UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Bank of Granite Corporation

 

(Exact name of registrant as specified in its charter)

Delaware		56-1550545
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
P.O. Box 128, Granite Falls, N.C.		28630
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (828) 496-2000

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

(Title of each class)		Name of each exchange on which registered
Common Stock, $1.00 Par Value Per Share		The NASDAQ Stock Market, LLC

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     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 þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

     As of March 8, 2010, 15,454,000 shares of common stock, $1.00 par value, were outstanding. As of June 30, 2009, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $45,683,000 based on the closing sales price as reported on the NASDAQ Global Select Market.

DOCUMENTS INCORPORATED BY REFERENCE

     PART III: Portions of the Definitive Proxy Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 2010 Annual Meeting of Stockholders.

 

 

Exhibit Index begins on page 68

FORM 10-K TABLE OF CONTENTS

		2009
		Form 10-K
		Page
PART I
Item 1 – Business			3
Item 1A – Risk Factors			9
Item 1B – Unresolved Staff Comments			13
Item 2 – Properties			13
Item 3 – Legal Proceedings			14
Item 4 – Removed and Reserved			14
PART II
Item 5 – Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			15
Item 6 – Selected Financial Data			15
Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 7A – Quantitative and Qualitative Disclosures about Market Risk			29
Item 8 – Financial Statements			30
Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			61
Item 9A – Controls and Procedures			62
Item 9B – Other Information			63
PART III
Item 10 – Directors, Executive Officers and Corporate Governance			63
Item 11 – Executive Compensation			63
Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			15 and 63
Item 13 – Certain Relationships and Related Transactions and Director Independence			64
Item 14 – Principal Accountant Fees and Services			64
PART IV
Item 15 – Exhibits and Financial Statement Schedules			65
Signatures			67
EX-10.3
EX-10.6
EX-10.10
EX-21
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

FORWARD LOOKING STATEMENTS

The discussions included in this annual report contain statements that may be deemed forward looking statements within the meaning of the Private Securities Litigation Act of 1995, including Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from these statements. For the purposes of these discussions, any statements that are not statements of historical fact may be deemed to be forward looking statements. Such statements are often characterized by the use of qualifying words such as “expects,” “anticipates,” “believes,” “estimates,” “plans,” “projects,” or other statements concerning opinions or judgments of the Company and its management about future events. The accuracy of such forward looking statements could be affected by certain factors, including but not limited to, the financial success or changing conditions or strategies of the Company’s customers or vendors, fluctuations in interest rates, actions of government regulators, the availability of capital and personnel, failure to comply with regulatory orders, and general economic conditions.

PART I

ITEM 1 — BUSINESS

Bank of Granite Corporation (the “Company”) is a Delaware corporation that was organized June 1, 1987 as a bank holding company. The Company’s only businesses are the ownership and operation of Bank of Granite (the “Bank”), a state bank chartered under the laws of North Carolina on August 2, 1906, and Granite Mortgage, Inc. (“Granite Mortgage”), a mortgage bank chartered under the laws of North Carolina on June 24, 1985.

We conduct our business through three reportable business segments: Community Banking, Mortgage Banking and Other. The Community Banking segment offers a variety of loan and deposit products and other financial services. The Mortgage Banking segment previously originated and sold mortgage loans. During the third quarter of 2009 Granite Mortgage discontinued all loan origination activity. The current activity is related to the resolution of a small loan held for investment portfolio and settling existing contractual obligations. The Other segment includes activities at the holding company level such as corporate and stockholder relations and funding from the issuance of commercial paper and trust preferred securities. For financial information on our three business segments, see Note 20, “Operating Segments,” of the “Notes to Consolidated Financial Statements.” We conduct our community banking business operations from 20 full-service offices located in Burke, Caldwell, Catawba, Forsyth, Iredell, Mecklenburg, Watauga, and Wilkes counties in North Carolina. According to the Federal Deposit Insurance Corporation (the “FDIC”), as of December 31, 2009, the Bank ranked 19th in assets and 17th in deposits among North Carolina banking institutions.

GENERAL BUSINESS

The Bank’s principal community banking activities include the taking of demand and time deposits and the making of loans, secured and unsecured, to individuals, associations, partnerships and corporations. The majority of the Bank’s 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 a material adverse effect on the business of the Bank. No material portion of the business of the Bank is seasonal.

GENERAL DESCRIPTION OF ECONOMIC AREAS

We conduct our community banking operations primarily in eight counties in the western part of North Carolina. The three counties we served prior to 2003 (Caldwell, Catawba and Burke) were historically known as a center for the manufacture of fiber optic and coaxial cable, furniture, and apparel. When the economy began to weaken in 2001, there were massive layoffs in these industries, and these counties were significantly impacted with a sudden rise in their unemployment rates.

Since 2003, we have expanded our business by opening branch offices in counties where the local economies had been more diversified and growing. In 2003, we opened new offices in Watauga County (Boone), Wilkes County (Wilkesboro), and Mecklenburg County (Matthews), and acquired First Commerce Bank and its three banking offices in Mecklenburg County (Charlotte and Cornelius). We opened banking offices in Forsyth County (Winston-Salem) in 2004 and in Iredell County (Statesville) in 2006.

Since 2008, economic conditions in our market area declined significantly, as they have in the U.S. in general. The economic slowdown grew more intense as 2009 proceeded. These economic difficulties negatively affected many of the Company’s customers, including businesses and individuals. Unemployment rates in our market area increased significantly during 2009. Our operations are significantly influenced by economic conditions in our market area, including the state of the real estate market.

TERRITORY SERVED AND COMPETITION

Commercial banking in North Carolina is extremely competitive in large part due to a long history of statewide branching. We compete in our market area with some of the largest banking organizations in the state and the country and other financial institutions, such as federally and state-chartered savings and loan institutions and credit unions, as well as consumer finance companies, mortgage companies and other lenders engaged in the business of extending credit. Many of our competitors have broader geographic markets and higher lending limits than us and are also able to provide more services and make greater use of media advertising.

Despite the competition in our market area, we believe that we have certain competitive advantages that distinguish us from our competition. We believe that our primary competitive advantages are our strong local identity and affiliation with the community and our emphasis on providing specialized services to small and medium-sized business enterprises, as well as professional and upper-income individuals. We are locally managed and are able to make credit and other decisions in a manner that has a direct bearing on faster service and more efficiently obtained credit. We offer customers modern, high-tech banking without forsaking community values such as prompt, personal service and friendliness. We offer many personalized services and attract customers by being responsive and sensitive to their individualized needs. We also rely on goodwill and referrals from shareholders and satisfied customers, as well as traditional newspaper and radio media to attract new customers. To enhance a positive image in the community, we support and participate in local events, and our officers and directors serve on boards of civic and charitable organizations.

Our community banking operations are required to compete based on rates in order to conduct loan business in each of our markets. Our community bank also competes for deposits in each of its markets. However, we believe that our focus on and commitment to providing superior customer service is what distinguishes us from our competitors.

EMPLOYEES

As of December 31, 2009, the Bank had 200 full-time equivalent employees. The Bank considers its relationship with its employees to be excellent.

SUPERVISION AND REGULATION

The Company is extensively regulated under both federal and state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on our business.

The Bank Holding Company Act

Our 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 any bank, unless it already owns a majority of the voting stock of such bank. Furthermore, a bank holding company must 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.

State Law

Our Bank is subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws that set specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina ^- chartered banks to assure compliance with state banking statutes and regulations, and the Bank is required to make regular reports to the Commissioner describing in detail its resources, assets, liabilities and financial condition. Among other things, the Commissioner regulates mergers and acquisitions of state ^- chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

Deposit Insurance

As a member institution of the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s deposits are insured up to a maximum of $250,000 per depositor through the deposit insurance fund (“DIF”), administered by the FDIC. An increase in basic federal deposit insurance coverage from $100,000 to $250,000 per depositor became effective on October 3, 2008, as part of the Emergency Economic Stabilization Act of 2008. The legislation, as amended, provides that the basic deposit insurance limit will return to $100,000 per depositor after December 31, 2013.

