51



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##### 



|                                                |                   |      |                                  |           |  |      |            |            |   |   |            |            | 
|----------------------------------------------- | ----------------- | ---- | -------------------------------- | --------- |  | ---- | ---------- | ---------- | - | - | ---------- | ---------- | 
|                                                |                   |      | For the Years Ended December 31,
|                                                |                   |      |                                 
|Condensed Results of Operations                 |                   | 2002 |                                  | 2001      |  | 2000
|Equity in earnings of subsidiary bank:          |                   |      |                                  |           |  |      |            |            |   |   |            |           
|                                                | Dividends         |      | $                                | 8,627,072 |  |      | $          | 13,913,195 |   |   | $          | 11,849,229 | 
|                                                | Earnings retained |      |                                  | 5,577,290 |  |      |            | (642,641   | ) |   |            | 3,990,387  | 
|Equity in earnings of subsidiary mortgage bank: |                   |      |                                  |           |  |      |            |            |   |   |            |           
|                                                | Dividends         |      |                                  | 326,155   |  |      |            | 61,090     |   |   |            | 169,535    | 
|                                                | Earnings retained |      |                                  | 881,165   |  |      |            | 820,408    |   |   |            | 74,645     | 
|Income (expenses), net                          |                   |      | (309,382                         | )         |  |      | (343,497   | )          |   |   | (509,213   | )         
|                                                |                   |      |                                  |           |  |      |            |            |   |   |            |           
|Net income                                      |                   | $    | 15,102,300                       |           |  | $    | 13,808,555 |            |   | $ | 15,574,583 |           
|                                                |                   |      |                                  |           |  |      |            |            |   |   |            |           

|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |             |  
|------------------------------------- | --------------------------------------------------------- | ---- | -------------------------------- | ----------- | - | ---- | ---------- | ---------- | - | - | ---------- | ----------- | -
|                                      |                                                           |      | For the Years Ended December 31,
|                                      |                                                           |      |                                 
|Condensed Cash Flow                   |                                                           | 2002 |                                  | 2001        |   | 2000
|Cash flows from operating activities: |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|                                      | Interest received                                         |      | $                                | 304,653     |   |      | $          | 213,862    |   |   | $          | 189,778     |  
|                                      | Interest paid                                             |      |                                  | (262,350    | ) |      |            | (364,624   | ) |   |            | (432,357    | )
|                                      | Dividends received from subsidiary bank                   |      |                                  | 8,627,072   |   |      |            | 13,913,195 |   |   |            | 11,849,229  |  
|                                      | Dividends received from subsidiary mortgage bank          |      |                                  | 326,155     |   |      |            | 61,090     |   |   |            | 169,535     |  
|                                      | Net cash used by other
operating activities               |      |                                  | (61,813     | ) |      |            | (104,143   | ) |   |            | (290,429    | )
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|                                      | Net cash provided by operating activities                 |      |                                  | 8,933,717   |   |      |            | 13,719,380 |   |   |            | 11,485,756  |  
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|Cash flows from investing activities: |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|                                      | Proceeds from maturities of securities
available for sale |      |                                  | 300,000     |   |      |            |           |   |   |            |            |  
|                                      | Proceeds from sales of securities
available for sale      |      |                                  | 56,599      |   |      |            | 506,226    |   |   |            |            |  
|                                      | Purchases of securities available for sale                |      |                                  | (500,749    | ) |      |            | (1,828,288 | ) |   |            | (339,988    | )
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|                                      | Net cash used by investing activities                     |      |                                  | (144,150    | ) |      |            | (1,322,062 | ) |   |            | (339,988    | )
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|Cash flows from financing activities: |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|                                      | Net increase (decrease) in overnight borrowings           |      |                                  | 1,724,205   |   |      |            | 2,327,654  |   |   |            | (854,109    | )
|                                      | Net proceeds from issuance of common stock                |      |                                  |            |   |      |            | 337,847    |   |   |            | 293,813     |  
|                                      | Net dividends paid                                        |      |                                  | (5,594,799  | ) |      |            | (5,110,539 | ) |   |            | (4,756,387  | )
|                                      | Cash paid for fractional shares                           |      |                                  | (17,528     | ) |      |            |           |   |   |            |            |  
|                                      | Purchases of common stock for treasury                    |      |                                  | (7,267,338  | ) |      |            | (3,767,609 | ) |   |            | (6,353,652  | )
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|                                      | Net cash used by financing activities                     |      |                                  | (11,155,460 | ) |      |            | (6,212,647 | ) |   |            | (11,670,335 | )
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|Net increase (decrease) in cash       |                                                           |      | (2,365,893                       | )           |   |      | 6,184,671  |            |   |   | (524,567   | )          
|Cash at beginning of year             |                                                           |      | 18,257,334                       |             |   |      | 12,072,663 |            |   |   | 12,597,230 |            
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            
|Cash at end of year                   |                                                           | $    | 15,891,441                       |             |   | $    | 18,257,334 |            |   | $ | 12,072,663 |            
|                                      |                                                           |      |                                  |             |   |      |            |            |   |   |            |            