Each member institution is required to pay quarterly deposit insurance premium assessments to the FDIC. During 2009, a large number of bank failures put pressure on the DIF. In an effort to replenish the DIF, the FDIC implemented a special assessment of five basis points of each insured institution’s assets minus Tier 1 capital as of June 30, 2009. In addition, the FDIC required insured institutions to prepay their estimated quarterly risk-based deposit insurance assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012. Although the prepayment of these assessments is mandatory for all insured depository institutions, the FDIC retains the discretion as supervisor and insurer to exempt any institution from the prepayment requirement under certain circumstances as set forth in its regulations. In accordance with the discretion provided to the FDIC under 12 C.F.R. § 327.12(i)(1), the FDIC has exempted the Bank from prepaying its quarterly risk-based assessment for the fourth quarter of 2009, and all of 2010, 2011, and 2012. This action did not impact our third quarter 2009 assessment, which was paid on December 30, 2009. Our assessments for 2010, 2011, and 2012 will continue to be payable quarterly.

The Bank has chosen to participate in the transaction guarantee component of the FDIC Temporary Liquidity Guarantee Program. As of October 14, 2008, all noninterest-bearing transaction deposit accounts at our participating FDIC ^- Insured Institution, including all personal and business checking deposit accounts that do not earn interest, are fully insured for the entire amount in the deposit account. This unlimited insurance coverage, as amended, is temporary and will remain in effect until June 30, 2010.

Capital Requirements

The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying noncumulative perpetual preferred stock, minority interests in certain equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions and restricted core capital elements, including trust preferred securities. “Tier 2,” or supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular circumstances warrant.

The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a bank’s capital adequacy, an assessment of the bank’s interest rate risk (“IRR”) exposure. The standards for measuring the adequacy and effectiveness of a banking organization’s IRR management include a measurement of board of directors and senior management oversight, and a determination of whether a banking organization’s procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.

Failure to meet applicable capital guidelines could subject a banking organization to a variety of enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit insurance by the FDIC. See “Federal Deposit Insurance Corporation Improvement Act of 1991” below for more discussion of enforcement actions applicable to undercapitalized institutions. In addition, future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect our ability to grow and could restrict the amount of profits, if any, available for the payment of dividends to the shareholders.

At December 31, 2009, our Tier I ratio, total capital ratio to risk-adjusted assets, and leverage ratio were 6.44%, 7.73% and 4.84%, respectively. We met the regulatory capital requirements to be “well capitalized” for our Tier I capital ratio, “adequately capitalized” for our leverage ratio and were “undercapitalized” for total capital.

As we reported in our Form 8-K filed with the SEC on September 4, 2009, the Bank entered into a Stipulation and Consent (“Consent”) to the issuance of an Order to Cease and Desist (“Order”) by the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks (“The Commissioner”). Based on our Consent, the FDIC and the Commissioner jointly issued the Order on August 27, 2009.

The Order is a formal corrective action pursuant to which the Bank has agreed to address specific issues set forth below, through the adoption and implementation of procedures, plan and policies designed to enhance the safety and soundness of the Bank.

Among other things, the Order requires the Bank to:

	•		Assure the on-going participation of the Bank’s Board of Directors in the affairs of the Bank;
	•		Have and retain qualified management of the Bank, and assess management and staffing needs, qualifications and performance;
	•		Present a written capital plan to the FDIC and the Commissioner within 30 days of the Order by which the Bank would achieve a Tier 1 Leverage Capital Ratio of not less than 8 percent and Total Risk-Based Capital Ratio of not less than 12 percent during the life of the Order;
	•		Formulate and implement a plan to reduce the Bank’s risk exposure in assets classified “Substandard or Doubtful” in the FDIC’s most recent report of examination by 20 percent in 180 days; 40 percent in 360 days; 65 percent in 540 days and by 75 percent in 720 days;
	•		Analyze and reduce credit concentrations in the Bank’s loan portfolio;
	•		Within 60 days, ensure full implementation of effective lending and collection policies;
	•		Cease to extend additional credit to any borrower who has a loan or extension of credit with the Bank that is classified as “Loss” or “Doubtful”;
	•		Within 45 days, adopt and implement a plan regarding the Bank’s liquidity, contingent funding and asset liability management, and review and revise the plan on a quarterly basis;
	•		Not pay cash dividends without the prior written consent of the FDIC and the Commissioner;
	•		Neither renew, roll-over nor increase the amount of brokered deposits above the amount outstanding at the date of the Order without obtaining a waiver from the FDIC.

The Order, as set forth above, requires the Bank to achieve and maintain Tier 1 Leverage Capital Ratio of not less than 8 percent and a Total Risk-Based Capital of not less than 12 percent for the life of the Order.

See Note 2, “Regulatory Matters and Going Concern Considerations,” and Note 15, “Regulation and Regulatory Restrictions,” in the Notes to Consolidated Financial Statements for additional discussion of our regulatory actions.

Federal Deposit Insurance Corporation Improvement Act of 1991

In December, 1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other federal banking statutes. FDICIA provides for, among other things:

	•		Publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,
	•		The establishment of uniform accounting standards by federal banking agencies,
	•		The establishment of a “prompt corrective action” system of regulatory supervision and intervention, based on capitalization levels, with greater scrutiny and restrictions placed on depository institutions with lower levels of capital,
	•		Additional grounds for the appointment of a conservator or receiver, and
	•		Restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.

FDICIA also provides for increased funding of the FDIC insurance funds and the implementation of risk-based premiums.

A central feature of FDICIA is the requirement that the federal banking agencies take “prompt corrective action” with respect to depository institutions that do not meet minimum capital requirements. Pursuant to FDICIA, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” An institution may be deemed by the regulators to be in a capitalization category that is lower than is indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.

FDICIA provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. FDICIA also limits the circumstances under which the FDIC is permitted to provide financial assistance to an insured institution before appointment of a conservator or receiver.

Miscellaneous

The dividends that may be paid by the Company are subject to legal limitations. The Bank is the only source of dividends that may be paid by the Company. In accordance with North Carolina banking law, dividends may not be paid by the Bank unless its capital surplus is at least 50% of its paid-in capital.

The earnings of the Company will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. 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 our earnings.

Effective March 11, 2000, the Gramm-Leach-Bliley Act of 1999 allows a bank holding company to qualify as a “financial holding company” and, as a result, be permitted to engage in a broader range of activities that are “financial in nature” and in activities that are determined to be incidental or complementary to activities that are financial in nature. The Gramm-Leach-Bliley Act amends the Bank Holding Company Act to include a list of activities that are financial in nature, and the list includes activities such as underwriting, dealing in and making a market in securities, insurance underwriting and agency activities and merchant banking. The Federal Reserve Board is authorized to determine other activities that are financial in nature or incidental or complementary to such activities. The Gramm-Leach-Bliley Act also authorizes banks to engage through financial subsidiaries in certain of the activities permitted for financial holding companies. The Company has elected not to register as a financial holding company.

We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on our operations.

On October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish regulations and to impose requirements and restrictions on the operation of financial institutions. This act has increased the overall cost of our regulatory compliance activities.

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

INVESTMENT POLICIES

For a discussion of our investment policies, see “Investment Securities” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this annual report.

LOAN PORTFOLIO

For a discussion of our loan portfolio, see “Loans” and “Provisions and Allowances for Loan Losses” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this annual report.

AVAILABLE INFORMATION

Additional information about our company and business is available at our website, at www.bankofgranite.com. Our 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 filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934, are available, free of charge, on our website at www.bankofgranite.com under the heading “Investor Relations — SEC Filings.” These reports are available as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. In addition, copies of these filings are available at the Securities and Exchange Commission’s Public Reference Room located at 100 F Street, NE, Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission’s website, www.sec.gov, is another source of this information. Information included on our website is not incorporated by reference into this annual report.

ITEM 1A — RISK FACTORS

There is substantial doubt about our ability to continue as a going concern.

As discussed in Note 2 of the “Notes to Consolidated Financial Statements” we are under an Order from the FDIC and the North Carolina Commissioner of Banks to increase our leverage and total risk based capital ratios to at least 8% and 12%. We are not in compliance at December 31, 2009. Failure to increase our capital ratios or further declines in our capital ratios exposes us to additional restrictions and regulatory actions, including potential regulatory receivership. This uncertainty as to our ability to meet existing or future regulatory requirements raises substantial doubt about our ability to continue as a going concern. We do not expect to meet the capital ratio requirements in the near – term future. Our audited financial statements were prepared under the assumption that we will continue our operations on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. Our financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. If we cannot continue as a going concern, our shareholders will lose some or all of their investment in the Company. In addition, our customers, employees, vendors, correspondent institutions, and others with whom we do business may react negatively to the substantial doubt about our ability to continue as a going concern. This negative reaction may lead to heightened concerns regarding our financial condition that could result in a significant loss in deposits and customer relationships, key employees, vendor relationships and our ability to do business with correspondent institutions upon which we rely.

Failure to comply with regulatory orders is likely to result in adverse actions and restrictions.

Effective August 27, 2009, the Company is operating under an Order to Cease and Desist with the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Order requires the Bank to report to the regulators at least quarterly to address, among other things, the ongoing management and oversight of the Bank, an increase in the Bank’s capital levels, a reduction in the Bank’s classified assets, a reduction in concentrations of credit and improvement in the Bank’s earnings. The Bank is currently not in compliance with the capital levels required in the Order, and we do not expect to meet the capital ratio requirements in the near-term future. Continued failure to comply with the Order is likely to result in further adverse regulatory actions and restrictions upon our activities.

Continued losses will further erode our capital levels.

Our capital level at December 31, 2009 are at a level that is below the “well capitalized” level under regulatory definitions, and our total risk-based capital ratio is below the “adequately capitalized” level. Failure to maintain “well capitalized” status is a violation of the Bank’s Order with our regulators, which could result in adverse regulatory actions against us. Additional significant increases in our allowance for loan losses, significant write-downs of foreclosed real estate and other assets, or other operating losses would decrease our capital levels further.

Our business has been and may be adversely affected by conditions in the financial markets and economic conditions generally.

In 2009 and continuing into 2010, economic conditions in our market area declined significantly, as they have in the U.S. in general. The economic slowdown grew more intense as 2009 proceeded. These economic difficulties negatively affected many of our customers, including businesses and individuals. Unemployment rates in our market area have increased significantly. Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the market where we operate. In addition, further negative economic developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for loan losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult economic conditions on us and others in the financial services industry.

As a result of the difficult economic environment, many lending institutions, including us, have experienced declines in the performance of their loans. Moreover, competition among depository institutions for deposits and quality loans has increased significantly. In addition, the value of real estate collateral supporting many commercial loans and home mortgages has declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies to raise capital or borrow in the debt markets. As a result, there is a potential for additional federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be aggressive in responding to concerns and trends identified in examinations. The impact of these conditions and any new legislation may negatively impact our operations by restricting our business, which could adversely impact our financial performance and our stock price.

Overall, during the past year, the general business environment has had an adverse effect on our business, and we can not predict whether the environment will improve in the near term. Until conditions improve, we expect our business, financial condition, and results of operations to be adversely affected.

Economic difficulties could impair the ability of our customers, both individuals and businesses, to repay their loans.

Our largest source of revenue is payments on loans that we make to our customers. During times of economic downturns, our customers’ sources of funds to repay loans are adversely affected, and delinquencies on loans increase. Weakness in the economy in general, and especially weakness in real estate markets, adversely affects our collections and the strength of our loan portfolio. Declines in the ability of our customers to repay loans causes loss of revenue and increased levels of nonperforming loans, which results in higher loan losses, higher provisions for loan losses, and lower earnings.

Changes in interest rates could cause our earnings to decline.

Our balance sheet is currently asset sensitive, which means that when market interest rates change, interest rates on our interest rate sensitive assets, such as loans and investment securities, change more rapidly than interest rates on our interest rate sensitive liabilities, such as deposits and borrowings. Therefore, there are more assets than liabilities subject to immediate repricing as market interest rates change. In a decreasing interest rate environment, our net interest income will tend to fall, and in a rising rate environment, the reverse holds.

Strong competition within our market areas may limit our growth and profitability. Larger banks and numerous other financial institutions with greater resources may be able to compete more effectively than we can.

We face numerous competitors in our community banking operations in all parts of our market area. In addition to competing with larger and smaller banks, which tend to be numerous, we compete with credit unions, brokerage and insurance firms, and other nonbank businesses, such as manufacturers and retailers, that engage in consumer financing activities. Price competition for loans and deposits might result in earning less on our loans and paying more on our deposits, which would reduce our net interest income. Competition also makes it more challenging to grow loans and deposits and to hire and retain experienced employees. Some of the institutions with which we compete have substantially greater resources and lending limits than we do and may offer services that we do not provide. We expect competition to continue to increase in the future as a result of legislative, regulatory, and technological changes and the continuing trend of consolidation in the financial services industry.

If significant increases are required to our allowance for loan losses, our earnings would decrease.

We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If one or more conditions or events causes our prior assumptions to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in increases to our allowance and loss provision. Material additions to our allowance would materially decrease our net income.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs required by regulatory authorities could have a material adverse effect on our financial condition and results of operations.

We may be required to raise additional capital in the future, but that capital may not be available or may not be available on terms acceptable to us when it is needed.

We are required to maintain adequate capital levels to support our operations and to comply with the existing regulatory agreements. The current need for the Company to raise capital and the depressed or almost nonexistent availability of such capital, increases the uncertainty about our ability to raise additional capital in the future on terms acceptable to us. If we can not raise additional capital our ability to conduct our operations could be materially impaired.

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

Our holding company and community banking businesses are highly regulated. Our holding company is regulated by the FRB, the Banking Commission, and the Securities and Exchange Commission. Our community banking subsidiary is regulated by the FDIC and the Banking Commission. Such regulation and supervision govern the activities in which we may engage and are intended primarily for the protection of the deposit insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations or legislation, may have a material impact on our operations. In addition to the risks of noncompliance, we are required to dedicate considerable time and monetary resources in our efforts to comply with the numerous laws and regulations that govern the ways in which we conduct our community banking activities.

The FDIC Deposit Insurance assessments that we are required to pay will increase, possibly materially, in the future, which would have an adverse effect on our earnings.

As a member institution of the FDIC, we are required to pay quarterly deposit insurance premium assessments to the FDIC. Due to the recent turmoil in the financial system, including the failure of several unaffiliated FDIC-insured depository institutions, the deposit insurance premium assessments paid by all banks have increased. Continued increases in the assessments would adversely impact our earnings, perhaps materially.

If investment securities we own suffer a decline in value that we determine to be other than temporary, we may be required to record a significant charge to earnings.

We evaluate our investment securities that have declined in value to determine whether we believe the decline was due to reasons other than temporary market fluctuations. For example, securities may decline in value if the issuer is experiencing difficulties that may jeopardize our ability to recover in a reasonable time the amount we invested. Should we determine that a decline in security value is other than temporary, we are required to record a charge to earnings in our financial statements during the period in which we made that determination. In times of economic stress, declines in the value of securities become more prevalent, increasing the likelihood of charges to our earnings.

Changes in accounting may affect our reported earnings and operating income.

Generally accepted accounting principles and accompanying accounting pronouncements, implementation guidelines, and interpretations for many aspects of our business, such as accounting for investments and loans, are highly complex and involve subjective judgments. Changes in these rules or their interpretation could significantly change our reported earnings. See Note 1, “Summary of Significant Accounting Policies,” of the “Notes to Consolidated Financial Statements.”