52



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##### 



(table concluded from previous page)

|                                                                           |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |            |            |  
|-------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | -------------------------------------------------------- | - | -------------------------------- | ---------- | ---- | - | ---------- | -------- | - | - | ---------- | ---------- | -
|                                                                           |                                                                                                  |                                                          |   | For the Years Ended December 31,
|                                                                           |                                                                                                  |                                                          |   |                                 
|Condensed Cash Flow                                                        |                                                                                                  | 2002                                                     |   | 2001                             |            | 2000
|Reconciliation of net income to net cash
provided by operating activities: |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |           
|                                                                           | Net income                                                                                       |                                                          | $ | 15,102,300                       |            |      | $ | 13,808,555 |          |   | $ | 15,574,583 |           
|                                                                           |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |           
|                                                                           | Adjustments to reconcile net income to net
cash provided by operating activities:                |                                                          |   |                                  |            |      |   |            |          |   |   |            |           
|                                                                           |                                                                                                  | Equity in undistributed earnings of subsidiaries         |   |                                  | (6,458,455 | )    |   |            | (177,767 | ) |   |            | (4,065,032 | )
|                                                                           |                                                                                                  | Premium amortization and discount
accretion, net         |   |                                  | (1,761     | )    |   |            | (1,774   | ) |   |            | (1,428     | )
|                                                                           |                                                                                                  | Gains on sales or calls of
securities available for sale |   |                                  | (3,170     | )    |   |            | (9,214   | ) |   |            |           |  
|                                                                           |                                                                                                  | Decrease (increase) in interest receivable               |   |                                  | 8,670      |      |   |            | (33,162  | ) |   |            | (1,932     | )
|                                                                           |                                                                                                  | Decrease in other assets                                 |   |                                  | 61,949     |      |   |            | 44,587   |   |   |            | 82,376     |  
|                                                                           |                                                                                                  | Increase (decrease) in other liabilities                 |   |                                  | 224,184    |      |   |            | 88,155   |   |   |            | (102,811   | )
|                                                                           |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |           
|                                                                           | Total adjustments                                                                                |                                                          |   | (6,168,583                       | )          |      |   | (89,175    | )        |   |   | (4,088,827 | )         
|                                                                           |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |           
|                                                                           | Net cash provided by operating activities                                                        |                                                          | $ | 8,933,717                        |            |      | $ | 13,719,380 |          |   | $ | 11,485,756 |           
|                                                                           |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |           
|Supplemental disclosure of non-cash transactions:                          |                                                                                                  |                                                          |   |                                  |            |      |   |            |          |   |   |           
|                                                                           | Transfer from surplus to common
stock due to stock split                                         |                                                          | $ | 2,883,471                        |            |      | $ |           |          |   | $ |           |           
|                                                                           | Increase in unrealized
gains or losses on securities
available for sale                          |                                                          |   | 179,434                          |            |      |   | 114,890    |          |   |   | 93,973     |           
|                                                                           | Decrease in deferred income
taxes on unrealized gains or losses
on securities available for sale |                                                          |   | (71,548                          | )          |      |   | (45,813    | )        |   |   | (37,472    | )         



|18. |  | COMMITMENTS AND CONTINGENCIES
|--- |  | -----------------------------

The Companys subsidiaries are parties to financial instruments in the ordinary course of business. The Bank
routinely enters into commitments to extend credit and issues standby letters of credit in order to meet the
financing needs of its customers. Beginning in late 2002, GLL entered into forward commitments and options to
sell mortgage-backed securities in an effort to reduce its exposure to interest rate risk resulting from a
change in its process of managing its production of mortgage loan originations. The following table presents the
contractual or notional amount of these financial instruments as of the dates indicated.

|                                                                                                          |                                                                    |   |              |            |      |   |            |           | 
|--------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | - | ------------ | ---------- | ---- | - | ---------- | --------- | 
|                                                                                                          |                                                                    |   | December 31,
|                                                                                                          |                                                                    |   |             
|                                                                                                          |                                                                    |   | 2002         |            | 2001
|Financial instruments whose contract amounts represent credit risk
Commitments to extend credit           |                                                                    | $ | 87,675,231   |            |      | $ | 80,693,300 |          
|                                                                                                          | Standby letters of credit                                          |   |              | 6,664,731  |      |   |            | 2,957,344 | 
|Financial instruments whose notional or contract amounts are
intended to hedge against interest rate risk |                                                                    |   |              |            |      |   |            |          
|                                                                                                          | Forward commitments and options to sell mortgage-backed securities |   | $            | 17,981,335 |      |   | $          |          | 

Commitments to extend credit are legally binding agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally have fixed expiration dates or
other termination clauses. Since many of the commitments are expected to expire without being drawn upon,
the total commitment amounts outstanding do not necessarily represent future cash requirements. Standby letters
of credit represent conditional commitments issued by the Bank to assure the performance of a customer to a
third party.

53



---



##### 



The Banks exposure to credit loss for commitments to extend credit and standby letters of credit is the
contractual amount of those financial instruments. The Bank uses the same credit policies for making
commitments and issuing standby letters of credit as it does for on-balance sheet financial instruments. Each
customers creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral,
if deemed necessary by management, is based upon this evaluation of creditworthiness. Collateral held varies,
but may include marketable securities, deposits, property, plant and equipment, investment assets, inventories
and accounts receivable. Management does not anticipate any significant losses as a result of these financial
instruments.

Forward commitments and options to sell mortgage-backed securities are contracts for delayed delivery of
securities in which GLL agrees to make delivery at a specified future date of a specified instrument, at a
specified price or yield. Risks arise from the possible inability of counterparties to meet the terms of their
contracts and from movements in the underlying securities values and interest rates.

Legal Proceedings

The nature of the businesses of the Companys subsidiaries ordinarily results in a certain amount of litigation.
The Companys subsidiaries are involved in various legal proceedings, all of which are considered incidental
to the normal conduct of business. Management believes that the liabilities, if any, arising from these
proceedings will not have a material adverse effect on the consolidated financial position or consolidated
results of operations of the Company.



|19. |  | FAIR VALUE OF FINANCIAL INSTRUMENTS
|--- |  | -----------------------------------

The following estimated fair value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable judgment is necessarily required
to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material effect on the estimated fair
value amounts.

|                                                                    |                              |  |                   |             |                   |  |           |             |       |  |   |             |           |  |   |             | 
|------------------------------------------------------------------- | ---------------------------- |  | ----------------- | ----------- | ----------------- |  | --------- | ----------- | ----- |  | - | ----------- | --------- |  | - | ----------- | 
|                                                                    |                              |  | December 31, 2002 |             | December 31, 2001
|                                                                    |                              |  |                   |             |                  
|                                                                    |                              |  |                   |             |                   |  | Estimated |             |       |  |   |             | Estimated
|                                                                    |                              |  | Carrying          |             | Fair              |  | Carrying  |             | Fair 
|                                                                    |                              |  | Amount            |             | Value             |  | Amount    |             | Value
|Assets:                                                             |                              |  |                   |             |                   |  |           |             |       |  |   |             |           |  |   |            
|                                                                    | Cash and cash equivalents    |  | $                 | 33,384,612  |                   |  | $         | 33,384,612  |       |  | $ | 27,058,013  |           |  | $ | 27,058,013  | 
|                                                                    | Marketable securities        |  |                   | 124,924,296 |                   |  |           | 128,732,795 |       |  |   | 159,185,159 |           |  |   | 160,356,507 | 
|                                                                    | Loans                        |  |                   | 556,539,488 |                   |  |           | 556,916,717 |       |  |   | 503,984,471 |           |  |   | 508,388,350 | 
|Liabilities:                                                        |                              |  |                   |             |                   |  |           |             |       |  |   |             |           |  |   |            
|                                                                    | Demand deposits              |  |                   | 300,092,032 |                   |  |           | 300,092,032 |       |  |   | 241,887,120 |           |  |   | 241,887,120 | 
|                                                                    | Time deposits                |  |                   | 247,157,283 |                   |  |           | 250,316,798 |       |  |   | 280,895,599 |           |  |   | 283,197,039 | 
|                                                                    | Overnight borrowings         |  |                   | 16,720,407  |                   |  |           | 16,720,407  |       |  |   | 40,576,330  |           |  |   | 40,576,330  | 
|                                                                    | Other borrowings             |  |                   | 45,677,313  |                   |  |           | 45,677,313  |       |  |   | 23,257,111  |           |  |   | 23,257,111  | 
|Financial instruments whose contract
amounts represent credit risk: |                              |  |                   |             |                   |  |           |             |       |  |   |             |           |  |   |            
|                                                                    | Commitments to extend credit |  |                   |            |                   |  |           | 87,675,231  |       |  |   |            |           |  |   | 80,693,300  | 
|                                                                    | Standby letters of credit    |  |                   |            |                   |  |           | 6,664,731   |       |  |   |            |           |  |   | 2,957,344   | 