A concentration of real estate development and commercial real estate loans in our portfolio could result in additional increases in our allowance for loan losses, and corresponding decreases in our earnings, if the general economy or real estate markets continue to experience a downward trend.

The volatility of the real estate development and commercial real estate markets could affect our assumptions about the collectibility of our loan portfolio, and the value of the real estate serving as collateral for the repayment of these loans. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, and could materially decrease our net income.

Losing key personnel could negatively affect us.

None of the current members of the Bank’s executive management team are under employment contracts, and the loss of additional key personnel could have a negative impact on us and our future results of operations.

Further decline in market value of Company stock could trigger delisting on the stock exchange.

The market value of the Company’s stock traded on the NASDAQ Global Select Market declined below $1.00 per share during 2009, and the Company received notice in November 2009 that it had a 180 day grace period for the bid price to exceed $1.00 per share for 10 consecutive days to prevent the Company’s stock from being delisted. The Company regained compliance with the NASDAQ listing rules in January 2010; however, if the Company’s stock price does not continue to meet this criteria, the stock could be delisted.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None

ITEM 2 — PROPERTIES

We indirectly own and operate real estate through our ownership of the Bank. The Bank owns its headquarters, operations and information technology center offices located in Granite Falls, North Carolina. The Bank also owns banking offices in the North Carolina cities and communities of Conover, Granite Falls, Hickory, Hudson, Lenoir, Matthews, Morganton, Newton, Winston-Salem and Wilkesboro. The Bank leases banking offices in the North Carolina cities and communities of Boone, Charlotte, Cornelius, Granite Falls and Statesville. We believe that the premises occupied by the Bank are well located and suitably equipped to serve and support our community banking business. We do not currently anticipate any problems with the renewal of our leases. See also Note 6, “Premises and Equipment,” of the “Notes to Consolidated Financial Statements.”

The Bank both owns and leases its facilities as indicated 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

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

2630 Connelly Springs Road (Baton)

Banking office in Ingle’s      Supermarket

430

none

leased

Boone, North Carolina

230 Wilson Drive

Banking office

5,705

none

leased

Charlotte, North Carolina

301 South McDowell Street

Banking office

6,096

none

leased

3920 Sharon Road (SouthPark)

Banking office

1,955

none

leased

Conover, North Carolina

1109 Conover Blvd, East

Banking office

4,421

1.4

owned

Cornelius, North Carolina

18825 West Catawba Avenue

Banking office

3,409

none

leased

Approximate

Facility Size

Lot Size

Owned

Location

Principal Use

(square feet)

(acres)

or Leased

Hickory, North Carolina

25 3rd Street NW

Banking office

9,515

0.5

owned

315 1st Avenue NW (Bank of Granite Plaza)

Support offices

15,092

0.5

owned

2220 12th Avenue NE (Springs Road)

Banking office

3,612

1.6

owned

281 14th Avenue NE (Viewmont)

Banking office

4,200

2.0

owned

2900 Highway 127 South (Mountain View)

Banking office

2,480

1.8

owned

Hudson, North Carolina

537 Main Street

Banking office

4,235

4.1

owned

707 College Avenue SW

Banking office

7,400

1.2

owned

1351 Norwood Street SW (Whitnel)

Banking office

2,530

1.0

owned

701 Wilkesboro Boulevard NE (Hibriten)

Banking office closed in 2009

2,480

2.1

owned

Matthews, North Carolina

2432 McKee Road

Banking office

4,941

1.5

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

Statesville, North Carolina

207 South Center Street

Banking office

5,000

none

leased

Wilkesboro, North Carolina

1305A S. Collegiate Drive

Banking office

1,600

none

owned

Winston-Salem, North Carolina

791 Jonestown Road, Ste 100

Banking office

5,000

none

owned

ITEM 3 — LEGAL PROCEEDINGS

There were no material legal proceedings pending as of December 31, 2009. During the year ended December 31, 2009, we were not required to pay any penalties for failure to disclose certain “reportable transactions” under Section 6707A of the Internal Revenue Code.

ITEM 4 — REMOVED AND RESERVED

PART II

Our common stock, $1.00 par value, trades on The NASDAQ Global Select Market of The NASDAQ Stock Market^® under the symbol GRAN. Price and volume information is contained in The Wall Street Journal^® and many other major daily newspapers in the NASDAQ section under the National Market Market System listings.

During 2009, the market participants making a market in our common stock with the highest volumes of our shares traded were Knight Equity Markets, L.P., Direct Edge ECN LLC, UBS Securities LLC, Citadel Securities LLC and Automated Trading Desk. There were no issuances of unregistered securities by us during the year ended December 31, 2009.

As of December 31, 2009, there were 15,454,000 shares of our common stock outstanding, owned by approximately 2,000 stockholders of record and an estimated 4,000 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, 2009.

Quarterly Common Stock Market Price Ranges and Dividends

2009		Quarter 1				Quarter 2				Quarter 3				Quarter 4
Price Range
High		$	3.61			$	3.50			$	3.12			$	1.04
Low			1.10				1.50				1.02				0.40
Close			1.71				3.01				1.03				0.51
Dividends*			n/a				n/a				n/a				n/a

2008		Quarter 1				Quarter 2				Quarter 3				Quarter 4
Price Range
High		$	12.99			$	11.85			$	8.58			$	5.00
Low			9.75				6.66				2.29				2.15
Close			10.98				7.11				2.38				2.45
Dividends*			0.13				0.13				n/a				n/a

See also Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for information about securities authorized for issuance under equity compensation plans and share repurchases.

ITEM 6 — SELECTED FINANCIAL DATA

This item is not applicable.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

Management’s Discussion and Analysis is provided to assist in understanding and evaluating our results of operations and financial condition. The following discussion is intended to provide a general overview of our performance for the year ended December 31, 2009. Readers seeking more in-depth information should read the more detailed discussions that follow as well as the consolidated financial statements and related notes included under Item 8 of this annual report. All information presented is consolidated data unless otherwise specified.

EXECUTIVE OVERVIEW

The Company reported a loss of $25.6 million, or $1.66 per share for 2009, compared to a loss of $36.3 million, or $2.35 per share for 2008. The 2009 loss reflects a continuation of very elevated levels of credit costs for loan losses and losses on the disposal of real estate obtained in the settlement of loans. Those costs were approximately $39.0 million for 2009, compared to $31.1 million for 2008.

The depressed economic environment in our markets continues to affect the values of all collateral which underlie our loans. The loss severity on new home construction, development lots and raw land has been the most significant component of our losses. Additionally, we have experienced weakness in our small business portfolio, which in combination with the depressed real estate market reduces the collateral value of the buildings housing the business operations of these customers. These conditions are the primary reasons for the continuing elevated levels of loan charge-offs and related loss provisioning, and the level of non-performing loans.

The 2009 loss includes a $2.1 million loss related to our mortgage subsidiary. Funding and operational issues resulted in attempting to restructure the operating model and eventually discontinuing all loan origination activity in the third quarter of 2009. All further comments relate solely to the operations and financial condition of the Bank.

The Company was able to recognize a $5.8 million tax benefit in the fourth quarter as a result of favorable tax legislation for small companies, including banks that had not received TARP assistance.

As discussed more completely in the footnotes to the financial statements, the Bank consented to the regulatory issuance of a Cease and Desist Order (“the Order”) in August of 2009. The Bank’s inadequate capital levels; continuing operating losses; and continuing loan asset quality challenges were the primary issues noted in the Order for correction. In response, the Bank has restructured the balance sheet mix of assets, curtailed lending activities (although loan demand in our markets is consistent with other cited evidence of very weak loan demand in general), and aggressively reduced core operating costs. However, increased FDIC insurance costs, and the legal and other costs of resolving the problem loans significantly outweighs the cost reductions.