The fair values of marketable securities is based on quoted market prices, dealer quotes and prices obtained from
independent pricing services. The fair value of loans, time deposits, commitments and guarantees is estimated
based on present values using applicable risk-adjusted spreads to the U.S. Treasury curve to approximate current
entry-value interest rates applicable to each category of such financial instruments.

No adjustment was made to the entry-value interest rates for changes in credit of loans for which there are no
known credit concerns. Management segregates loans in appropriate risk categories. Management believes that
the risk factor embedded in the entry-value interest rates, along with the general reserves applicable to the loan
portfolio for which there are no known credit concerns, result in a fair valuation of such loans on an entry-value
basis.

Demand deposits are shown at their face value.

54



---



##### 



The fair values for forward commitments and options to sell mortgage-backed securities are estimated based
on quoted prices, if available, and are set forth in the following table.

|                                                                   |  |                   |            |                   |  |           |            |       |  |   |   |           |  |   |   | 
|------------------------------------------------------------------ |  | ----------------- | ---------- | ----------------- |  | --------- | ---------- | ----- |  | - | - | --------- |  | - | - | 
|                                                                   |  | December 31, 2002 |            | December 31, 2001
|                                                                   |  |                   |            |                  
|                                                                   |  |                   |            |                   |  | Estimated |            |       |  |   |   | Estimated
|                                                                   |  | Carrying          |            | Fair              |  | Carrying  |            | Fair 
|                                                                   |  | Amount            |            | Value             |  | Amount    |            | Value
|Forward commitments and options
to sell mortgage-backed securities |  | $                 | 17,763,251 |                   |  | $         | 17,763,251 |       |  | $ |  |           |  | $ |  | 

The fair value estimates presented herein are based on pertinent information available to management as of
December 31, 2002. Although management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these
financial statements since that date and, therefore, current estimates of fair value may differ significantly from
the amounts presented herein.



|20. |  | DERIVATIVE FINANCIAL INSTRUMENTS
|--- |  | --------------------------------

The Companys mortgage banking subsidiary, GLL, uses two types of financial instruments to manage interest
rate risk. These instruments, commonly referred to as derivatives, consists of contracts to forward sell
mortgage-backed securities and options to forward sell securities. A derivative is a financial instrument that
derives its cash flows, and therefore its value, by reference to an underlying instrument. GLL uses derivatives
primarily to hedge the changes in the market values of the mortgage loans it generates and sells. The following
table sets forth certain information about GLLs derivative financial instruments as of December 31, 2002.

|                                                                   |  |                   |            |       |  |           |            | 
|------------------------------------------------------------------ |  | ----------------- | ---------- | ----- |  | --------- | ---------- | 
|                                                                   |  | December 31, 2002
|                                                                   |  |                  
|                                                                   |  |                   |            |       |  | Estimated
|                                                                   |  | Notional          |            | Fair 
|                                                                   |  | Amount            |            | Value
|Forward commitments and options to sell mortgage-backed securities |  | $                 | 17,981,335 |       |  | $         | 17,763,251 | 

GLL classifies its derivatives in accordance with SFAS No. 133 as a hedge of an exposure to changes in the
fair value of a recorded asset or liability (fair value hedge). As of December 31, 2002, all of GLLs
derivative financial instruments were designated as fair value hedges. There instruments had net unrealized
losses of $218,084, which were recorded in other liabilities. The maximum length of time over which GLL is
hedging its exposure to changes in the fair value of its recorded mortgage assets is less than three months.

Credit risk related to derivatives arises when amounts receivable from a counterparty exceed amounts payable
to that counterparty. Because the notional amount of the instrument only serves as a basis for calculating
amounts receivable or payable, the risk of loss with any counterparty is limited to a small fraction of the
notional amount. GLL deals with large institutions with good credit ratings in their derivatives activities.
Further, GLL has netting arrangements with the dealers with whom it does business. Because of these
factors, GLL believes its credit risk exposure related to derivative contracts at December 31, 2002 was
not material.