Our balance sheet restructuring and loan resolution efforts have combined to result in a $160.0 million reduction in the Bank’s loans year over year. Other restructuring activities and aggressive fourth quarter deposit acquisition activity has resulted in our deposit levels remaining essentially level on a comparative year basis, with liquidity improving significantly year over year.

In the fourth quarter we saw a surge in borrowers indicating, through notice or lack of performance, an inability to meet existing loan terms. As a result, nonperforming loans increased significantly on a consecutive quarter basis, and the degradation of the portfolio has continued into 2010. Unless the economy improves significantly, these asset quality issues and related costs are likely to continue to depress the Bank’s operating performance in 2010.

The erosion of regulatory capital because of the operating loss, net of the benefits of the balance sheet restructuring and the tax benefit, results in the Bank being “undercapitalized” under regulatory definitions on a total risk basis at December 31, 2009. The uncertainties related to the Bank’s ability to meet the capital levels set forth in the Order and the possible regulatory response to the continuing capital level deficiencies, raises substantial doubt as to the Company’s ability to continue as a going concern.

The following sections of this discussion provide more detail regarding current and prior year matters. Additionally, Note 2, “Regulatory Matters and Going Concern Considerations,” in the “Notes to Consolidated Financial Statements” discusses the regulatory and capital levels in significantly more detail.

CRITICAL ACCOUNTING POLICIES

Information included in our audited financial statements and management’s discussion and analysis is derived from our accounting records, which are maintained in accordance with accounting principles generally accepted in the United States of America (US GAAP) and general practices within the banking industry. While much of the information is definitive, certain accounting issues are highly dependent upon estimates and assumptions made by management. An understanding of these estimates and assumptions is vital to understanding the Company’s financial statements. Critical accounting policies are those policies that are most important to the determination of our financial condition and results of operations, or that require management to make assumptions and estimates that are subjective or complex.

We periodically evaluate our critical accounting policies, including those related to the allowance for loan losses and fair value estimates. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from these estimates under different assumptions or outcomes.

ALLOWANCE FOR LOAN LOSSES — The allowance for loan losses reflects the estimated losses resulting from the inability of our customers to make required loan payments. The allowance reflects management’s evaluation of the risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible loan losses. Our evaluation process is based on historical evidence and current trends among delinquencies, defaults and nonperforming assets.

The methodology for determining the allowance for loan losses is based on historical loss rates, current credit grades, specific allocation for impaired loans and an unallocated amount. 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. We periodically revise historical loss factors for different segments of the portfolio to be more reflective of current market conditions.

Large commercial loans that exhibit probable or observed credit weaknesses are subject to individual review for impairment. When individual loans are impaired, the impairment allowance is measured in accordance with the accounting standard entitled Accounting by Creditors for Impairment of a Loan. The predominant measurement method for the Bank is the evaluation of the fair value of the underlying collateral. Our policy for the recognition of interest income on impaired loans is the same as our interest recognition policy for all non-accrual loans. Accrued interest is reversed to income to the extent it relates to the current year and charged off otherwise.

The evaluations described above are inherently subjective, as they require the use of material estimates. Unanticipated future adverse changes in borrower or economic conditions could result in material adjustments to our allowance for loan losses that could adversely impact our earnings in future periods.

FAIR VALUE ESTIMATES — The Company reports investment securities available for sale, and certain impaired loans and other assets at fair value. At December 31, 2009, the percentage of total assets measured at fair value on a recurring basis was 18.0%. The majority of assets and liabilities reported at fair value are based on quoted market prices or market prices for similar instruments. Other financial assets are reported at fair value on a nonrecurring basis, as impaired loans and other real estate. See Note 19, ”Fair Value of Financial Instruments”, in the Notes to Consolidated Financial Statements for additional disclosures regarding the fair value of financial instruments.

RESULTS OF OPERATIONS

Performance Summary for 2009 and 2008

The following table includes significant elements of the Company’s 2009 and 2008 operations. The most significant change in the 2009 loss of $25.6 million versus the 2008 amount of $36.3 million is $10.4 million related to federal income taxes. In 2009, the Company was able to carry back $5.8 million of the operating loss to previously closed years. In 2008, the net result of the Company realizing the operating loss through carryback, and providing a valuation reserve against existing deferred tax assets, was the recognition of a $4.6 million tax expense.

In 2008 the Company determined that the value of its goodwill was impaired in the amount of $10.8 million and the goodwill was written off.

The net interest income decreased $5.7 million when comparing 2009 to 2008. Both years reflect the effect of historically low market interest rates that continue to exist. The competition for deposits creates a floor for deposits that continues to compress net interest margin. See the separate section “Net Interest Income” of this discussion for details of the net interest income components.

Other expenses decreased $6.0 million. The salaries and employee benefits decreased $5.5 million and resulted from headcount reduction in the Bank, substantially all personnel eliminated in the mortgage company, and the curtailment of pension benefits. These amounts were partially offset by payment of termination benefits. In 2009, the Company incurred losses on disposal and write-down of existing other real estate of $10.3 million versus $0.9 million in 2008. FDIC insurance cost increased by $2.5 million from 2008, primarily due to the Bank’s risk ratings declining substantially, and the FDIC imposing a special assessment that related to all banks of $1.0 million as a measure to attempt to stabilize the insurance fund. The 2008 amount had increased by approximately $1.0 million from recent prior years.

Other income was $1.5 million less in 2009 than 2008, as the mortgage banking income decreased by $2.8 million. Our mortgage company ceased originating new loans in early 2009. In 2008 the Company incurred securities losses of $1.9 million as a result of the decision to sell a portfolio of securities in the holding company that were deemed to be at risk of high losses in the future.

The following table highlights differences in operations for the year ended December 31, 2009 compared to the year ended December 31, 2008.

		2009				2008				$ Change				% Change
(Table dollars in thousands except per share amounts)
Net loss		$	(25,620	)		$	(36,251	)		$	10,631				-29.3	%
Net loss per share			(1.66	)			(2.35	)			0.69				-29.4	%
Interest income			52,646				66,923				(14,277	)			-21.3	%
Interest expense			21,224				29,753				(8,529	)			-28.7	%
Net interest income			31,422				37,170				(5,748	)			-15.5	%
Interest and fees from loans			46,948				57,953				(11,005	)			-19.0	%
Average gross loans			877,432				971,560				(94,128	)			-9.7	%
Provision for loan losses			28,733				30,228				(1,495	)			-4.9	%
Charge-offs, net of recoveries			25,702				23,095				2,607				11.3	%
Nonperforming loans			53,140				50,591				2,549				5.0	%
Interest on securities and overnight investments			4,032				4,634				(602	)			-13.0	%
Total other income			8,887				10,378				(1,491	)			-14.4	%
Total other expenses			42,996				48,974				(5,978	)			-12.2	%
Personnel expenses			16,010				21,497				(5,487	)			-25.5	%
Goodwill impairment			—				10,763				(10,763	)			-100.0	%
Other noninterest expenses			26,986				16,714				10,272				61.5	%
Income tax expense (benefit)			(5,800	)			4,597				(10,397	)			-226.2	%
Net interest margin			3.11	%			3.48	%
Average prime rate			3.25	%			5.09	%
Yield on loans			5.54	%			6.41	%
Yield on securities and overnight investments			3.03	%			4.51	%
Cost of interest-bearing deposits			2.32	%			3.13	%

NET INTEREST INCOME

Net interest income (the difference between interest earned on interest-earning assets, primarily loans in the Bank, and interest paid on interest-bearing liabilities, primarily deposits in the Bank) normally represents the most significant component of our revenue. Net interest income was approximately $31.4 million and $37.2 million for 2009 and 2008, respectively, representing a decrease of 15.5% for 2009 over 2008. The decrease in net interest income reflects the continued effect of low market interest rates and approximately $160.0 million decrease in the Bank’s loan portfolio. A result of the balance sheet restructuring has been to increase the securities investment portfolio and reduce loans; however, rates on investments within the Bank’s pricing and risk tolerances are substantially below replaced loan rates. The Bank has implemented a more rigorous risk based pricing protocol for loans in the second half of 2009, including the utilization of rate floors, and as a result, net interest income has increased on a linked quarter basis in each of the last two quarters.

The Bank’s cost of funds continues to decline as maturing certificates of deposit generally reflect rates in existence prior to the dramatic decrease in market rates in late 2008.

The following table presents our daily average balances, interest income and expense and average rates earned and paid on interest-earning assets and interest-bearing liabilities for the last three years.

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

		2009												2008												2007
						Average				Interest								Average				Interest								Average				Interest
		Average				Yield/				Income/				Average				Yield/				Income/				Average				Yield/				Income/
(Table dollars in thousands)		Balance				Cost				Expense				Balance				Cost				Expense				Balance				Cost				Expense
Assets
Loans (1)		$	877,432				5.54	%		$	48,614			$	971,560				6.41	%		$	62,289			$	949,574				8.63	%		$	81,906
Taxable securities			126,253				2.90	%			3,660				83,166				3.89	%			3,236				128,848				4.44	%			5,726
Nontaxable securities (2)			8,270				6.77	%			560				30,839				6.66	%			2,054				36,861				6.64	%			2,449
Federal funds sold			5,116				0.16	%			8				4,667				1.35	%			63				1,748				5.21	%			91
Total interest-earning assets			1,017,071				5.20	%			52,842				1,090,232				6.20	%			67,642				1,117,031				8.07	%			90,172
Cash and due from banks			39,091												23,919												25,779
All other assets			45,497												75,549												63,101
Total assets		$	1,101,659											$	1,189,700											$	1,205,911
Liabilities and stockholders’ equity
NOW deposits		$	140,022				0.96	%			1,348			$	134,919				1.14	%			1,533			$	122,345				1.28	%			1,572
Money market deposits			197,416				1.51	%			2,981				233,782				2.89	%			6,755				244,361				4.25	%			10,381
Savings deposits			20,303				0.20	%			40				21,567				0.24	%			52				22,677				0.39	%			89
Time deposits of $100 or more			209,525				3.16	%			6,630				214,208				4.07	%			8,724				204,249				4.91	%			10,036
Other time deposits			282,971				3.07	%			8,699				246,424				3.89	%			9,580				229,716				4.67	%			10,734
Interest-bearing deposits			850,237				2.32	%			19,698				850,900				3.13	%			26,644				823,348				3.99	%			32,812
Overnight borrowings			11,240				1.09	%			123				28,305				2.48	%			703				36,357				3.87	%			1,407
Other borrowings			45,569				3.08	%			1,403				52,857				4.55	%			2,406				48,503				5.42	%			2,629
Total interest-bearing liabilities			907,046				2.34	%			21,224				932,062				3.19	%			29,753				908,208				4.06	%			36,848
Noninterest-bearing deposits			111,614												131,563												146,563
Other liabilities			15,134												12,820												11,376
Stockholders’ equity			67,865												113,255												139,764
Total liabilities and stockholders’ equity		$	1,101,659											$	1,189,700											$	1,205,911
Net yield on earning assets and
net interest income (2)(3)							3.11	%		$	31,618								3.48	%		$	37,889								4.77	%		$	53,324
Interest rate spread (4)							2.86	%											3.01	%											4.01	%

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,

		2009 compared to 2008												2008 compared to 2007
		Change												Change
		Attributable to												Attributable to
(Table in thousands)		Volume(1)				Rate(1)				Total				Volume(1)				Rate(1)				Total
Loans		$	(5,625	)		$	(8,050	)		$	(13,675	)		$	1,653			$	(21,270	)		$	(19,617	)
Taxable securities			1,463				(1,039	)			424				(1,904	)			(586	)			(2,490	)
Nontaxable securities			(1,516	)			22				(1,494	)			(401	)			6				(395	)
Federal funds sold			3				(58	)			(55	)			96				(124	)			(28	)
Interest-earning assets		$	(5,675	)		$	(9,125	)		$	(14,800	)		$	(556	)		$	(21,974	)		$	(22,530	)
NOW deposits		$	54			$	(239	)		$	(185	)		$	152			$	(191	)		$	(39	)
Money market deposits			(800	)			(2,974	)			(3,774	)			(378	)			(3,248	)			(3,626	)
Savings deposits			(3	)			(9	)			(12	)			(4	)			(33	)			(37	)
Time deposits of $100 or more			(169	)			(1,925	)			(2,094	)			447				(1,759	)			(1,312	)
Other time deposits			1,272				(2,153	)			(881	)			715				(1,869	)			(1,154	)
Interest-bearing deposits			354				(7,300	)			(6,946	)			932				(7,100	)			(6,168	)
Overnight borrowings			(305	)			(275	)			(580	)			(256	)			(448	)			(704	)
Other borrowings			(278	)			(725	)			(1,003	)			217				(440	)			(223	)
Interest-bearing liabilities		$	(229	)		$	(8,300	)		$	(8,529	)		$	893			$	(7,988	)		$	(7,095	)

LIQUIDITY AND ASSET/LIABILITY MANAGEMENT

The Company’s historical liquidity management process included anticipating operating cash requirements, evaluating time deposit maturities, monitoring loan to deposit ratios, and correlating these activities to an overall periodic internal liquidity measure. In evaluating our asset mix, we have sought to maintain a securities portfolio sufficient to provide short-term liquidity in periods of unusual fluctuations. The activity also included the Granite Mortgage operations, which were always separately funded and have now been largely discontinued.

As outside funding sources have been withdrawn or restricted to current levels of outstandings, our liquidity management has focused on insuring adequate internal funding by the Bank.

The Bank’s primary internal sources of liquidity are customer deposits, cash and balances due from other Banks, and unencumbered investment securities. These funds, together with loan repayments, are used to make loans and to fund continuing operations. Additionally, retail and commercial deposit balances fluctuate significantly, and we target liquidity levels to meet those periodic declines. The Bank’s liquidity (cash + unencumbered securities / total deposits) was approximately $180.0 million, or 19% of total deposits at December 31, 2009.

As of December 31, 2009, the Bank’s core deposits, defined as total deposits, excluding time deposits of $100 thousand or more, totaled $719.0 million, or 74.4%, of the Bank’s total deposits versus $783.8 million, or 79.0%, at December 31, 2008.

The regulatory Order limits the Bank’s participation in the national markets for deposits and requires that local rates conform to rates that are not more than 75 basis points above the average local market rates for all products (effective March 1, 2010 the Bank cannot offer rates in excess of 75 basis points over National market rates). This restriction does not currently prevent the Bank from offering competitive rates.

Certificates of deposit of $100 thousand or more represented 25.6% and 21.0%, respectively, of the Bank’s total deposits at December 31, 2009 and 2008. Management believes that a sizeable portion of the Bank’s time deposits are relationship-oriented. Brokered certificates of deposit totaled $8.2 million and $52.8 million at December 31, 2009 and 2008, respectively. While the Bank appreciates the need to pay competitive rates to retain these deposits, other subjective factors also influence deposit retention. Based upon prior experience, the Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

The objective of the Bank’s asset/liability management process is focused to providing relative stability and reduction of volatility for the Bank’s net interest income through various scenarios of changes in interest rates. The process attempts to balance the need for stability and predictability of net interest income against competing needs such as balance sheet mix constraints, overall earnings targets and the risk/return relationships between liquidity, interest rate risk, market risk and capital adequacy. The Bank maintains an asset/liability management policy approved by the Bank’s Board of Directors. This policy and the analysis process undertaken by management and the Board’s Asset/Liability Management Committee (“ALCO”) provides guidelines to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a range around an “earnings neutral position”, which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, the Bank has generally invested such funds in securities, primarily securities issued by U.S. governmental agencies, and in accordance with the balance sheet restructuring to limit any credit risk and risk based asset allocation. The securities portfolio contributes to the Bank’s earnings and plays an important part in overall interest rate management.