* * * * *

55



---



##### 



BANK OF GRANITE CORPORATION AND SUBSIDIARIES

SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
YEARS ENDED DECEMBER 31, 2002 AND 2001

|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |            | 
|--------------------------------------------------- | -------- | --------- | ---------- | ---------- |  | --------- | ---------- | ---------- |  | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|2002                                                |          | Quarter 1 |            | Quarter 2  |  | Quarter 3 |            | Quarter 4 
|Interest income                                     |          | $         | 11,445,654 |            |  | $         | 11,253,789 |            |  | $ | 11,302,466 |            |  | $ | 11,708,617 |           
|Interest expense                                    |          |           | 2,897,584  |            |  |           | 2,703,359  |            |  |   | 2,667,918  |            |  |   | 2,533,561  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net interest income                                 |          |           | 8,548,070  |            |  |           | 8,550,430  |            |  |   | 8,634,548  |            |  |   | 9,175,056  |           
|Provision for loan losses                           |          |           | 791,035    |            |  |           | 1,007,249  |            |  |   | 896,782    |            |  |   | 797,316    |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net interest income after
provision for loan losses |          |           | 7,757,035  |            |  |           | 7,543,181  |            |  |   | 7,737,766  |            |  |   | 8,377,740  |           
|Other income                                        |          |           | 2,650,121  |            |  |           | 2,467,936  |            |  |   | 2,925,264  |            |  |   | 3,354,384  |           
|Other expense                                       |          |           | 4,820,180  |            |  |           | 5,090,311  |            |  |   | 5,017,793  |            |  |   | 5,387,950  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Income before income taxes                          |          |           | 5,586,976  |            |  |           | 4,920,806  |            |  |   | 5,645,237  |            |  |   | 6,344,174  |           
|Income taxes                                        |          |           | 1,804,637  |            |  |           | 1,469,271  |            |  |   | 1,962,653  |            |  |   | 2,158,332  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net income                                          |          | $         | 3,782,339  |            |  | $         | 3,451,535  |            |  | $ | 3,682,584  |            |  | $ | 4,185,842  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net income per share                                |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|                                                    | Basic*   |           | $          | 0.28       |  |           | $          | 0.25       |  |   | $          | 0.27       |  |   | $          | 0.31       | 
|                                                    | Diluted* |           |            | 0.28       |  |           |            | 0.25       |  |   |            | 0.27       |  |   |            | 0.31       | 
|Average shares outstanding                          |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|                                                    | Basic*   |           |            | 13,691,860 |  |           |            | 13,600,060 |  |   |            | 13,494,158 |  |   |            | 13,406,832 | 
|                                                    | Diluted* |           |            | 13,692,765 |  |           |            | 13,610,724 |  |   |            | 13,501,632 |  |   |            | 13,413,909 | 

|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |            | 
|--------------------------------------------------- | -------- | --------- | ---------- | ---------- |  | --------- | ---------- | ---------- |  | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|2001                                                |          | Quarter 1 |            | Quarter 2  |  | Quarter 3 |            | Quarter 4 
|
|Interest income                                     |          | $         | 14,096,359 |            |  | $         | 13,499,609 |            |  | $ | 12,714,285 |            |  | $ | 11,973,966 |           
|Interest expense                                    |          |           | 5,544,222  |            |  |           | 5,433,151  |            |  |   | 4,778,767  |            |  |   | 3,687,429  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net interest income                                 |          |           | 8,552,137  |            |  |           | 8,066,458  |            |  |   | 7,935,518  |            |  |   | 8,286,537  |           
|Provision for loan losses                           |          |           | 699,898    |            |  |           | 2,010,680  |            |  |   | 798,497    |            |  |   | 707,697    |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net interest income after
provision for loan losses |          |           | 7,852,239  |            |  |           | 6,055,778  |            |  |   | 7,137,021  |            |  |   | 7,578,840  |           
|Other income                                        |          |           | 2,446,857  |            |  |           | 2,329,945  |            |  |   | 2,489,665  |            |  |   | 2,873,593  |           
|Other expense                                       |          |           | 4,500,616  |            |  |           | 4,562,618  |            |  |   | 4,640,991  |            |  |   | 4,638,054  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Income before income taxes                          |          |           | 5,798,480  |            |  |           | 3,823,105  |            |  |   | 4,985,695  |            |  |   | 5,814,379  |           
|Income taxes                                        |          |           | 1,950,374  |            |  |           | 1,192,598  |            |  |   | 1,573,880  |            |  |   | 1,896,252  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net income                                          |          | $         | 3,848,106  |            |  | $         | 2,630,507  |            |  | $ | 3,411,815  |            |  | $ | 3,918,127  |           
|                                                    |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|Net income per share                                |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|                                                    | Basic*   |           | $          | 0.28       |  |           | $          | 0.19       |  |   | $          | 0.25       |  |   | $          | 0.28       | 
|                                                    | Diluted* |           |            | 0.28       |  |           |            | 0.19       |  |   |            | 0.25       |  |   |            | 0.28       | 
|Average shares outstanding                          |          |           |            |            |  |           |            |            |  |   |            |            |  |   |            |           
|                                                    | Basic*   |           |            | 13,926,886 |  |           |            | 13,895,333 |  |   |            | 13,872,594 |  |   |            | 13,797,284 | 
|                                                    | Diluted* |           |            | 13,932,342 |  |           |            | 13,896,348 |  |   |            | 13,874,830 |  |   |            | 13,798,664 | 