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of the exposure to interest rate risk. Management believes that because interest rate gap analysis does not address all factors that can affect earnings performance, its practical usefulness in managing the Bank’s interest rate risk is limited, and it should be used in conjunction with other methods managing expected net interest income.

The Bank’s gap analysis at December 31, 2009 indicates that its balance sheet is generally asset sensitive, meaning that in a given period there will be more assets than liabilities subject to immediate repricing as market rates change. This would indicate that in a decreasing rate environment, hypothetical net interest income would tend to fall. However, the results of computer simulation modeling at that date suggest minimal interest rate exposure under moderately increasing or decreasing interest rate scenarios. Under the moderate rising rate environment, the Bank’s net interest income would be expected to increase by approximately 9%.

The management of interest rate risk and the overall asset/liability position is integrated with the liquidity management process. Currently less than 10% of the Bank’s loans are directly related to market interest rates. The remaining loans are fixed rate or relate to the Bank’s independent index, which relates more directly to the Bank’s operating footprint.

The following table presents interest rate sensitivity of our interest-earning assets and interest-bearing liabilities.

INTEREST RATE SENSITIVITY (GAP ANALYSIS)
As of December 31, 2009

																		Non-sensitive
		Interest Sensitive Within												Total				or Sensitive
		1 to				91 to				181 to				Within				Beyond
(Table dollars in thousands)		90 Days				180 Days				365 Days				1 Year				1 Year				Total
Interest-earning Assets
Interest-bearing due from banks		$	1,763			$	—			$	—			$	1,763			$	—			$	1,763
Securities (at amortized cost) (1):
U.S. Government agencies			—				—				1,539				1,539				42,172				43,711
Mortgage-backed securities			—				—				—				—				150,738				150,738
Other (including equity securities)			—				—				—				—				853				853
Loans (gross):
Real estate — Construction			38,874				1,092				361				40,327				19,374				59,701
Real estate — Mortgage			334,356				5,338				10,221				349,915				216,082				565,997
Commercial, financial and agricultural			108,757				1,155				2,110				112,022				31,596				143,618
Consumer			1,355				229				636				2,220				3,986				6,206
All other			147				—				—				147				—				147
Total interest-earning assets		$	485,252			$	7,814			$	14,867			$	507,933			$	464,801			$	972,734
Interest-bearing Liabilities
Interest-bearing deposits:
Savings and NOW accounts		$	164,627			$	—			$	—			$	164,627			$	—			$	164,627
Money market accounts			155,745				—				—				155,745				—				155,745
Time deposits of $100 or more			42,043				29,359				123,878				195,280				52,359				247,639
Other time deposits			56,349				40,738				139,672				236,759				52,162				288,921
Overnight and short-term borrowings			3,000				2,000				15,000				20,000				—				20,000
Long-term borrowings			—				—				—				—				20,000				20,000
Total interest-bearing liabilities		$	421,764			$	72,097			$	278,550			$	772,411			$	124,521			$	896,932
Interest sensitivity gap		$	63,488			$	(64,283	)		$	(263,683	)		$	(264,478	)
Cumulative interest sensitivity gap			63,488				(795	)			(264,478	)			(264,478	)
Interest earning-assets as a percentage of interest-bearing liabilities			115	%			11	%			5	%			66	%

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

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
As of December 31, 2009

		Within				One to				Five
		One				Five				Years or
(Table in thousands)		Year				Years				More				Total
Real estate — Construction		$	34,625			$	17,790			$	7,286			$	59,701
Real estate — Mortgage			129,679				302,771				133,547				565,997
Commercial, financial and agricultural			65,915				62,801				14,902				143,618
Consumer			1,436				4,687				83				6,206
All other			147				—				—				147
Total		$	231,802			$	388,049			$	155,818			$	775,669
Predetermined rate, maturity greater than one year		$	—			$	182,433			$	53,690			$	236,123
Variable rate or maturing within one year			231,802				205,616				102,128				539,546
Total		$	231,802			$	388,049			$	155,818			$	775,669

Our average rate paid on interest-bearing deposits declined to 2.32% in 2009 compared to 3.13% in 2008. Our decline in average deposits was primarily in demand deposits. The daily average amounts of deposits of the Bank are summarized below.

AVERAGE DEPOSITS
for the years ended December 31,

(Table in thousands)		2009				2008				2007
Non-interest-bearing demand deposits		$	111,614			$	131,563			$	146,563
Interest-bearing demand deposits			337,438				368,701				366,706
Savings deposits			20,303				21,567				22,677
Time deposits			492,496				460,632				433,965
Total		$	961,851			$	982,463			$	969,911

The preceding table includes certificates of deposits $100 thousand and over, which at December 31, 2009 totaled $247.6 million. The following table presents the maturities of these time deposits of $100 thousand or more.

MATURITIES OF TIME DEPOSITS OF $100 THOUSAND OR MORE
As of December 31, 2009

		Within				Three to				Six to				Within				One to
		Three				Six				Twelve				One				Five
(In thousands)		Months				Months				Months				Year				Years				Total
Time deposits of $100 thousand or more		$	42,043			$	29,359			$	123,878			$	195,280			$	52,359			$	247,639

CAPITAL RESOURCES

The levels of capital resources and related regulatory matters are discussed in detail in Note 2, “Regulatory Matters and Going Concern Considerations,” and Note 15, “Regulation and Regulatory Restrictions,” in the “Notes to Consolidated Financial Statements.” As set forth therein, the Bank’s capital levels are significantly below the capital levels set forth in the regulatory Order. As a result the Bank is precluded from paying dividends to the parent company for the duration of the Order.

LOANS

The Company’s lending activities have been concentrated in real estate related loans and commercial loans to small and medium sized businesses. We have a diversified loan portfolio with no concentrations to any one borrower. The amounts and types of loans outstanding for the past five years are shown in the following table.

LOANS
As of December 31,

(Table dollars in thousands)

		2009								2008								2007								2006								2005
						% of								% of								% of								% of								% of
						Total								Total								Total								Total								Total
		Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans				Amount				Loans
Loans
Real estate -
Construction		$	59,701				7.7	%		$	146,167				15.4	%		$	182,457				19.2	%		$	161,072				17.6	%		$	125,555				15.1	%
Mortgage			565,997				73.0	%			593,233				62.5	%			513,140				54.1	%			488,347				53.4	%			455,322				54.6	%
Commercial, financial and agricultural			143,618				18.5	%			199,370				21.0	%			238,469				25.2	%			248,691				27.2	%			231,229				27.7	%
Consumer			6,206				0.8	%			10,713				1.1	%			13,481				1.4	%			15,317				1.7	%			20,911				2.5	%
All other			147				0.0	%			258				0.0	%			567				0.1	%			742				0.1	%			915				0.1	%
Total loans			775,669				100.0	%			949,741				100.0	%			948,114				100.0	%			914,169				100.0	%			833,932				100.0	%
Deferred origination fees, net			(650	)							(1,592	)							(1,788	)							(1,677	)							(1,485	)
Total loans, net of deferred fees		$	775,019							$	948,149							$	946,326							$	912,492							$	832,447

For commercial, financial and agricultural loans, the Bank is generally collateralized by all business assets, including the related real estate where applicable. Also see Note 19, “Fair Value of Financial Instruments” in the “Notes to Consolidated Financial Statements.”

NONPERFORMING LOANS AND NONPERFORMING ASSETS
As of December 31,

(Table dollars in thousands)		2009				2008				2007				2006				2005
Nonperforming assets
Nonaccrual loans		$	40,736			$	50,591			$	36,450			$	9,289			$	6,424
Restructured loans — nonaccrual			12,404				—				—				—				—
Total nonperforming loans			53,140				50,591				36,450				9,289				6,424
Foreclosed properties			13,235				6,805				2,491				1,162				926
Total nonperforming assets		$	66,375			$	57,396			$	38,941			$	10,451			$	7,350
Restructured loans — accruing		$	13,284			$	—			$	—			$	—			$	—
Loans past due 90 days or more and still accruing interest			1,195				114				162				5,074				4,208
Nonperforming loans to total loans			6.86	%			5.34	%			3.85	%			1.02	%			0.77	%
Allowance for loan losses to nonperforming loans			52.38	%			49.03	%			48.49	%			169.95	%			216.75	%
Nonperforming loans to total assets			5.01	%			4.41	%			2.99	%			0.77	%			0.58	%
Nonperforming assets to total assets			6.26	%			5.00	%			3.19	%			0.87	%			0.66	%

We classify loans as nonaccrual when the loan is 90 days past due, or we believe the loan may be impaired, and the accrual of interest on such loans is discontinued. The recorded accrued interest receivable deemed uncollectible is reversed to the extent it was accrued in the current year or charged-off to the extent it was accrued in previous years. A loan classified as nonaccrual is returned to accrual status when the obligation has been brought current, it has performed in accordance with its contractual terms for a sufficient period of time, and the ultimate collection of principal and interest is no longer considered doubtful. Of the Bank’s $53.1 million nonperforming loans at December 31, 2009, approximately $12.4 million is single family homes, unimproved land or residential lots in various stages of development. The remaining population consists of loans to a variety of small business operations that are in default and are generally secured by commercial real estate. The increase in nonperforming assets as of December 31, 2009 is primarily related to the increase in foreclosed properties.

All of our investment in impaired loans, $38.9 million at December 31, 2009, is included in nonaccrual loans in the table above, and the related loan loss allowance for these loans was $7.7 million. At December 31, 2008 our investment in impaired loans was $42.6 million, and the related loan loss allowance was $5.4 million. The average recorded balance of impaired loans was $34.0 million for 2009 and $29.0 million for 2008.

In addition to the nonaccrual loans, the Bank has potential problem loans of approximately $86.5 million at December 31, 2009. Potential problem loans are loans as to which management has serious doubts as to the ability of the borrowers to comply with present repayment terms. These loans do not meet the criteria for, and are therefore not included in, nonperforming assets. Management defines potential problem loans as those loans graded substandard in the Bank’s grading system. These loans were considered in determining the adequacy of the allowance for loan losses and are closely and regularly monitored to protect the Bank’s interests.

Our investment in impaired loans for the past five years ended December 31, was as follows:

IMPAIRED LOANS
As of December 31,

(Table in thousands)		2009				2008				2007				2006				2005
Total investment in impaired loans		$	38,912			$	42,615			$	27,017			$	15,516			$	11,046
Loan loss allowance related to impaired loans		$	7,715			$	5,400			$	3,029			$	3,926			$	3,249

The Bank classifies a loan as impaired when, based on current information and events, management believes it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are measured primarily based on the fair value of the collateral supporting the loan. The total balance of impaired loans decreased $3.7 million, or 8.7% in 2009 compared to 2008, and the loan loss allowance related to impaired loans increased $2.3 million. The loan loss allowance related to impaired loans was 19.83% as of December 31, 2009 compared to 12.67% as of December 31, 2008.

For the years ended December 31, 2009 and 2008, the estimated gross interest income that would have been recorded had the nonaccruing loans been current in accordance with their original terms was $2.8 million, and $2.0 million, respectively, while the interest recognized on such loans was approximately $1.5 million and $1.0 million, respectively.

PROVISIONS AND ALLOWANCES FOR LOAN LOSSES

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

We use several measures to assess and monitor the credit risks in our loan portfolio, including a loan grading system that begins upon loan origination and continues until the loan is collected or collectibility becomes doubtful. When originated or renewed, all loans over a certain dollar amount receive in-depth reviews and risk assessments by the Bank’s Credit Administration. Furthermore, loans and commitments of $500 thousand or more made during the month, as well as commercial loans past due 30 days or more, are reviewed monthly by the Loan Committee of the Bank’s Board of Directors.

Large commercial loans that exhibit probable or observed credit weaknesses are subject to individual review for impairment. When individual loans are impaired, the impairment allowance is measured in accordance with the accounting standard entitled Accounting By Creditors for Impairment of a Loan. The predominant measurement method for the Bank is the evaluation of the fair value of the underlying collateral. Allowance levels are estimated for other commercial loans in the portfolio based on their assigned credit risk grade, type of loan and other matters related to credit risk. The Bank aggregates non-graded retail type loans into pools of similar credits and reviews the historical loss experience associated with these pools as the criteria to allocate the allowance to each category.

The allowance for loan losses is comprised of three components: specific reserves, general reserves and unallocated reserves. Generally, all loans with outstanding balances of $250 thousand or greater that have been identified as impaired are reviewed periodically in order to determine whether a specific allowance is required. When the value of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded as a specific reserve. Loans for which specific reserves are provided are excluded from the general allowance calculations as described below.

The general allowance reflects the best estimate of probable losses that exist within the portfolios of loans that have not been specifically identified. The general allowance for the commercial loan portfolio is established considering several factors including: current loan grades, historical loss rates, estimated future cash flows available to service the loan, and the results of individual loan reviews and analyses. The allowance for loan losses for consumer loans, mortgage loans, and leases is determined based on past due levels and historical projected loss rates relative to each portfolio.

The unallocated allowance is determined through our assessment of probable losses that are in the portfolio but are not adequately captured by the other two components of the allowance, including consideration of current economic and business conditions and regulatory requirements. The unallocated allowance also reflects our acknowledgement of the imprecision and subjectivity that underlie the assessment of credit risk.

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 us to be uncollectible. Recoveries during the period are credited to the allowance for loan losses.

Management is continuing to closely monitor the value of real estate serving as collateral for our loans, especially lots and land under development, due to continued concern that the low level of real estate sales activity will continue to have a negative impact on the value of real estate collateral. In addition, depressed market conditions have adversely impacted, and may continue to adversely impact, the financial condition and liquidity position of certain of our borrowers. Additionally, the value of commercial real estate collateral may come under further pressure from weak economic conditions and prevailing unemployment levels.

We believe that the Company’s allowance is an adequate estimation of probable losses incurred in our loan portfolio at December 31, 2009. No assurance can be given, however, that adverse economic circumstances or other events, including additional and continued loan review, future regulatory examination findings or changes in borrowers’ financial conditions, will not result in increased losses in the loan portfolio or in the need for increases in the allowance for loan losses.

The following table presents an analysis of changes in the allowance for loan losses for years indicated.

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

(Table dollars in thousands)		2009				2008				2007				2006				2005
Balance at beginning of year		$	24,806			$	17,673			$	15,787			$	13,924			$	13,665
Loans charged off:
Real estate			23,435				15,550				14,850				1,708				919
Commercial, financial and agricultural			5,003				10,557				30,955				2,808				3,484
Credit cards and related plans			54				16				15				26				45
Installment loans to individuals			78				396				177				410				540
Demand deposit overdraft program			159				195				233				251				262
Asset-based lending			—				—				7,433				—				—
Total charge-offs			28,729				26,714				53,663				5,203				5,250
Recoveries of loans previously charged off:
Real estate			738				1,340				233				84				63
Commercial, financial and agricultural			2,176				2,041				19				282				29
Credit cards and related plans			7				1				4				10				3
Installment loans to individuals			36				145				47				138				42
Demand deposit overdraft program			70				92				115				138				178
Total recoveries			3,027				3,619				418				652				315
Net charge-offs			25,702				23,095				53,245				4,551				4,935
Provision for loan losses			28,733				30,228				55,131				6,414				5,194
Balance at end of year		$	27,837			$	24,806			$	17,673			$	15,787			$	13,924
Ratio of net charge-offs during the year to average loans outstanding during the year			2.95	%			2.42	%			5.70	%			0.52	%			0.61	%
Allowance coverage of net charge-offs			108.31	%			107.41	%			33.19	%			346.95	%			282.14	%
Allowance as a percentage of gross loans			3.59	%			2.62	%			1.87	%			1.73	%			1.67	%