*     Amounts reflect the 5-for-4 stock split paid May 31, 2002.

ITEM 9 - CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements with accountants on accounting and financial disclosures as
defined by Item 304 of Regulation S-K.

56



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##### 



PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is set forth on pages 4 - 6 in the definitive proxy materials
of the Company filed in connection with its 2003 ANNUAL MEETING OF SHAREHOLDERS.
The information required by this item contained in such definitive proxy materials is incorporated herein by
reference.

ITEM 11 - EXECUTIVE COMPENSATION

The information required by this item is set forth on pages 7 - 13 in the definitive proxy materials of the
Company filed in connection with its 2003 ANNUAL MEETING OF SHAREHOLDERS, which
information is incorporated herein by reference.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is set forth on pages 2, 6 and 11 in the definitive proxy
materials of the Company filed in connection with its 2003 ANNUAL MEETING OF SHAREHOLDERS,
which information is incorporated herein by reference.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is set forth on page 15 in the definitive proxy materials of the
Company filed in connection with its 2003 ANNUAL MEETING OF SHAREHOLDERS, which
information is incorporated herein by reference.

ITEM 14 - CONTROLS AND PROCEDURES

(a)  Evaluation of Disclosure Controls and Procedures.

The Companys Chief Executive Officer and Chief Financial Officer have evaluated the Companys
disclosure controls and procedures within 90 days of the filing date of this report, and they concluded
that these controls and procedures are effective.

(b)  Changes in Internal Controls

There were no significant changes in internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation.

ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORMS 8-K *

*     Exhibits, Financial Statement Schedules and Reports on Forms 8-K, included in or incorporated by
reference into this filing were filed with the Securities and Exchange Commission. Bank of Granite
Corporation provides these documents through its Internet site at www.bankofgranite.com or by mail upon
request.



|a. 1. |  | Financial Statements                                           
|----- |  | ---------------------------------------------------------------
|     
|      |  | The information required by this item is set forth under Item 8
|     
|2.    |  | Financial Statement Schedules                                  
|     
|      |  | None                                                           

57



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##### 



|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|-- |  | ------ |  | ----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. |  |        |  |       |  | Exhibits                                                                                                                                                                                                                                                                             
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  | 3. (i) |  |       |  | Certificate of
Incorporation
Bank of Granite Corporations Restated Certificate of Incorporation, as amended, filed
as Exhibit 3.(a) to the Quarterly Report to Shareholders on Form 10-Q for the quarterly
period ended March 31, 2001 is incorporated herein by reference.         
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  | (ii)   |  |       |  | Bylaws of the
Registrant
Bank of Granite Corporations Bylaws, filed as Exhibit D of Pre-Effective Amendment
No. 1 to the Registrants Registration Statement on Form S-4 (Registration Statement No.
33-11876) on February 23, 1987 is incorporated herein by reference             
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  | 10.    |  |       |  | Material Contracts                                                                                                                                                                                                                                                                   
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.1. |  | Bank of Granite Employees Profit Sharing Plan and Trust, as amended, filed as
Exhibit 4.1 to the Registrants Registration Statement on Form S-8 (Registration Statement
No. 333-102383) on January 7, 2003, is incorporated herein by reference                                    
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.2. |  | Bank of Granite Supplemental Executive Retirement Plan filed as Exhibit 10.2. to the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 2000 is
incorporated herein by reference                                                                         
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.3. |  | Bank of Granite Corporations 1997 Incentive Stock Option Plan, filed as Exhibit 4.1 to the
Registrants Registration Statement on Form S-8 (Registration Statement No. 333-29157) on
June 13, 1997 is incorporated herein by reference                                              
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.4. |  | Employment and Noncompetition Agreement, dated June 1, 1999, 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, 2000 is incorporated herein by
reference                 
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.5. |  | Bank of Granite Corporations 2001 Incentive Stock Option Plan, filed as Exhibit 4.1 to the
Registrants Registration Statement on Form S-8 (Registration Statement No. 333-61640) on
May 25, 2001 is incorporated herein by reference                                               
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.6. |  | Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and John A. Forlines, Jr. filed as Exhibit 10.6. to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 is incorporated herein by
reference
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.7. |  | Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and Charles M. Snipes filed as Exhibit 10.7. to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 is incorporated herein by
reference    
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.8. |  | Executive Supplemental Retirement Plan Executive Agreement, dated November 15, 2001,
between the Bank and Kirby A. Tyndall filed as Exhibit 10.8. to the Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2001 is incorporated herein by
reference     
|   |  |        |  |       |  |                                                                                                                                                                                                                                                                                      
|   |  |        |  | 10.9. |  | Change of Control Agreement, dated January 1, 2002, between the Company and
John A. Forlines, Jr. filed as Exhibit 10.9. to the Registrants Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 is incorporated herein by reference                              

58



---



##### 



| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ---- |  | ------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |      |  | 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. |  | Definitive Merger Agreement, dated December 18, 2002, between the Company and
First Commerce Corporation filed as Exhibit 99.1 to the Registrants Report on Form 8-K
dated December 18, 2002 is incorporated herein by reference                                                                                                                                                                                                             
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |      |  | 10.13. |  | Amendment to Definitive Merger Agreement, dated January 22, 2003, between the Company
and First Commerce Corporation filed as Exhibit 99.1 to the Registrants Report on Form
8-K dated January 23, 2003 is incorporated herein by reference                                                                                                                                                                                                  
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 11.  |  |        |  | Schedule of Computation of Net Income Per Share
The information required by this item is also set forth under Item 8, Note 1. Summary
Of Significant Accounting Policies and Note 15. Reconciliation Of Basic And Diluted
Earnings Per Share                                                                                                                                                                                                  
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 21.  |  |        |  | Subsidiaries of the Registrant
The information required by this item is also set forth under Item 8, Note 1. Summary
Of Significant Accounting Policies                                                                                                                                                                                                                                                                                       
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 23.  |  |        |  | Consent of Independent Auditors                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 99.1 |  |        |  | 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                                                                                                                                                                                                                                                                                                
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 99.2 |  |        |  | 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                                                                                                                                                                                                                                                                                                
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | b. |      |  |        |  | Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |      |  |        |  | On October 15, 2002, the Company filed a report on Form 8-K regarding its October 15,
2002 news release in which it announced its earnings for the quarter ended September 30,
2002. The full text news release dated October 15, 2002 was attached as exhibit 99(a) to this
Form 8-K filing.                                                                                                                                                 
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |      |  |        |  | On December 18, 2002, the Company filed a report on Form 8-K regarding its December 18,
2002 announcement of its signing of a definitive merger agreement providing for the merger
of First Commerce Corporation of Charlotte, North Carolina and Bank of Granite
Corporation, with Bank of Granite Corporation surviving the merger. The full text news
release dated December 18, 2002 was attached as exhibit 99.1 to this Form 8-K filing.
| |    |      |  |        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |      |  |        |  | On January 23, 2003, the Company filed a report on Form 8-K regarding its January 23,
2003 announcement of its signing of an amendment to its definitive merger agreement with
First Commerce Corporation. The full text news release dated January 23, 2003 was attached
as exhibit 99.1 to this Form 8-K filing.                                                                                                                            

59



---



##### 



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

|    |  |                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------
|    |  | BANK OF GRANITE CORPORATION                                                                       
|   
|By: |  | /s/ John A. Forlines, Jr.John A. Forlines, Jr.
Chairman and Chief Executive Officer
March 10, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.

|                                                 |  |                                                                               |  |               
|------------------------------------------------ |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                         |  | Date          
|                                                
|/s/ John A. Forlines, Jr.John A. Forlines, Jr.   |  | Chairman and
Chief Executive Officer                                          |  | March 10, 2003
|                                                
|/s/ Kirby A. TyndallKirby A. Tyndall, CPA        |  | Secretary/Treasurer,
Chief Financial
Officer and Principal
Accounting Officer |  | March 10, 2003
|                                                
|/s/ John N. BrayJohn N. Bray                     |  | Director                                                                      |  | March 10, 2003
|                                                
|/s/ Paul M. Fleetwood, IIIPaul M. Fleetwood, III |  | Director                                                                      |  | March 10, 2003
|                                                
|/s/ John A. Forlines, Jr.John A. Forlines, Jr.   |  | Director                                                                      |  | March 10, 2003
|                                                
|/s/ Barbara F. FreimanBarbara F. Freiman         |  | Director                                                                      |  | March 10, 2003
|                                                
|/s/ Hugh R. GaitherHugh R. Gaither               |  | Director                                                                      |  | March 10, 2003
|                                                
|/s/ Charles M. SnipesCharles M. Snipes           |  | Director                                                                      |  | March 10, 2003
|                                                
|/s/ Boyd C. Wilson, Jr.Boyd C. Wilson, Jr., CPA  |  | Director                                                                      |  | March 10, 2003

60



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##### 



CERTIFICATIONS

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

I, John A. Forlines, Jr., certify that:



| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of Bank of Granite Corporation;                                                                                                                                                                                                                                         
|
| | 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
|
| | 3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;                   
|
| | 4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and we
have:                                                                                              



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of registrants board of directors (or persons performing
the equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying officers and I have indicated in this annual report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.

| |                      |  |                                                                                    
| | -------------------- |  | -----------------------------------------------------------------------------------
| | Date: March 10, 2003 |  | /s/ John A. Forlines, Jr.John A. Forlines, Jr.
Chairman and
Chief Executive Officer

61



---



##### 



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

I, Kirby A. Tyndall, certify that:



| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. I have reviewed this annual report on Form 10-K of Bank of Granite Corporation;                                                                                                                                                                                                                                         
|
| | 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;
|
| | 3. Based on my knowledge, the financial statements, and other financial information included in this annual
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;                   
|
| | 4. The registrants other certifying officers and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d-14) for the registrant and we
have:                                                                                              



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90
days prior to the filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;                                                                                                                        



| |                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to
the registrants auditors and the audit committee of registrants board of directors (or persons performing
the equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal controls which could adversely affect the
registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
|
| | b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrants internal controls; and                                                                                                                                        



| |                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. The registrants other certifying officers and I have indicated in this annual report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.

| |                      |  |                                                                                                                        
| | -------------------- |  | -----------------------------------------------------------------------------------------------------------------------
| | Date: March 10, 2003 |  | /s/ Kirby A. TyndallKirby A. Tyndall
Senior Vice President and
Chief Financial Officer and
Principal Accounting Officer

62



---



##### 



Bank of Granite Corporation
Exhibit Index

|        |  |                                                                                                                                                |  |               
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|        |  |                                                                                                                                                |  | Begins        
|Exhibit |  |                                                                                                                                                |  | on Page       
|3.(i)   |  | Bank of Granite Corporations Certificate of Incorporation                                                                                     |  | *             
|        |  |                                                                                                                                                |  |               
|3.(ii)  |  | Bank of Granite Corporations Bylaws                                                                                                           |  | *             
|        |  |                                                                                                                                                |  |               
|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    |  | Employment and Noncompetition Agreement between
GLL & Associates, Inc. and Gary L. Lackey                                                      |  | *             
|        |  |                                                                                                                                                |  |               
|10.5    |  | Bank of Granite Corporations 2001 Incentive Stock
Option Plan                                                                                 |  | *             
|        |  |                                                                                                                                                |  |               
|10.6    |  | Executive Supplemental Retirement Plan Executive
Agreement between the Bank and John A. Forlines, Jr.                                          |  | *             
|        |  |                                                                                                                                                |  |               
|10.7    |  | Executive Supplemental Retirement Plan Executive
Agreement between the Bank and Charles M. Snipes                                              |  | *             
|        |  |                                                                                                                                                |  |               
|10.8    |  | Executive Supplemental Retirement Plan Executive
Agreement between the Bank and Kirby A. Tyndall                                               |  | *             
|        |  |                                                                                                                                                |  |               
|10.9    |  | Change of Control Agreement between the Company and
John A. Forlines, Jr.                                                                      |  | *             
|        |  |                                                                                                                                                |  |               
|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   |  | Definitive Merger Agreement between the Company and
First Commerce Corporation                                                                 |  | *             
|        |  |                                                                                                                                                |  |               
|10.13   |  | Amendment to Definitive Merger Agreement between the
Company and First Commerce Corporation                                                    |  | *             
|        |  |                                                                                                                                                |  |               
|11      |  | Schedule of Computation of Net Income Per Share                                                                                                |  | Filed herewith
|        |  |                                                                                                                                                |  |               
|21      |  | Subsidiaries of the Registrant                                                                                                                 |  | Filed herewith
|        |  |                                                                                                                                                |  |               
|23      |  | Consent of Independent Auditors                                                                                                                |  | Filed herewith
|        |  |                                                                                                                                                |  |               
|99.1    |  | 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 herewith
|        |  |                                                                                                                                                |  |               
|99.2    |  | 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

63